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> Posted by Danielle Donza
Four days after taking on David Roodman in DC, Dr. Milford Bateman travelled north where the Boston Microfinance Club invited him to debate Dr. Guy Stuart, an independent consultant and Senior Advisor at Microfinance Opportunities. The point that resonated most with me was this question: Maybe consumer goods aren’t such a bad thing.
Milford made the argument that many microfinance loans are being used for consumption, say a TV, which immediately made me cringe. Consumption often has a bad name as an unproductive use of funds.
But then Guy jumped in and unpacked consumption for us. Yes, there is consumption in the form of alcohol, cigarettes and gambling, and we can all agree that is not a desirable use of microfinance loans. Yet, Guy, who has done countless financial diaries with microfinance clients, points out that money is fungible. So, if a client uses some of loan to buy a consumer good, such as a TV, and uses some of the loan to improve her business, as long as she is able to pay off the loan with interest, then who’s to say consumption is such a bad thing? That TV has now provided the client with 1. A source of information/education, 2. Status in the community, 3. An asset, and 4. Improved quality of life. Read the rest of this entry »
> Posted by Marco De Natale
This post marks the Center’s launch of “Over-Indebtedness of Microborrowers in Ghana,” a new report written by Jessica Schicks.
“Over-Indebtedness of Microborrowers in Ghana” is an innovative and already influential study on what is currently the main concern of microfinance practitioners (cf. “Microfinance Banana Skins 2011,” CSFI).
The research considers a very relevant country for global microfinance trends, as Ghana is a prime example of a well-developed sector where observers have noted potential warning signs of over-indebtedness: Urban markets (especially in the capital, Accra, and in the business capital, Kumasi) are increasingly served by a variety of financial institutions (mainly deposit-taking NBFIs and NGOs), the credit bureau system is arguably still not up to speed, and there is a relatively large number of informal/unregulated credit providers.
Indeed, a recent study of the Center for Microfinance at the University of Zurich identifies Ghana having a “medium to high level of early warning signals for over-indebtedness” based on a set of 14 macro/industry indicators. Read the rest of this entry »
> Posted by Jessica Schicks
Over-indebtedness is difficult to measure, but in principle don’t we all have a clear idea what it’s about? Don’t we know it when we see it? Many would say that over-indebtedness is when clients can’t repay. However, protecting clients is different from protecting the portfolio quality of MFIs. We define over-indebtedness as a situation in which a client makes repeated, serious sacrifices in order to repay debts. By that definition, the harm of having too much debt comes to clients long before it hits lenders in the form of delinquency and default.
In a joint study for my PhD at the Center for European Research in Microfinance (CERMi), together with the Smart Campaign at the Center for Financial Inclusion at ACCION International and with the Independent FC Evaluation Unit of KfW Entwicklungsbank, the German development bank, we interviewed 531 microborrowers in urban Ghana to find out when and how clients perceive over-indebtedness. Here is a glimpse of what we found:
- In contrast with recent concerns, delinquency and multiple borrowing among Ghana’s top microlenders show no signs of a crisis. Read the rest of this entry »
> Posted by Charlotte Connors
My generation is the first in four in my family not to go into the shoe business. Instead, I work in the microfinance industry, and never expected the two to show up in the same story. On my way home from work last night, I was taken in by an NPR piece about a credit crisis in Wenzhou, China resulting in the suicide of a shoe entrepreneur. He owed 60 MILLION DOLLARS to loan sharks and other underground lenders because private business owners in China have very little access to loans from state banks.
Having spent the last three years focused on client protection in microfinance and the Client Protection Principles, the circumstances that Shen Kuizheng found himself in (owing US$15,000 in interest every day), seem to make the case for more attention to the prevention of over-indebtedness in China. But, where do you start when state-run banks only lend to state companies? “Shadow financing has grown dramatically in recent years.This summer, it stood at US$2.6 trillion — nearly one-third of all lending in China,” according to GaveKal, a global financial research firm based in Hong Kong. Read the rest of this entry »
> Posted by Center Staff
“Why can’t women repay their loans sometimes?” This is a question whose answer has industry-wide implications, not least against the backdrop of the Smart Campaign’s focus on over-indebtedness.
Aurélie Dagneaux and her colleagues are putting this question under the microscope while at Fundación Paraguaya, where she’s visiting as an ACCION International Ambassador. The Ambassadors, who have been deployed around the world in 2011 to look into the industry “on the ground,” have a blog you can find here. You can also subscribe.
Besides a previous post from Dagneaux, the Center blog has also showcased reports from Ambassadors Nirav Chheda, Pamela Chang, David Firth Bard, Stephen Matthew Lee, Jason Loughnane, Wei Wei Pan, and Leah Vinton.
Dagneaux’s post “Why Can’t You Repay Your Loan?” begins:
Together with Mary Helen, another ACCION Ambassador, and along with 3 interns from Fundacion Paraguaya, we are conducting a study to determine “causes of arrears among women’s committees”.
In simple words: “Why can’t women repay their loans sometimes ?”
1. The problem
The portfolio at risk (PAR30 for the experts) [that is the part of Fundacion Paraguaya’s loan portfolio that is at risk of not being repaid by the clients] is currently very low among group lending’s clients (women who borrow in groups of 15 to 30): less than 1%. That is particularly low compared to the 4% of individual lending. Yet, this percentage has recently been increasing. And worrisome, defaulting on a loan (ie not being able to repay it) now happens to women who are in their very first loan cycle, after only 1 month of taking out a credit. Read the rest of this entry »
> Posted by Sergio Guzmán
In the midst of the greatest economic downturn since the 1930s, the national student debt in the United States now exceeds US$1 trillion. Reportedly, it is now surpasses the national credit card debt! This is a matter of concern, not only because students are borrowing at an unsustainable rate, but because of the consequences that this might have for the economy and society itself. Young people are sometimes going to great lengths to make ends meet and pay their debts, as one Huffington Post article notes. Working on the Smart Campaign, this really rings the over-indebtedness bell. Does anyone else agree?
College education in the US is growing more costly, sometimes reaching $42,000 per year as is the case for Sarah Lawrence College, which is pointed to as the most expensive of the 25 most expensive private universities. As the article explains, the average 2011 college graduate leaves the university $27,000 in debt! That is significant if you take into account that these students have not yet begun earning income and the unemployment rate for persons under 25 is a whopping 54%.
A few key facts found on Dino Grandoni‘s post “Americans Now Owe More Than $1 Trillion in Student Loans” on The Atlantic Wire:
- “Last year marks the first year American students took out more than $100 billion in loans to pay for school, averaging $4,963 per student in 2010.”
- “Students are borrowing twice as much as they were a decade ago, adjusted for inflation, so that that $1 trillion student loan bill is double what it was five years ago.”
- “The default rate on student loans — which, unlike almost every other type of loan, survive even after bankruptcy — jumped from 6.7 percent in 2007 to 8.8 percent in 2009. Default rates were highest at for-profit schools.”
Providers must be aware of suitability and affordability of products. The sub-prime housing crash of 2007 left many lessons, among them that bubbles will burst. It is important for us to remember that this lesson applies not only to complex structured finance in the US, but also to any financial services provider. Are there any lessons for the microfinance industry in this case? As microfinance providers diversify their product offering (credit types, savings, insurance, remittances, payments) what are some of the key aspects they should consider?
Image credit: Kit
Have you read?
Consequences of Over-indebtedness: Lessons from India
Microlenders ‘Need Systems’ to Handle Client Problems
‘We Need to Keep Learning About Over-indebtedness’ – Beth Rhyne on CGAP Microfinance Blog
> Posted by Sergio Guzmán
Mexican microfinance leaders and industry observers are becoming alarmed that the country’s microfinance market may be over-heating, and they are especially concerned about future client indebtedness and political risks. In past posts, we have discussed Mexico’s great need and potential for financial inclusion. Several factors have led to an expansion of the industry in recent years, including state intervention and subsidization, regulatory approaches that eased NGO-to-finance-company transformations, and of course market leaders who created a strong business case for new entrants.
A new study (unfortunately, Spanish only) by Marulanda Consultores and commissioned by DAI Mexico looks at the Mexican microfinance industry with a critical eye and offers fresh insights. The study says that the Mexican microfinance industry is in a state of “precarious maturity” and that its potential for success can only be reached if certain challenges are addressed. These must-address challenges include a risk of market over-heating, the strengthening regulatory and supervisory agencies as microfinance becomes a larger part of the financial pie, and growing attention from politicians and journalists in the run up to next year’s elections. Some of these concerns echo the Center’s recent “Opportunities and Obstacles to Financial Inclusion” paper, which contains a special addendum about Mexico. Read the rest of this entry »
> Posted by Siddhartha Chowdri
Siddhartha Chowdri with residents of Bihar
Editor’s note: This post, originally published in June 2009, is one of this blog’s all-time most popular pieces of analysis. We are returning it to the front page to be sure that it’s available to everyone interested in the health of India’s microfinance industry, especially in connection with client protection.
At a financial literacy event I attended the other day, I had a long conversation with some of the senior management of Grameen Financial Services (Grameen Koota) about the delinquency issues facing ALL MFIs in the Indian state of Karnataka. Their analysis of the chain of events that has led to the situation is the following:
- MFI borrowers are borrowing from as many as 6 MFIs and many local money lenders. MFIs do not have the systems to track how much debt their clients are taking on from the other MFIs.
- Some of these clients significantly exceed their capacity to pay and run into problems when managing these multiple borrowings.
- When faced with these problems, some of these clients turn to local leaders to complain about their situation.
- Seeing this as an opportunity to score political points these local leaders (politicians, mullahs, mafia, etc.) either force MFIs to stop operating in the local areas or tell the local client base that they are being exploited and not to repay the MFIs.
- These local elements are now spreading their message to defy the MFIs throughout the state via local language media, including circulars, newsletters and word of mouth and preaching by local leaders.
The net result of this is an increasing level of financial exclusion Read the rest of this entry »
> By Sergio Guzmán
Bosnia, Morocco, India, Nicaragua – as we’ve learned from harsh experience, over-indebtedness concerns not only MFIs and their financial sustainability, but also clients who want to preserve their livelihood and policymakers who must look after the macroeconomic stability of a country.
Good news. Peru’s microfinance association, ASOMIF, is working with its members by recognizing that over-indebtedness, as set forth in the Smart Campaign’s Client Protection Principles, is an important issue that can best be dealt with through industry-facing initiatives.
Peruvian MFIs are striving to avoid client over-indebtedness by restricting the number of loans customers can have with other MFIs, especially in urban areas where the credit market might be saturated.
ASOMIF President Fernando Valencia Dongo on June 12 told the Peru News Agency that each MFI is aware of specific zones of saturation and that they are paying special attention to such areas to avoid client over-indebtedness.
The success of ASOMIF’s initiative depends entirely on all Peruvian service providers taking some basic actions to reduce both their own and their clients’ exposure to risky debts.
Image credit: CIA World Factbook
Have you read?
‘We Need to Keep Learning About Over-indebtedness’ – Beth Rhyne on CGAP Microfinance Blog
Study on Over-indebtedness in Microfinance Markets Published
> Posted by Beth Rhyne
In the Economist Intelligence Unit’s annual “Microscope” country rankings of the enabling environment for microfinance, the Philippines has been number two for the past two years (behind Peru). But the players in the Philippines microfinance sector, regulators and providers alike, want to be number one. They also want to avoid the kind of crisis that has affected Indian microfinance.
Those considerations prompted the back-to-back seminars I attended in Manila last week. One event, sponsored by the Rural Bankers Association of the Philippines and Microfinance Council of the Philippines, examined the factors leading to the Indian crisis and asked whether the Philippines is vulnerable to the same kind of problems. The second event, sponsored by the Central Bank of the Philippines, asked what was needed to move the Philippines to the top of the Microscope’s chart.
There is little evidence that an immediate crisis might be on the way. According to Ron Chua of the Asian Institute of Management, a long-time analyst of microfinance in the Philippines, the sector has been growing at a rate of about 25 to 35 percent per year – fast but not excessive. And while the range of institutional types makes it hard to count, the total number of clients (somewhere between 2 and 6 million borrowers) does not appear to be creating severe market saturation as yet, though there are pockets that may have high saturation. Read the rest of this entry »
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