> Posted by Sergio Guzmán
In November of 2009, we reported that the microfinance industry in Nicaragua is under siege by a politically motivated group of borrowers. Calling themselves “No Payment Movement,” they pressured the government to lower their interest rates, suspend debt recovery trials, and grant grace periods on repayment. On February 24th, 87 out of 92 members of the National Assembly voted to order microfinance companies to sit down with their delinquent borrowers and renegotiate all loans past due since June 30, 2009; microfinance companies were also ordered to suspend asset seizures and trials. Furthermore, the assembly has instituted interest rate caps of 16% per annum on all renegotiated loans. President Ortega has not yet signed the bill, which is a requirement before it becomes into Law, however it is expected that he will.
The Microfinance Association of Nicaragua, ASOMIF, had, in numerous occasions, voiced its opposition to the law, saying that it would institute a culture of non-payment that is bad for both the country and for individual borrowers. Such a culture could make foreign investors wary of Nicaraguan deals, withholding financing for MFIs serving as many as 450,000 clients in good standing.
Some investment funds who had previously spoken out against the law have now said that they are not going to make new investments in Nicaragua. For instance, Incofin, a Belgium-based investment fund, will not renew investments of US$5 million in the country. By making collection of bad debts much more difficult for Nicaraguan MFIs, the Law creates uncertainty about the ability of those MFIs to maintain sound portfolios. Add that to the already tense global capital markets, and you’ve produced a set of very nervous investors.
Investors and microfinanciers agree that this law sends the wrong message to borrowers. In the words of Silvio Conrado, of the Banco Centroamericano de Integración Económica, “This can give borrowers a message that those who pay their loans on time are not very smart. Those who are not paying their loans on time can all of a sudden have better interest rates, even better than those punctual clients, and that is a dangerous thing.”
We will continue to monitor the situation in Nicaragua to see how the industry, investors, and the government proceed.
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March 24, 2010 at 12:37 pm
Fehmeen
I don’t think the fault here lies with the politically motivated groups of borrowers. As I read about the trials and asset seizures being carried out by the MFIs in this article, I was shocked. These MFIs clearly have lost the social dimension of microfinance if they go to such lengths to get their money back.
March 24, 2010 at 1:29 pm
Sergio Guzmán
Dear Fehmeen,
Thanks for your comment. You are right in the fact that one of the MFIs in question did employ questionable practices on two of their clients who were on arrears. However, we don’t think that this is reason enough to jeopardize the industry as a whole.
Sergio
March 24, 2010 at 2:29 pm
Fehmeen
I agree that the industry need not be jeopardized, but the MFIs could have prevented this crisis. The Grameen Bank model, if followed in spirit, guards against default risks as well as rebellions similar to the one above.
When loans are distributed, 5% of it is kept aside by each member of the group as an ‘emergency fund’ which is dipped into when a borrower faces the risk of defaulting. At the same time, the loan in question is re-scheduled (often, the duration is stretched) to assist the borrower.
Most MFIs refuse to extend a second loan to defaulters and that leads to plenty of problems on its own, but Grameen Bank simply reset the credit history of the particular borrower and let them start over again.
It’s small things like this that prevent people from thinking they’re being exploited, which may fuel rebellion.
I may, of course, be wrong because I’m not aware of the details regarding the Nicaraguan protest. But MFIs need to do their part too.
March 24, 2010 at 2:37 pm
Sergio Guzmán
Dear Fehmeen,
I agree with you, this I think is one of the main reasons why the Center alongside industry leaders have gotten together to launch the Smart Campaign, an effort to promote client protection in the microfinance industry.
I would encourage you to visit http://www.smartcampaign.org so that you can see exactly how we are promoting MFIs to be more responsible in their interactions with clients.
Your comments are deeply appreciated!
Sergio
March 24, 2010 at 2:57 pm
Fehmeen
Thank you for the link. It’s comforting to learn about this endeavor and I plan to write a post about it on my blog so more people know about it! I just hope MFIs that are highly profit oriented find short term incentives to follow this code, instead of creating circumstances that require the stick approach (as in the above case).
Just an observation: principles highlighted in the Smart Campaign come under the umbrella of Corporate Governance. You could consider promoting it as such to a certain segment.
January 24, 2011 at 10:19 am
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