Nicaraguan protesters during an earlier period of "No Pago" movement activities.

One of our most-read series here at the Center blog has covered the Nicaraguan microfinance industry’s crisis and subsequent progress toward recovery. Senior Analyst Sergio Guzmán has provided nearly all of the posts, which are assembled below to give you an overview of the unfolding story.

• Nicaraguan Microfinance in Crisis – November 5, 2009
  The microfinance industry in Nicaragua is under siege by a politically motivated group of borrowers who call themselves the No Payment Movement (Moviemiento No Pago). 
• Ley Moratoria (Moratorium Law) Passes in Nicaragua – March 23, 2010
  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.
• Nicaragua’s Microfinance Crisis: Looking Back, What Did We Learn? – January 24, 2011 
  The Nicaraguan microfinance industry suffered a profound crisis in 2009 and 2010 as a result of both the international financial downturn and the domestic No Pago (No Payment) Movement.
• Nicaraguan MFIs Forge Ahead in Wake of ‘No Pago’ Crisis – May 2, 2011
  Nicaragua’s MFIs are playing an important social and economic role, and some are rebounding from the No Pago (No Payment) Movement crisis, according to local and international reports.
• Nicaragua’s MF Crisis: Is It Winding Down? – September 8, 2011
  It seems like it is too good to be true, but the “No Pago” Movement leaders have agreed to have their members individually negotiate with MFIs the restructuring of their loans.

We look forward to providing you with more analysis of the challenges and opportunities in Nicaragua. If you are interested in microfinance in general and Latin American microfinance in specific, we invite you to bookmark this blog and subscribe.

Image credit: El Observador Económico

We wish this was a joke, really we do. According to BBC Mundo, “The mayor of Zaragoza, Spain, launched a campaign to alert its inhabitants who have yet to pay the outstanding contributions to the cemeteries, that it shall remove the remains of their loved ones.” According to the source, stickers will be placed on the gravestones of those persons who have failed to pay upkeep fees. Warning of action was sent in March, via collections notices in the mail, and given the lack of response, the mayor chose the course of action described.

Talk about appropriate collections practices, eh? This seems like a very eerie, unorthodox, and frankly Scrooge-like way of collecting past-due debts.  Does anyone have examples of inappropriate collections practices they want to share?

Happy Halloween and Feliz Dia de las Brujas to everyone!

Image credit: Albus Dumbledore

Have you read?

Vampires: Can They Make Financial Education More Fun?

Nicaraguan protesters during an earlier period of "No Pago" movement activities.

It seems like it is too good to be true, but the “No Pago” Movement leaders have agreed to have their members individually negotiate with MFIs the restructuring of their loans. This is a major concession from the movement that rallied and protested in front of MFI branches and even successfully lobbied the National Assembly to pass a Moratorium Law forcing MFIs to renegotiate loans. This created a major setback for MFIs in the country who saw their portfolio’s quality deteriorate and their investors flee during the height of the protest.

The “No Pagos” wanted collective bargaining rights in order to restructure their loans in the laxest possible way. Neither the MFIs nor the government gave in to their requests and now the movement’s 1,500 members (down from estimates of 5,000 – 13,000 at the height of the crisis) are approaching their financial service providers in a bilateral  effort to renegotiate their obligations.

Why did they give up? As Omar Vilches, leader of the movement, explained, the members did not want to jeopardize their future ability to obtain loans and were facing pushback from the MFIs who did not want collective bargaining.

It was estimated that the crisis created losses of up to US$20 million for the MFIs that restructured more than 32,000 loans.

Hopefully, the renegotiation of loans with individual borrowers will contribute to the unraveling of this two-year episode. This would be a good time for the sector in Nicaragua to look back at the causes of the crisis and implement solutions to avoid a repetition. A good place to start would be this 6-Point Action Agenda to Recalibrate Microfinance.

Image credit: El Observador Económico

Have you read?

Nicaraguan MFIs Forge Ahead in Wake of ‘No Pago’ Crisis

Nicaragua’s Microfinance Crisis: Looking Back, What Did We Learn?

Ley Moratoria (Moratorium Law) Passes in Nicaragua

Nicaraguan Microfinance in Crisis

The Council of Microfinance Equity Funds (CMEF) recently responded to the Reserve Bank of India’s invitation to comment on the Malegam Committee Report.

Sixteen members of CMEF, which brings together the leading private entities that make equity investments in MFIs in the developing world, have invested Rs. 8.1 billion (813 crores; US$178 million) of equity in Indian microfinance institutions, and other members are in negotiations with potential investee institutions. As direct investors in MFIs, CMEF members place great importance on their corporate governance role as board directors, shareholders and guardians of the double bottom line.

The CMEF concern is that “Although implementation of many of the proposed recommendations would indeed add to a sustainable development of the sector — through the enhanced institutionalization of transparency in pricing, client protection and corporate governance — it is our opinion that several recommendations could seriously set back the clock for microfinance in India.”

“The recommendations would severely limit the capacity of MFIs to reach and provide the level and quality of financial inclusion that poor clients need and deserve,” states the CMEF. “The restrictions on MFI lending rates, especially in the absence of measures to address the availability and cost of MFI debt funding, may well endanger the viability of many institutions.”

The CMEF further comments that “many proposed recommendations are likely to result in a sharp drop off in access to credit, hurting poor clients and impeding progress toward financial inclusion achieved over the last two decades.  We anticipate, furthermore, that these recommendations are likely to have a very negative impact on future flows of equity investment, even from the socially responsible investor community; these funds are critical to fuel the growth and continued outreach of the microfinance sector.”

In proposing a way forward, the CMEF strongly suggests “that the [Reserve Bank of India] acquaint itself with the experiences of other countries. There are now many examples worldwide of creative and efficient regulatory frameworks including Peru, Uganda, South Africa with its Microfinance Regulatory Council as a self regulator, and Cambodia.”

In concluding, the CMEF states that “the Malegam Committee Report represents a short-term response to a serious regional crisis which will result in intensive regulation of a very small subset of credit only institutions, in our opinion.  While this approach may quell political tensions in the short term, it is likely to have negative consequences for the industry and its clients in the long run. The CMEF would like to thank the [Reserve Bank of India] for providing us this opportunity to comment on the recommendations and we urge the RBI to consider a more holistic view of financial inclusion and the most appropriate strategy to achieve it.”

CGAP has just come out with an important new Focus Note analyzing recent microfinance repayment crises in Nicaragua, Morocco, Bosnia, and Pakistan—“Growth and Vulnerabilities in Microfinance.” Reading it set me thinking back to the Bolivian repayment crisis of 1999-2000 and to the lessons that came out of it.

The Bolivian crisis had all the same hallmarks as recent crises.  New entrants, in this case consumer lenders, came in with very aggressive growth strategies, as second movers behind the more established MFIs.  They tolerated and even welcomed multiple borrowing.  Borrower difficulties were triggered by a recession, which in turn triggered a virulent—and politically motivated—debt protest movement. At one point protestors piled all the computers of MFI branches into the street and set fire to them.  At the height of the crisis, the outlook for Bolivian microfinance was bad. But today, Bolivian microfinance is thriving, and that includes all of the leading microfinance institutions who experienced the crisis.

A number of key short- and longer-term actions made it possible for Bolivian microfinance to survive, recover, and move to a more stable footing.

In the short term, the Bolivian MFIs instigated intensive dialogue with government so that responses to the debt protestors could be worked out together. They then announced that they would work with every single client who the protestors named to resolve their repayment problems. This helped defuse the protests.  In fact, the big numbers melted away as it turned out there were only a few seriously troubled borrowers in the debt protest movement. The banking regulators issued out a new rule limiting debt service for consumer loans to 25 percent of a person’s salary.  This shattered the business models of most of the consumer lenders, who fled Bolivia or quietly closed operations, losing millions on the way.

Longer term, MFIs ended up writing off many loans and taking a big hit to profitability for a couple of years.  They survived by drawing on their past strong financial, especially the financial cushions they had in terms of prudent provisioning and leveraging.  NGOs working in rural areas were hit less hard than regulated urban lenders who occupied the same market space as the consumer lenders.

Since the crisis, and partly as a result, the MFIs in Bolivia strengthened their associations, which became strong and competent organizations, able to work with government and monitor the status of their members.  Government, associations, and MFIs worked together to improve the coverage and timeliness of credit bureaus.  And MFIs strengthened their own operations, in improved repayment capacity analysis and by seeking to offer clients greater value—a fuller range of services.

Each repayment crisis has its own specifics, but the lessons from Bolivia give some indication of the paths the microfinance industry can take to resolve and rebuild—and possibly even prevent the next crisis.