Preface: I recently posted a blog describing some of the unique challenges people in Bluefields must deal with. I’d like to encourage those of you that haven’t already seen it, to first click here to get a bit of context before reading this post.
Microfinance faces some unique challenges in Nicaragua, and especially in the southern Atlantic Coastal region. This is my third placement as a Kiva Fellow (meaning the third partner microfinance institution I’ve worked with), and I have thought more deeply about poverty, development, and the role of microfinance in my first three weeks here in Bluefields, Nicaragua, than I did during my entire 3 months with field partners in Guatemala. Why is that, you ask? Because things were going relatively well in Guatemala. The MFIs were mostly self-sufficient, lots of loans were made, and nearly all were being paid back. Things are not going as well here in Nicaragua. Don’t get me wrong, there are certainly some success stories here; examples of people using Kiva loans to expand their businesses, increasing their income and successfully paying back the loan. But there are also many stories of people not paying back on time, if at all. Delinquency and default rates in Bluefields are substantially higher than what is standard in microfinance.
In talking with staff at my MFI and others in the area, I’ve heard a few theories as to why that is. Here’s a summary of the arguments, as they’ve been presented to me:
1. It’s a cultural thing. Some people here just don’t care about the commitment to pay back. Some people just aren’t responsible. A lot of people lie about what they are going to use their money for, when they’re going to pay, why they can or can’t pay, etc. There are definitely a lot of trust issues. Furthermore, things like solidarity groups to share the responsibility of repayment among many clients are reportedly not realistic here, as people are simply not willing to back their friends and neighbors financially.
2. Donations. This area is among the poorest in a country that is the second poorest nation in the western hemisphere. Over the years, few organizations have really invested in development here. Instead, the Nicaraguan government and well-intentioned NGOs have donated a lot of money. So the ultra poor have gotten handouts when they need it most, and sometimes otherwise. Accordingly, there is now an expectation, among some, that if things get bad enough, someone will come along with handouts for them. Evidently many prefer to wait for those handouts, rather than get in a situation where they have to pay back a loan. Furthermore, those that do take out loans, may have a somewhat clouded understanding of what a loan is, since they have grown up accustomed to charity, which obviously involves no repayment.
3. Lack of education and training. Many microentrepreneurs do not have much knowledge of basic business administration and money management, so they don’t have a good grasp on managing pricing, savings, etc. to be able to pay back successfully.
These are the most common explanations I’ve heard in talking with people that have been working in microfinance here for awhile. The first two theories are tough – in terms of measuring and defining and in terms of overcoming. The third one, however, holds a lot of potential, as this is certainly something that can be measured and largely overcome with the right training. Of course such training requires time and money, neither of which seem to be readily available in Bluefields.
While there is clearly no simple answer to the question of why some people repay their loans while others do not, I do believe that witnessing the challenges here is giving me greater insight into both the potential of microfinance as well as its limitations. The thing that I currently struggle with the most is how damaging delinquent and defaulting loans can be for individuals, communities, and the microfinance industry in the region. Taking out a loan, building a business, and paying off that loan is an incredibly empowering thing for anyone, and especially for the poor who have had so few opportunities. So I can’t help but think about how, on the flip side of that, failing to pay off a loan is the opposite of empowering. It seems like failure to fulfill loan obligations could cause a person to lose faith in their abilities, can damage their sense of responsibility, and certainly limits future opportunities. So the big question is: what can microfinance institutions do to ensure that the clients they are lending to are set up for success? What can and should be done when evaluating a new client for a loan to select clients that will be empowered by their loan? How do you know which prospective clients are trustworthy and responsible and entrepreneurial enough to be a good candidate for a microloan? And what can be done throughout the life of the loan and beyond in order to increase a client’s success in their business and repayment of the loan?
These are tough questions, with no easy, formulaic answers. What I find most disturbing though, is the argument that the success of microfinance is predetermined, to some extent, by the cultural conditions of an area. I really don’t want to believe that there are simply some areas where microfinance will never work because the people are not responsible or trustworthy. I hope to gain greater insight into this theory and other limitations of microfinance in the coming months./>