The Microfinance Insider is a forum for graduate students engaged or interested in working in the field of microfinance. Through weekly posts and comments we hope to inspire students and foster the creation of a knowledge community of bloggers with a commitment to financial access and first hand industry information.

Monday, July 28, 2008

Too Much of a Good Thing?

The global microfinance revolution is about unleashing power. Even small loans can enable poor communities to transform their skills and energy into higher incomes. This is the basic idea celebrated by the 2006 Nobel Peace Prize to Muhammad Yunus and Grameen Bank of Bangladesh. It meshes with economic theory, and it’s backed by thousands of success stories.

So why, all of a sudden, does credit seem like a mixed blessing? A few months ago I joined thirty microfinance leaders for an off-the-record meeting at an estate outside New York City. Participants flew in from Africa, Latin America, and Asia. There were no guidelines and no set topics for conversation. But one theme emerged more strongly than others (and was highlighted in the group’s public statement): we need to start worrying about over-indebtedness. Now. Before the big crash.

This is a remarkable turnaround. For decades the problem has been that poor households have way too little access to loans. But with many microfinance institutions doubling in size every two years, barriers to access are breaking down. Poor borrowers now may have options, weighing offers of credit from competing microfinance institutions vying for business. The response of customers increasingly is: “Thanks! I’ll take them all!” Borrowers thus take loans from multiple lenders, and lenders stay in the dark about how indebted their customers are.

In slowly growing numbers, borrowers are getting in over their heads, triggering even more borrowing and even worse problems. Credit bureaus would help, but they’re largely absent in the communities served by microfinance.

This sounds a lot like the problem with credit cards in the US. For most people, credit cards are a great financial tool, but they’re easy to abuse (Hello,!), and not all financial institutions are equally good at policing themselves. Microfinance is not today suffering a crisis of over-indebtedness of the sort seen in segments of the credit card market. The biggest problem is still that way too many people lack access to decent financial tools, not that too many people have too much access. And that makes it exactly the right time to start thinking about the problem. Before the crash.

1 comment:

Pia Saunders said...

To avoid loan default and over indebtedness in the microfinance industry, MFIs must accept the responsibility to ensure that their clients do not borrow beyond their repayment capacity. While the entry of private-sector funds and profit-driven financial institutions to the microfinance industry is an advancement that is both significant and positive (in that it increases funds available for microloans and thus increases access to credit for poor households), MFIs and commercial banks that operate a social-lending scheme must remember the primary mission of microfinance: to alleviate poverty. Financial institutions that lend to clients that are already in loan repayment should be held accountable for over lending. In the absence of credit bureaus, lending institutions face a more difficult screening process for loan clients. One solution is for the lending institution to secure one or two guarantors (preferably also clients of that same MFI) to ‘vouch’ that the borrower does not have outstanding loans and does have the capacity to repay the loan, thus creating social accountability similar to that of group lending.