What Went Wrong with Microfinance?

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Over-indebtedness has become a problem in Lebanon.

Program participant Laura Amelia Trueba Contreras, marketing manager at Banco Adopem in the Dominican Republic, said high unemployment and financial turmoil in the United States and Europe were making it more difficult for her clients“There’s more inflation and less growth,” she noted. The United States is the Dominican Republic’s most important trading partner, importing sugar, tobacco, coffee, textiles and an array of other goods. So an economic downturn in the U.S. also impacts clients in the Dominican Republic. “We are very dependent on commerce with the U.S.”

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The downturn also impacts the flow of money from abroad, she added. “We receive a lot of remittances, especially from the States. There’s a huge population of Dominicans in New York. So remittances are a very important economic accelerator, one of the most important aspects of the Dominican economy,” she said. “Since the economy is so bad in Europe and in the States, there’s also less money on the streets — less money to repay loans, less money for people to buy consumer products. So the microfinance sector is not doing as well for the repayment of the loans.”

In Kenya, microlenders are working to educate clients about how to cope with fluctuating interest rates and rising inflation, said program participant Esther Muiruri, general manager of agribusiness at Equity Bank. “When the interest rates are fluctuating a lot, there are uncertainties about how much. And when there’s inflation, the cost of money becomes very expensive…. Therefore, the cost of doing business is also very high.”

Clients may also have trouble if their business depends on exports. Kenya exports coffee, black tea and fresh flowers to Europe, for example. “To the extent that countries are trading, like in Kenya [where] we have a lot of exports to Europe, certainly there’s going to be some uncertainties in cost and pricing,” she said.

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Sometimes repayment problems are more political than economic. In countries such as Nicaragua, Pakistan and India, some government leaders have at times encouraged borrowers to stop repaying their loans, saying interest rates are too high. In other cases, local governments seeking political favor subsidize loans at below-market rates or give out credit without checking to see if the borrower can repay the loan.

“That doesn’t help the people,” noted program participant Paul Arias Guevara, CEO and general manager of Credife, the microcredit program of Banco del Pichincha in Ecuador. “It’s just bread for today and hunger for tomorrow.”

Problems with over-indebtedness are also caused by a lack of education, according to Arias Guevara. “Over-indebtedness comes when somebody offers to you more credit than [you can] manage. That’s a problem with the microfinance clients and all clients,” he said, pointing to examples of credit card debt and subprime mortgages in the United States. Over-indebtedness happens in “other socio-demographic sectors all around the world. Maybe [in microfinance] it’s the worst because we’re working with people who are poor.”

Over-indebtedness, increased competition and other problems in the microfinance industry are part of its evolution, Arias Guevara noted, and can be solved if the industry works toward a more sustainable future. “Ten years ago, we were saying that more banks, more money needed to come into this sector because we are working with the poor people. And now they are coming and we are today saying, ‘Please don’t come!'”

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Microfinance can still play an important role in poverty alleviation — though not the only role, he said. “My personal thought is that when they say microfinance hasn’t helped poverty much … we are not responsible for lifting people out of poverty. When you give somebody credit … but they don’t have water, infrastructure or education, I’m sure that all our efforts [can] help, but not help enough.”

That doesn’t mean microfinance should abandon its work, practitioners say. According to the “Banana Skins” report, more than 2.7 billion people in the world still have no access to formal financial services. In Ecuador, Arias Guevara pointed out, “only 40% of our population has normal access to banking services. So we still have a lot to do.”

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