I’d want more than to be told “it’s working” by the organisations themselves or by Muhammad Yunus. I have no doubt it works - I don’t think they’re lying when they say their repayment rates are around 90%. My question is how they get their rates are that high. What enforcement mechanisms are they using? In the western world, including the US, UK and Germany, there are serious and significant enforcement mechanisms: credit ratings, legal bankruptcy, debt collection agencies, and a lot of people still default on their debts. So when I see certain microfinance organisations claim to produce high repayment rates with essentially no enforcement at all I find it hard to believe.
OK, that’s an enforcement mechanism. If the microfinance organisation is one of the only sources of credit for these groups and they stand to be barred from it if one member doesn’t pay, and the rest of the group harasses them to pay up, then the group itself effectively plays the role of a debt collection agency. I can see how that could work.
Do you any sources for this? Preferably other than Muhammed Yunus or the organisations themselves?
Nobody says they have no enforcement at all. They have different enforcement systems than credit ratings or debt collection - the lending circles. This has been said repeatedly, yet you don’t want to believe it because the companies themselves say it?
Do all the articles written by journalists about the microfinance model also not count for you? Because then the only way to find out the “truth” I can see is that you have to ask the people involved directly. Which will tell you the same thing the groups say, and which they have told the journalists: The lending circles and the people themselves enforce it.
And once again: in the western world, “more” people default because of the bad practise in lending money in the first place. People default on consumer credits, which is usually not covered under microfinance.
Back in the 90s when the dotcoms started, most of them had no products they were making (other than writing code for webpages or programs), no hardware as security, so they could not get credit like normal business. But they got Venture Capital because their skills and ideas convinced the investors. (That the market become overheated and burst does not make Venture Capital in itself bad).
That’s exactly what microfinance does: giving people with no safety except their determination and skills the boost to start a small business.
And in the western world outside the US, until recently repayment rate was very high, too, because banks didn’t push consumer credits onto everybody, including those bad with finances, but people only got credits for long-term things like houses, cars or a new sofa, and did so responsibly. And the bank officer was also interested in making the loan safe and not on closing as many deals as possible regardless of risk.
There is nothing unusual in the repayment rate of microfinance if you look at all the factors of how the groups work; they only stress the high rate because of changed habits in the Western world, and because people with political agendas lie that “poor people are bad with money, that’s why they are poor, so giving them money doesn’t help them”. To disspell that lie, Kiva and the others show their figures, but if Western banks returned to the same principle of sifting carefully and only giving credit to trustworthy people, and educating people on how to manage their finances, working with the customers instead of against them, asking every week how their business is doing and offering help when there’s trouble - then the western banks could have high rates of repayment once again.
No, I don’t have sources that you would believe, because besides the group themselves, I have read articles by journalists, which are also disregarded. So you have to keep wondering by disregarding the evidence.
Because it is so compatable with so many different perspectives on development, microfinance is quite the darling and thus extremely well studied. A trip to any university library should easily point you to thousands of peer-reviewed studies on every imagineable aspect of microfinance.
As for enforcement, if you defaul it’s not like you are screwing over some huge, anonymous, probably evil bank like you are in the west. With microfinance, defaults screw a very tight knit group of your closest friends in which you all have vowed to help each other and in which everyone knows exactly how you are screwing them and wont’t hesitate to let the community at large know how you have thrown them under the bus. We are not talking about annoying phone calls- we are talking about dirty looks from everyone every time you leave the house, ALL of your friends disappearing, your kids facing diminished marriage prospects (who wants to marry in to a theiving family?)), nobody using your business, etc. Getting a bad reputation in a village will easily make life for you and your family hell. If your business is making money, why would you risk that for these small sums?
There are lots of solid reasons to question the hype around microfinance (and I would gladly jump in) but this is not one of them.
If one pokes around their websites a bit, it looks like the answer is really much simpler than has been discussed here: Those numbers just don’t mean what you think they mean.
This is easiest to see on Kiva’s site, where it discusses “Risk and Due Diligence.” Kiva does not itself make loans directly to individual borrowers or borrower groups. Rather, it has entered into partnerships with local lenders who make the actual loans. The 99% is the rate at which the local lenders repay Kiva, not the rate at which borrowers repay the local lenders. Kiva explains this point as follows:
[QUOTE=Kiva]
Note that this repayment rate is not necessarily indicative of borrower repayment rates since many Kiva Field Partners chose to guarantee or cover individual borrower defaults
[/QUOTE]
One likely example of this phenomenon is Kiva’s partner Zene Za Zene, a lender in Bosnia. Kiva’s page for this lender states that Zene Za Zene was placed in “Paused” status because of “a significant increase in delinquency due to the over-indebted position of many of their borrowers.” Kiva’s statistics for this lender, however, show a default rate of 0%.
The upshot is that we don’t know what the Kiva borrowers’ repayment rate is, but it’s lower than 99%. Why would a local lender step in and cover a borrower’s default so that Kiva gets repaid? I’m completely speculating here, but it looks like these lenders are not wholly funded from Kiva; they get funding from other sources as well. It may be that Kiva is their cheapest or their most reliable source of capital, so it’s worth it to them to make some other investor or funding source take the loss instead.
Five Talents’ website is slightly harder to navigate for this information, but they do partner with local lenders as well, and they may benefit from similar guarantees against borrower default. I have not looked at Grameen’s website, because for some reason, Google flags it as “possibly compromised.”
I can’t even find where the microfinance groups say this: none of the groups mentioned in this thread so far say anything about how they enforce repayment on their websites. I can’t find anything on Grameen Bank’s website. You told me to “read a report from Kiva” but if you’re not familiar with them, Kiva doesn’t actually lend to any entrepreneurs on the ground. They collect money and lend to smaller microfinance groups, who guarantee the loans and conduct any enforcement - if indeed there is any - themselves. So Kiva says nothing about how the loans are enforced, because they’re not involved with enforcing them. The other groups I mentioned don’t say anything about enforcement either. Hence why I started the thread - I have yet to see any detailed explanation at all about what the enforcement is, and in particular I haven’t seen anything from independent sources.
[QUOTE=even sven]
A trip to any university library should easily point you to thousands of peer-reviewed studies on every imagineable aspect of microfinance.
[/QUOTE]
Do you have any examples of peer-reviewed studies that analyse the aspect of how loan repayment is enforced in microfinance?
Here is a German article from the (very reputable magazine) SPIEGEL. They give the following numbers
Here is a critical report from the NY Times that points out what has been said several times already:
Which means it’s one tool of several, not the all-cure (which is where I disagree with Yunnus who believes it is). And because not every poor person is an entrepreneur, the MF groups don’t go around distributing loans like US credit card companies do; rather, they wait for people with enough energy and dedication to form a circle; they educate the people first, and teach them responsible, long-term financial commitment like saving, before giving the loan. In other words, they do everything to make sure that the business which the loan is financing will succeed, and that there is a social environment to make payback highly likely.
You will keep not believing evidence until you stop letting go of your beliefs and look at reality:
Comparing the practice of US based credit card companies and banks to give consumer credits to everybody unsolicited (including dogs, 7 year old children and dead people who all received credit cards) with business credits of Microfinance is comparing apples to pears.
US credit card companies can afford to mail cards to everybody with an adress without further checking because of their relativly high rates: 20 to 30%, when a normal credit is 5 to 10%. They want people in continual debt for non-necessary items, because that way they will earn more. So a failure rate of 40% doesn’t worry them, they still make out like bandits on the rest due to the high percentage and fees.
Microfinance are business loans with strict banking practises tied together with a whole approach of customer care that is not used (and usually not necessary) in the West. If a businessman in the West applies for a credit, the bank doesn’t give him a course on how to do bookkeeping, they will assume that he already knows that. And if he doesn’t, there are half a dozen organisations where he can easily learn it.
In 3rd world countries, the Microfinance group (most often a charity with many different projects) trains their lenders in how to run a business, teaches them the skills to do it and so on. So women will get a 1-year course on sewing before they get the loan to buy a sewing machine.
You seem to believe that a 40% failure rate is normal because people are dishonest scum who love to steal. That’s a distortion for a small segment in the US because of the mentioned bad practices in 1). Under normal circumstances, people want to pay back and only need to have the opportunity to do so by earning the money. Together with good banking practises in carefully screening applicants for soundness - which are used in non-US western countries, too - a failure rate of below 20% is more the norm.
Just for comparison, at the green money fair this Saturday, I asked the banks there (though most did not have the numbers ready). The Umweltbank (ecological bank) which gives loans to business projects with only ecological purposes - wind farms, solar parks etc. - is a small bank compared to the normal ones, in a niche, but not microfinance.
Guess their failure rate?
Ready? Less than 1%. They aim for 0%. German link (We are very satisfied with 2009) to an interview with the head of the bank.
When making their financial statement at the end of the year, the bank has to reserve some funds for loans they expect or know to fail in the next year, so they are not surprised without sufficient cover.
Of course, the subsidies of the German govt. help in making Solar and Wind less risky, but still, it’s also conservative banking policy: if in doubt, they deny a loan. It helps that they have lots of experts for solar, wind etc in the bank, who can evaluate the numbers by the loan applicant to weed out unrealistic proposals more likely to fail.
I don’t have the numbers for the communal Stadtsparkasse or the GLS bank, which both also said they use conservative principles when screening applicants and have a failure rate low enough to not be a problem (both also feel obliged to not squander their customers money on bad loans, but act responsibly.)
The Deutsche Bank probably has a higher failure rate, considering that 50 mil. DM are “peanuts” for them (comparing to Milliards of overall sums), but I haven’t gotten their numbers yet. Still, they probably are nowhere near 40%.
If you still don’t/ can’t accept the reasons and mechanisms explained several times already in this thread…
then I’ll tell you the truth: the bank managers are high priests of the Church of FSM and lay a curse on everybody who doesn’t pay back that one day eventually they will die. That scares people straight. Happy now that you know the truth?
Where does it address enforcement of microfinance loans? Or what happens if a loanee says they can’t make repayments?
That article is mostly about interest rates. The only time it mentions an enforcement mechanism is this sentence: “After the courts stopped forcing small borrowers to repay, making international financial institutions hesitant to work with Nicaragua, the campaign [to allow loanees to default on their loans] evaporated”. So the enforcement mechanism in Nicaragua is the court system, just like it is in the US. Is that the enforcement mechanism that is used all around the world? Surely there isn’t a functioning court system in rural areas of Haiti or Malawi?
I haven’t looked at those two German articles because I’d have to use Google translate for them, and I wouldn’t be comfortable trying to parse whether they address enforcement issues just from a translation.
I’m not entirely sure that’s been my position. I’m asking what the enforcement mechanisms for microfinance companies are. And if the answer is “nothing more than close contact with customers, due diligence and/or refusing to make a second loan to someone who has defaulted” I’m just asking for cites, because if those really are the only enforcement mechanisms I think that’s very interesting.
Well, I inferred that because you have trouble grasping what has been said half a dozen times already.
Pray tell us what your position is that you need cites for normal banking behaviour / due diligence resulting in low default rate all by its own, coupled with the additional close contact/ good care?
I mean, do you need cites that dollar bills are green, too? The question isn’t what they are doing, is what your problem is that you keep demanding cites. Until you tell us what special kinds of cites you deign to accept as for how things work - nothing from any of the institutions involved, no reports in non-English, - I don’t want to spend hours searching for something that still doesn’t convince you because of some belief you’re holding.
Because if there isn’t some belief, there have been cites enough in this thread on how things work.
Those aren’t cites, because no one in this thread has any experience with taking out a microfinance loan or how microfinance loans are enforced. What makes you believe the only enforcement mechanisms are due diligence and close contact? Where did you learn that? It might well be true but I haven’t seen anyone with any knowledge of the industry actually say that. The microfinance companies themselves don’t say it on their websites, the news articles don’t say that, the studies you’ve cited don’t say that. So how are you so sure about it? Aren’t you just assuming?
In fact the only relevant cite you’ve provided - the NY Times article - contradicted what you’re saying: it claims that in Nicaragua, at least, it’s the court system and bankruptcy that’s the enforcement mechanism, not just due diligence and customer contact.
If you want data on microfinance, World Bank’s CGAP site is good, and for the issue of repayment see this:on growth and vulnerabilities, explosion of repayment problems Since I do a lot of business in Africa, always running into microfinance and especially ludicrous schemes promoted by well meaning white people. Contra the starry eyed renditions such as Constance above, there are a lot of problems in growing it beyond a small scale. India is also have serious emerging issues including long hidden abuses in repayment pressuring.
Thank you, those two reports are very interesting. For one thing they both say, contrary to what the microfinance companies themselves and Constanze above are saying, that microfinance companies are often poor at conducting due diligence and customer contact, and that the default and delinquency rates among microfinance customers is higher than we think and has rocketed over the last few years. It’s obviously not just western banks who tempt their customers into default. They both also note that MFI’s have been known to conduct “unsavory loan collection practises” and “strong-arm debt collection”, particularly when a market gets very competitive, which doesn’t surprise me.
However both reports, and the first report in particular, do seem to suggest that, as a number of people have suggested in this thread, the usual practise for MFI’s is to provide loans in an area of a poor country where people do not have access to any other forms of credit using a single repayment enforcement mechanism: that the borrower will only be able to get another loan if they repay the first one on time. Essentially it does indeed sound like the fundamental model for MFIs in very poor areas involves very little repayment enforcement at all, other than “if you don’t pay back this loan, we won’t give you another one”. And the loans start small and gradually increase so that if someone defaults on the first or second one, it doesn’t matter too much to the MFI’s bottom line.
I think that sounds like a nice way of doing business, and a good idea, and it’s interesting to me that apparently that can work in certain circumstances.
Yes, I don’t work with microfinance, but it’s becoming quite prevalent in Africa and know lots of people that do interact with it a lot.
It’s very clear that the “fairy dust” warm and fuzzy view only holds in a certain set of circumstances.
The ideal model is customer pressure - that was the model that was supposed to be the basis of it all, noble poor and all that, per our German above. However, it only works in areas starved for credit it would appear, and where there aren’t many choices. Whether it is the loan recycling or the Group Debt model (as I understand a borrower group becomes jointly liable for the group’s debts, and thus pressures members on repayment.
Sure, but caveat emptor. Nice way of doing business though? I am not sure that the borrower group model, given the stories out of Indian subcontinent, is particularly “nice” in the end.
Maybe not. What I meant by ‘nice’ though is that when a borrower can’t repay a loan, under those fundamental models of microfinance, it sounds like the response is genuinely to say “well that’s a shame, we can’t lend to you again, but have a nice day”, rather than sending in telephone collectors, cutting universal credit ratings, taking them to court or sending goons round to their house. Now I know that’s not always the case: some MFI companies do seem to use strong-arm tactics; in countries with a court system like Nicaragua they’ll use the courts; and the group borrower model can easily become a substitute for ‘sending the goons round’ if the other group members start bullying a member who can’t pay up. And it also sounds like that model is only viable in very specific conditions: say, a small African village where people have no access to other forms of credit, where there’s no real court system and where there’s only one MFI company operating. But it’s still interesting to me that the basic microfinance model, in specific conditions, doesn’t need any real enforcement mechanism at all.
I learned this from the articles I’ve read in various sources about microfinance; from Yunnus book (which you don’t believe, because it’s from the source itself). If three different news articles and two different groups involved with microfinance say all basically the same thing, it’s not assuming; and it’s pretty sure.
Of course, to everybody at least partially involved with and aware of modern banking practices and working with poor, the success rate is not a big mystery: proper banking practises alone lower the failure rate to 10% and below, so that social pressure, careful work before and during the loan would further lower it to 2-5% is no big mystery.
Except to somebody who believes either that a failure rate of 40% is normal (it’s not with good banking diligence); that people are scum about repaying (they’re not) or that poor people are bad with money and therefore always a risk, and will never repay (they aren’t and they do).
Moreover, how else would it work? The UN group has given the success rate; and the Nobel prize committee looked into the Grammeen bank before giving the prize to Yunnus in detail, too. How else do you explain it? You still didn’t answer what your alternative theory is.
Basically, this whole conversation runs along the lines of
You: how does this work?
other posters: explain at length
You: I don’t believe it.
others: explain again
You: It can’t work this way, that’s not possible.
others: explain again
You: Do you have cites? But nothing from the groups themselves.
others: did you read those articles?
You: Well, they’re in a foreign language. I want cites from peer-reviewed articles
others: why don’t you go to a library and look for yourself? We don’t know what your problem is
You: I don’t believe it. do you have cites?
If you want personal experiences from people who took a microcredit, you would need to look at Kiva, where you can get into contact with the lenders (the ZEIT had a long article where a journalist visited a lender three times: at the beginning, in the middle, and at the end of the loan and chronicled her experience, including bad luck and unexpected decisions and set-backs; but it’s in German). Or you would need to contact an American branch that gives microcredits.
But then you are still getting reports from people involved with this, which you rejected earlier, because you wanted other sources.
You count Yunnus as well-meaning white person? Huh, my impression was that he considers himself a Bengali.
You also don’t mention the many African women who went to India and Bangladesh to gather experience after (white-people) charity orgs. organized this in an effort to transplant the model beyond India, and that it was those African women who organized and adapted the model to be used in Africa itself.
If you’re referring to the recent scandals, every serious news reports mention that those came about when other banks got envious of the “profit” and tried to move in, breaking one of the main rules that Microcredits are for business only, and handed out consumer credits, which naturally led to problems.
If you are desperatly looking for bad-mouthing as the only source you are willing to accept, then go look at the infamous Friedman Inst.*, they had an article several years back dissing microfinance because empowering the poor is of course a bad thing for libertarians.
*The Friedman Inst. is the libertarian think-tank that in the 70s and 80s gave business advice to South American countries that turned out disastrous for most of the population, increasing poverty and inflation and national debt; Despite this, they still believe that because they’re libertarians, they are the experts on all things economical.
If you mean “becoming prevalent” that it’s getting more obvious and headlines, yes, but it’s been around Africa, too, for a good decade or more. However, it started small, for example when Brot für die Welt and similar realized that lending women money to buy a sewing machine after completing her sewing course worked better psychologically then giving her a machine as gift.
Have you been smoking that fairy dust? Because nobody said anything about a warm and fuzzy view. For the hundreth time now: it’s good banking practise of careful selection plus the group concept. I don’t see where there’s anything warm and fuzzy or fairy dust about it. Unless you count real life (once again) disproving that poor people are bad. But that doesn’t need to be proven: the educated people know this anyway, it’s not new, and the ideologists won’t believe it despite the evidence.
First, what has my nationality got to do with anything?
Second, it seems you also didn’t read Yunnus book: giving credit to potential entrepreneurs who could never get a credit from the normal bank is all the microfinance idea is about. Saying it only works in areas where other credit isn’t possible is like saying water is wet.
Third, group pressure is the negative view, and also not the norm. It serves as support group just as well: every week the members meet and discuss the problems and successes they have had in their business. A group of women meeting without their husbands, and getting encouragment to continue despite problems, is very empowering. (Or is that too warm and fuzzy for you?)
It’s a business. Yunnus intended that from the start in the 70s: to be profitable with his Grameen bank and stay in the black. A business doesn’t have to be nice, it has to be fair, honest, transparent and long-term. The good microfinance companies all fulfill that.
And the stories you hear from India should be compared with the normal loan sharks, which are the alternative for poor people to pay the seeds for the next farming season, to pay the doctor when somebody gets sick, or a new cow when the old one died unexpectdly. These loan sharks always demand a security, want 100% interest at least (and then additionally cheat the illiterate lenders), and if one rate can’t be paid, the cow is gone, which is the only way for the farmer to make a living (to plough the field). Or one of the children is sold into debt servitude.
Compared to that, a bit of group pressure is not drastic.
Sure, if a western person with good credit scores looks at the Grameen bank rules which all circles must promise to uphold, they sound very intrusive - I won’t give my daughter a dowry, nor demand one from the groom etc. - but in the context of poor, often illiterate women and long-term empowerment to earn money independently, it’s necessary.
Nobody said that. The response if somebody can’t repay a loan is to ask “Why are you not making the weekly/ monthly payment? What’s the trouble?” and when the lender says “My sister needed a doctor, I paid for the visit/ I used to have 100 people coming for dinner to my restaurant from the embassy, but now they’ve gone elsewhere/ the fuel I need for cooking has risen in price because of inflation/ the cotton I need to sew has risen in price” and then work out a way to fix this. Sometimes by prolonging it - next week the earnings will cover the credit rate; what can you do to get new customers?, can you raise prices to cover the higher costs? etc.
Working together with the lender.
As for sending in telephone collectors, cutting universal credit ratings, taking them to court: it sounds as if you still don’t understand who these people are. They have no telephone; they have no credit ratings; taking them to court won’t achieve anything because they have no possessions.
Sending goons to their house also doesn’t achieve anything. The creditors are business people; breaking their legs or taking their sewing machine away means that they will never ever make money to pay their credit back. It would be stupid. Helping them solve their difficulties, by extension or other options like advice, means that they will soon earn money again and be able to pay back.
It’s only viable in specific conditions because it was developed for these conditions. The ZEIT article mentions how Yunnus developed lending circles of original 50 people; this was adapted to 5, but when Kiva tried it in Nicaragua, they found that nobody trusted anybody else (possibly because of the civil war), so Kiva went directly to one person.
It’s like saying “amazing that the square bolt fits into the square hole” and ignoring that it was cut that way to fit.
Saying that there is no real enforcement because the telephone isn’t cut or goons are sent is like saying that because a dollar is green, all other money that isn’t green isn’t real money.
Enforcement is more than goons, telephone cut or international credit rating.
The articles you posted didn’t mention anything about enforcement. The only brief mention of enforcement in them contradicted what you’re saying - the NY Times article noted that in Nicaragua, microfinance companies use the court system to enforce loans, which you said they don’t. You told me to look at the websites of microfinance companies for the answer, which I did, and they don’t mention enforcement. You told me that Muhamed Yunus says there’s no enforcement mechanism, but you don’t tell me where he says that, and I don’t have much inclination to read his entire book just to get an answer to quite a simple question. And your final point, “why don’t you go look in a library yourself”, well that’s not a very helpful answer, is it? You could reply to any thread on this board saying that.
Look, I understand what you’re saying. You’re saying microfinance companies use no enforcement mechanism beyond due diligence and customer contact. But the NY Times article you quoted says that’s not true: in Nicaragua they use the court system. Both of the CGAP reports wmfellows posted above also say that’s not true, and that a lot of them use “strong-arm lending tactics” as well. Even the other posters didn’t agree with you: they said that the companies also use the threat of cutting off any future loans as an enforcement mechanism. So there’s a bunch of cites saying you’re wrong and a bunch of people who disagree with you; while you haven’t provided any cites backing up your argument. I’m not making any judgments, I just don’t see why I should conclude that your position is persuasive.
I’m asking what the enforcement mechanisms for microfinance companies are. And if the answer is “nothing more than close contact with customers, due diligence and/or refusing to make a second loan to someone who has defaulted” I’m just asking for cites, because if those really are the only enforcement mechanisms I think that’s very interesting.