How do microfinance companies enforce repayment of their loans?

[constanze]

@isaiahrobinson

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.

That’s because you keep moving the goalposts, and I no longer know what you want. You obviously have some kind of agenda or belief that leads you to reject what you don’t like, therefore you need to look up stuff to decide what you want.

First, you wanted to know how it works

• but not from the groups themselves, outsiders view
• but not articles in German
• only peer-reviewed articles
• experience reports from people having taking out a microfinance loan

If you reject the reports of the groups themselves, without giving any reason, groups that have been controlled by the tax office or the DZI on their work, or an accounting company when doing their financial statement (since Grameen is a real bank that has to obey the law); if you demand articles from journalists, but reject German language, which obviously most stuff I read about this will be in - then there’s not much I can do for you.

And with Yunnus book, I read the German edition, so I can’t give you the page quote for the English ed. Also, enforcement is not a single page, it’s a whole chapter on how the system works.

I don’t know why you keep mentioning Nicaragua using the court system - does that mean you cherry picked it from all other countries that also use microfinance? Because you also ignored my earlier questions and cherry pick (when not outright misunderstanding) my posts.

If you want to ignore what I say, fine. If you don’t want to believe me, okay. But please stop distorting and twisting what I say, I dislike that.

Look, I understand what you’re saying. You’re saying microfinance companies use no enforcement mechanism beyond due diligence and customer contact.

No, you don’t understand, and no, I didn’t say that at all. I described which enforcement mechanisms are you used.

I don’t know if English is not your native language, either, or if you keep using that word in a different way for other reasons; but if you claim that enforcement is only strong-armed goons, cutting the telephone and international credit rating … the NO bank in Germany (and probably the rest of Europe) has enforcement, either! The bank is not allowed to cut telephone, only the telephone company can do that.*
The bank is not allowed to send strong-armed goons, either. They would get into hot water very quickly.
And we have no international credit score, we have only the national Schufa.

And yet German banks manage to enforce their credits. Of course I don’t have a cite from a peer-reviewed article for that. I know the German laws that apply, I watch German TV reports when credits are badly given or sold by banks; I know that each year when the banks make their yearly statements, the accountants will control it, so what they say they do is largely accepted as true unless proven otherwise - but you don’t count that as cite.

• They might do if you don’t pay their bills after threatening letters, but they still must provide emergency 911.

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.

Did you read that part in the CGAP report where it refers to deplorable practises as the profit-greedy companies started moving in the previously charity-oriented, and not oversighted and regulated market, and how those excesses, including giving consumer credits to poor Indians and leading them to debt, produced the guidelines of the report?

Or were you only cherry-picking?

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.

That’s not disagreement, that’s part of the method I described. Maybe you should read my posts fully and not partly.

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.

One poster talking about fairy dust is a bunch of people? Two reports I dug up on the quick plus others you didn’t deign to read because you don’t accept German are a bunch of cites? You do have a strange measurement for sure. But then, we obviously start from different positions; I don’t find anything miraculously wonderful in microcredits working, it’s interesting to know and that’s it; while for you it’s so earth-shattering you can’t accept it. Obviously I can’t convince you, so like I said, go to the Friedman Inst., they do a good job of badmouthing everything on microcredits, even if they contradict themselves several times.

Frankly, I don’t need you to conclude anything about my position; I already noticed that you don’t believe normal sources. You also still didn’t answer my questions or explain anything, you just repeat like a broken record the same questions, the same false assertions and misunderstandings.

The only thing I want from you is to stop misinterpreting my posts. Everything else, what and whom you believe, is your decision.

[wmfellows]

@constanze

You count Yunnus as well-meaning white person? Huh, my impression was that he considers himself a Bengali.

No I count Germans adn starrey eyed promoters on the internet.

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.

Nice story.

However the literature shows that the problems run much deeper.

[wmfellows]

@constanze

Oh, one thing I wanted to add:

compared to the US model of credit scores that are:

This is entirely irrelevant. I don’t know what USA has to do with this, but it certainly isn’t relevant.

[wmfellows]

@constanze

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.

I have been working in Africa for longer than that time period. Becoming prevalent means just that, the concept is expanding out of the original countries where it was tried.

[brazil84]

I run a business which at times has extended small amounts of credit to people of all races and cultures. Contra chronos, most people are not fundamentally decent. Most people will dishonor their obligations at the drop of a hat. Well maybe not most, but a large percentage. The people who do honor their obligations tend to be people with sufficient financial resources that they did not need credit in the first place.

I have no knowledge of “Keva,” but I would guess that they are either lying or they are massaging the numbers to make their repayment rate look far more favorable than it actually is.

[isaiahrobinson]

For anyone who was interested I eventually got round to finding some cites to try and clear it up further.

1. This study of microfinance in the Gaza strip and the West Bank says that microfinance companies do sometimes use collateral as an enforcement mechanism: ie. when they lend money, they can secure it against assets like land, equipment or livestock, and repossess those assets if the borrower defaults. Repossession is not always feasible enough to be worthwhile in certain countries however.

2. This lecture on microfinance claims that a common method for microfinance groups is to make repayment dates for the loans so close together that borrowers are required to borrow money from local moneylenders to make the repayments. That means the microfinance companies effectively get to take advantage of the enforcement abilities of the local moneylenders - including sometimes their “strong-arm” tactics:

In a similar vein, Jain and Mansuri (2003) suggest that the microfinance lenders like to use the information and enforcement capability of the local moneylender. They do so by requiring that the borrowers repay in
tightly structured installments, which begins very soon after the disbursement of the loans. This induces the borrowers to borrow from the local moneylender in order to repay the microfinance lender. Thus, the lender leverages his own capabilities by employing the local moneylender’s capabilities in his favour.

3. This paper says that a lot of microfinance companies do tend to use the court systems for processes like bankruptcy and insolvency to enforce repayment, but that the local court systems can be slow and ineffective.

Many countries use courts to enforce debt contracts through bankruptcy or in-
solvency procedures. Especially in developing countries debt enforcement institu-
tions tend to perform poorly. To illustrate, Djankov et al. (2008) show that in 14
developed countries in their sample, insolvency takes less than a year to resolve,
while in nine, mostly poor, countries it takes more than five years. The enormous
costs involved in insolvency procedures in developing countries imply that in 80
percent of the cases insolvent businesses end up being sold piece-meal instead of
being saved as a going concern (Djankov et al., 2008).

4. That same paper argues that one of the strongest mechanisms is that in countries with ineffective court systems, there is less of a risk of a microfinance loan not being repaid, because it is harder to get loans off larger financial institutions, so borrowers are aware that microfinance companies might be their only option for taking out loans, an option they don’t want to lose by defaulting and being barred from future loans with that company:

I find strong evidence that inefficient debt enforcement [by which he means the local court system] is associated with less
MFI risk. That is, the number of days it takes to enforce a debt contract (contract
enforcement days) reduces MFI risk.

5. Finally all of those papers above mention that the group-lending strategy which a number of people in this thread have talked about often really does operate alone, without any other type of enforcement: the fact that group members rely on the microfinance company for loans in certain countries means that they put significant pressure on each other to repay, often “strong-arm” style pressure.

Constanze I didn’t read most of your last post, I couldn’t even follow it, but those are the kind of cites I was looking for as examples.

[wmfellows]

A note on what I know about the group lending strategy. Frequently the pressure comes from collective guaranty on the loans, that is no new lending is made to anyone in the group unless all are current. Group pressure becomes a major leverage point. I have read that when choices open up as well as when competition among MFIs increases such that the participant base becomes less “selective” the model breaks down.

Thus the commentary among analysts that the magic pixie dust is coming off.