“Multiple borrowing was endemic,” in Bangladesh as of 2008, says Shameran Abed, the director of microfinance at Bangladesh-based Brac International, “but we didn’t know if this was bad, although we knew it was a risk.” Mr Abed was speaking this morning at the opening plenary of the last day of European Microfinance Week, which is organized by the Luxembourgish NGO European Microfinance Platform (e-MFP). In the past, he explained, the members of borrowing groups were good at letting Brac staff know who was a good credit risk. As the market was getting saturated, “Groups became less cohesive, so we couldn’t totally rely on them to tell us if individuals were becoming overindebted.”
Daniel Rozas, the senior microfinance expert at e-MFP, cited a recent study on over-indebtedness in Mexico that found that most microcredit borrowers in the sample studied had four or more loans at one time. Fernando Fernandez, the general manger of the Mexican arm of nonprofit Pro Mujer, stated that, “There are hardly any clients that work with only one lender…so our goal is to be their primary lender, not the only one. We are certain there is over-indebtedness, but we are not certain of the scope of this. We may be talking about just a small segment of the market…. It is not clear if it has contaminated productive microcredit.”
Distinguishing the work of Pro Mujer from that of consumer lenders, which are very active in the country, Mr Fernandez said, “We are building a relationship with clients, not conducting a transaction. In the past we had one single product, but once women have learned about borrowing through a group loan, then competitors had better tools to offer. We are working to have tools to understand when a women in a group has a need to graduate to an individual loan, while continuing to be involved in group, which is like her family.”
Mr Abed said, “We weren’t naïve enough to think that multilending necessarily was over-indebtedness.” But his team decided to ask its clients why they had multiple loans and whether larger loan sizes would reduce this need. Their answer was no, because they need money at different times throughout the year. At that time Brac and its competitors were highly focused on one-year loan terms. Clients might want USD 200 in January and USD 200 in June, rather than a larger amount all at once. Clients also said they liked multiple borrowing, so they wouldn’t risk getting shut out by their only lender if they missed a few payments. As a result, Brac began making its loans more flexible to allow refinancing and the option to borrow additional money before repaying the entire prior loan.
Describing the environment of the market failure in Morocco around 2008, Youssef Bencheqroun, the director of microfinance institution Al Amana, said, “The largest institutions created an internal credit office to cross reference our files. Every week we pooled information about non-repayments.” Other institutions, however, “knew how to manage growth but did not have the DNA to manage risk.”
Regarding today’s market in Mexico, Mr Fernandez added, “We haven’t come to agree that we can destroy the market if we don’t care for clients. This is hard in Mexico, but we have seen what happened [with the microcredit crash] in Nicaragua. We know that re-constructing a market is difficult, so we have to defend the progress we have made so far. The leaders in the market have a high appetite for risk; this is making the authorities think.”
This article is one of a series covering the proceedings of European Microfinance Week, which is taking place in Luxembourg from November 12 to November 14. MicroCapital is reporting on the sessions onsite throughout this time under a sponsorship from e-MFP.
Additional Resources
MicroCapital Universe profile on Brac
MicroCapital Universe profile on Pro Mujer
European Microfinance Platform (e-MFP) to Host European Microfinance Week, November 12-14, 2014, With On-site Reporting by MicroCapital
More coverage of European Microfinance Week and the Action Groups of the European Microfinance Platform (e-MFP)
Do you know that MicroCapital publishes the MicroCapital Monitor newspaper each month?
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