Warning: A “Credit Bubble” in Microfinance
Microfinance has emerged in the last half century as a powerful force for economic development. According to the World Bank, microfinance institutions serve about 160 million people in developing countries. The theory is simple: with even extremely small loans, the poor can develop income-generating businesses and take steps toward self-sufficiency.
But now there comes a warning: microfinance may be experiencing a credit bubble, with serious consequences for the very people it is intended to help.
The warning comes from Oikocredit, an organization that provides loans to about 500 microfinance institutions in some 70 countries around the world. In a news release, Oikocredit warns:
The threat of poor entrepreneurs taking on too much loan debt is a growing reality, and a genuine threat to the rapidly expanding microfinance sector. At Oikocredit’s annual staff and board meetings, regional managers who operate in almost 70 different countries, raised concerns over the rate of over-indebtedness in some countries. Those working in the field have witnessed that cases of over-indebtedness are becoming more common
The scenario is akin to the one that's been played out in the developing world, with disastrous economic results over the past year. Like banks and financial firms in the developed world, microfinance organizations need to grow to be sustainable - and that has led to unhealthy competition, Oikocredit says.
In some cases, especially with the entrance of profit driven actors, this leads to an increase in competition and results in institutions reaching out to the same clients in the same (often urban) areas. Oikocredit Regional Directors reported stories of clients with loans by more than two, three or even five different microfinance institutions. The over-indebtedness of clients, and sometimes abusive collection practices, can often be a consequence of this multiple lending.
“Credit is a stepping stone out of poverty - as long as repayment is possible. If repayment becomes an insurmountable burden, a client becomes over-indebted. We do not want MFIs and their clients to fall into this trap. Organizations providing funds have an extremely important responsibility,” said Oikocredit Managing Director Tor Gull.
Oikocredit said its staff was taking a number of steps to address the issue, including contacting leading national and international organizations and networks. "The negative consequences of competition can only be effectively solved through agreements on a national level and joint initiatives," Oikocredit said.
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The issue of multiple borrowing is gradually becomming a cankerworm in the field of microfinance. if it is not addres it will be the tsunami of microfinance especially in countries where the market is down at the moment
As i am writing this piece, i had a recent discussion with my former employee regarding the status of the project i left behind in Sierra Leone ( whilst i am currently studinying in Germany doing a master in Developemt finance) regarding portfolio performamnce of the microfinance institutions.
A gloomy picture was reveal to me that the portfolio quality of the microfinance institutions in my country Sierra Leone is gradually deteriorating with high Par some up to 15% . As i went back to ask the reasons for this ,his first was because of mutiple borrowing by the client and the second ineffective monitoring of client activities on the part of the institution. After a thorugh investigation it was realised that most of the client have solicited loans from varoius other microfinance institutions ( multiple borrowing) and with the market down they are unable to honor their repayment so they become expose in the light of the multiple borrowing.
In any case the issue of multiple borrowing is becomming a major threat and has the potential of sinkig some microfinance institutions in the mere future especially institution who are madly driven and focus on making profit at any cost..
The issue of competion amongst MFI's will act a breeding ground for the so call bad client to operate freely capitalising on the inability of the financial service providers to come to terms as a away to address the issue of cordination ie interms of sharing client information. It is going to be a real task to sort this problem otherwise it will continue in future.
In comming up with certain solutions, at times the size of the institutions interms of client number makes it difficult for some remedial measure that one may think to adopt (like coordination -through net working, sharing client photos, etc) In the technical area where you can desiged a loan product that will give them the chance to do multiple borrowing as an incentive so that the laon activity will be concentrated in one institution,, yet still some client can still obtain the loan product and at the samet ime go across and obtain another loan from another financial service provider.
In this regard, i ask that a world wide conference be conducted on the issue of multiple borrowing so that microfinance expert will come together and brain storm on this issue to be able to address the issue of multiple loan borrowing before it is too late especially in this electronic world.
I wll need a respone or feed back on this comment and your own suggestions on this issue
Hassan Conteh
Student
M.Sc Development Finance
Frankfurt School of Finance and Management
Frankfurt
Germany