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.