Micro financing consultant Stefan Platteau says that in Nicaragua, microcredits are increasingly leading to financial problems. One of the root causes is reportedly the aggressive selling tactics of microfinance institutions that grant big loans without checking lenders’ creditworthiness.
"Quick and dirty", that’s how Stefan Platteau characterises the tendency among some microfinance institutions which are too quick to lend out too much money. Mr Platteau has been active as a microfinancing consultant for 20 years. At present, he is employed by the consultancy firm Triodos Facet in Nicaragua, a country that has been extremely popular among microfinance institutions for years.
Nicaragua is one of Latin America’s poorest countries, but has always been popular among Western countries as a recipient of development aid. Eighty percent of its families have taken out a microcredit. With a total of 286 million euros in outstanding loans, Nicaragua is Latin America’s top borrower, while at the same time hosting one of the smallest economies.
Eager to sell
The country’s popularity has led to a flooded market. "Anybody selling a product wants to keep increasing sales. This also holds true for micro finance providers", says Mr Platteau. "They get their money from investment funds, and it's burning a hole in their pockets; they want to get rid of it. And this leads to aggressive selling techniques and a search for new customers." Even though this may appear contradictory to their idealistic objectives, this is not always the case. “Their reasoning is quite simple: my mission is to provide financial services to the poor, I will fulfil it better with 10,000 clients than with 3,000. So growth is also motivated by the social mission."
Mr Platteau says this is not a problem in new markets, but after years of growth, as witnessed in Nicaragua, most people already have a microcredit. “So a sales rep is faced with two options: leave, or say his product is better: ‘Take out another loan, you do need extra money, don’t you? A poor person is easily persuaded to say ‘yes’ and takes out a credit which exceeds his financial possibilities.” For instance, some one who needs 5,000 Córdoba for his shop borrows double that amount. They invest the 5,000 in the business and use the rest to buy a radio or their daughter’s school uniform. The latter does not yield any money with which they can pay off the loan, so there is a real chance problems will ensue.”
Mr Platteau says this is not a global problem, but one that does play a role in other countries where microfinancing has been heavily promoted, such as Kyrgyzstan and Ecuador. The consultant has no information on the consequences for the people who have a loan. “The issue is yet to be properly analysed, but I do know tens of thousands of customers are in arrears. Some of them have sought refuge with Movimiento No Pago, an organisation of people who refuse to pay back their loans.” Which is why Mr Platteau in recent years has been paying special attention to borrowers; to boost their financial awareness and make them think twice before accepting a loan.
Victim of its own success
The first microfinance institutions have since gone bankrupt. Two months ago, Banco del Exito fell victim to its own success. "This bank was partly to blame for its problems. It had grown exponentially, thus acquiring large amounts of money from international funds, which they put out aggressively.” The bankruptcy has sparked awareness in Nicaragua that there is actually a problem, but this is no guarantee that a solution will be found. Should investment funds decide to pull out, the microfinance institutions would be left without money to lend out, “Which would only exacerbate the problem.”