By Isaac Iglesias, KF10, Mozambique
I used to work in the credit card industry for a major bank in London, looking at portfolios in the developed world. One of my biggest surprises when I started working with my MFI was the fact that they are much pushier than their European and American counterparts when it comes to asking for loan repayments. Before approving a loan, an assessment of the equity of the borrower is performed; and some or most of his property is offered as collateral. This is usually a fridge, a television or a piece of furniture. If a borrower starts to fall behind with his payments, different things may happen depending on the severity of the delinquency.
A few days behind: Phone calls and personal visits begin to happen every day, reminding the borrower that the payment is due. Even if the payment happens only a few days late, the interest is recalculated and a small daily fine is applied.
A couple of weeks behind: Phone calls become less informative and more pushy, and unannounced visits to the borrower are commonplace. The possibility of repossession is mentioned.
One month behind: Another payment is due and the one before has not been paid yet. This will generally result in a home visit demanding the payment. If this is not successful, a written warning is left, informing the borrower that the have 24h to show up at the MFI offices or face repossession.
24 hours later: If the borrower is unable to pay, her/his property is taken away and kept safe on the MFI’s premises. The borrower signs a paper confirming his property is being kept, and the MFI signs another part stating the number of days the borrower has to pay his debt and recover the property before it is sold.
After that period: The property is sold and the money put towards the payment of the loan.
Such procedures do not happen in Europe and America not because of banks’ goodwill – but rather because of anti-usury laws non-existent in other countries. However, this struck me with an apparent moral dilemma. If this MFI is a non profit institution whose mission is to alleviate poverty and help develop the area where it operates, do they need to be so harsh? Do they need to take away the only property/luxury this person owns? Is this necessary?
The answer is yes.
The MFI takes extremely good care in making sure the borrower understands how credit works and the consequences of delinquency. Also, they provided very small loans to first time borrowers and only increase the amount once they have a proven track of good repayment – id est, a credit history. However, if the borrower fails to repay, fines and repossessions need to be enforced.
For microfinance to work, these institutions will eventually need to be financially sustainable. They need to operate without foreign aid and donations. The money from repayments is necessary for other loans. A good understanding of credit culture has to be present in the community for it to raise itself out of poverty.
An optimistic note: by enforcing repayments, educating the community about credit and basically being painfully pushy, my MFI in Mozambique has been able to reduce its “Portfolio at Risk” measure from a whopping 51% to a mere 4% in less than a decade.
