Saturday, June 16, 2007

Reader questions


My dad writes in with questions:

1. Why should repaying members of a group pressure non-payers? As long as an individual member repays her loan isn't she off the hook? (I can understand in the grand scheme of things that lower repayment rates may influence the probability of future loans, but surely this can't rank very high in a single borrower's mind.)

This is actually proving to be more true of FINCA Nicaragua than I expected. However, the "classic" model of microfinance, as pioneered/disseminated by the Grameen Bank, founded in Bangladesh by Mohammed Yunus (who received the Nobel Peace Prize last year), relies on group responsibility rather than individual collateral. The idea is that since extremely poor people have nothing to leave as collateral except their good name, the village banks are run on a joint and several responsibility principle, in which all the members of the bank agree to be responsible for repaying the loans of anyone who defaults. The Grameen Bank has many more solidarity-building activities than FINCA Nicaragua, with a very strong emphasis on teaching poor women that they have the power to make decisions and change their lives. Grameen borrowers pledge, among other things, not to pay or receive dowry for their children's weddings, not to honor traditional caste prohibitions, and to build sanitary latrines.

The idea is that the group will be very careful about which new members it accepts, because everyone is responsible for everyone else.

Here in Nicaragua, FINCA requires collateral, and (very anecdotally) this decreases the rate of repayment. The loan officers are also given financial incentives for each new bank they organize, which could also undermine the selectivity of the process.

The New Yorker has a good (10-page) overview of the current state of play in the microfinance world (especially focused on the tension between the for-profit and non-profit groups):

http://www.newyorker.com/archive/2006/10/30/061030fa_fact1?currentPage=1

2. Who are the "loan officers" and what's in it for them?

About $330 base salary monthly, plus incentives. Many, but not all, have post-secondary education.

3. Who (other than FINCA investigators) pays $60/night for a bad (or even a mediocre) room in Managua?

I haven't the foggiest idea. Deeply misguided tourists, perhaps?

No comments: