What does the repayment rate of the microfinance industry NOT measure?

During my various visits to Kenya and now as a Nairobian, I have met hundreds of Kenyan borrowers. I also had the privilege to interview over one hundred of those individuals who borrow from microfinance. To my surprise, more than the majority of my interview subjects have paid for the loan of another borrower or have known a defaulter in his or her family or community.  

This was a surprise to me because the microfinance industry claims to have a high repayment of loans. It is often estimated that 96-98% of all loans are paid in full. I never considered how the microfinance industry measures repayment. Does the industry consider who paid the loan? 

The high repayment rate reported by the microfinance industry implies that low income borrowers are able to invest their loan in their business that helps it to grow and generate a profit that allows them to pay back their loan. 

From the individuals whom I have met and interviewed, I have learned that borrowers often use funds from sources other than the profit earned from their business(es) to pay back their loan(s). These other sources include borrowing from more than one lender, family members, individuals in their communities or self-help groups. Most of the Kenyan women whom I meet throughout Nairobi and the Rift Valley participate in at least one self-help group, specifically Chamas that is an informal savings group in which each member contributes a predetermined amount of money to the group at each meeting and one member is chosen to keep the contributions. Despite the proliferation of opportunities from financial institutions and banks, these sources of informal finance in Kenya are still common to help individuals cope with daily life, including the requirements of microfinance. 

As explained, loans are often paid with the help of others. Loan repayment is not the sole responsibility of borrowers. Most often, this responsibility is passed to the guarantors of borrowers who are in the same lending group. If a borrower defaults, his or her guarantors are legally responsible for paying the loan, including penalties. In fact, the microfinance lender will freeze all future loans of the group and even take the savings of the guarantors until the loan balance of the defaulter is paid in full. This puts financial and social pressure on borrowers and their guarantors who have their own loans to repay. Does such a situation contribute to the over indebtedness of microfinance borrowers and increase the cases of default in the microfinance industry?

High repayment rate is a matrix used to ensure successful lending practices of financial institutions, but does it guarantee a happy ending for borrowers? The repayment rate of the microfinance industry should account for who pays a loan. After all, the purpose behind the creation of microfinance was poverty alleviation rather than the current weakening of the community relations, financial stability and social capital of borrowers that I witnessed in Kenya.

I argue that when a loan is paid in full, the lender always benefit, but borrowers do not.