Story of Microfinance Borrower: Meet Susan

Meet Susan...

Susan was a first time microfinance borrower when she became very ill. As a result, her hotel failed and she was unable to pay her loan. 

Upon her second missed payment, her group members came to her home to take her property, including her bed, cooking gas and television. The group members explained to Susan that they had to take her property in order to pay the remaining amount that she owed because they could not afford to assist her while paying their own loan. 

Susan regrets not understanding such consequences when signing her loan agreement. She did not understand what would happen to her home, her business and to the other group members, if she did not pay her loan. 

What can the microfinance industry learn from this story?

The story of Susan can be found across the world. In the past, some of the most famous cases in which thousands and often millions of microfinance borrowers were unable to pay their loans (known as the repayment crisis) occurred in countries, including India, Bosnia and Herzegovina, Nicaragua, Bolivia and Pakistan. 

It disturbs me that the majority of Kenyan microfinance borrowers whom I interviewed have paid for a defaulter or defaulted on a loan. 

Could the “repayment crisis” reach the Kenyan microfinance industry? 

I cannot answer this question as my sample size for this project is too small (only 7 microfinance programs were profiled and 105 borrowers were interviewed) and there are various factors that contributed to the repayment crisis (including concentrated market competition and multiple borrowing, overstretched microfinance institution systems and controls, and erosion of microfinance institution lending discipline[1]).   

But, the Kenyan microfinance industry should learn from the commonalities of the cases listed above and plan appropriately.

How did this story contribute to the manual? 

To prevent such a situation in the future, the manual will contain information about the common consequences of not paying a microfinance loan, specifically what actions lenders can and cannot undertake in order to recover the debt of a borrower.

By reading this section of the manual, borrowers will hopefully be better equipped to fully comprehend the risk of borrowing and hold lenders or auctioneers accountable for their actions.

That said, I admit that the lack of financial literacy is not always the culprit for detrimental financial decisions. Circumstances of impoverishment, specifically trying to survive day to day, led individuals to undertake the risk of borrowing despite the consequences. 

Some individuals feel that they have no choice but to join any microfinance program that will lend to them. In their eyes, it is a decision based on survival. As one borrower stated during an interview, “Life happens and there is nothing that you can do.” In other words, if she defaults, then she defaults. In her eyes, if she does not try to survive with the help of microfinance, then she will be worse off.  

---

[1] Please read “Growth and Vulnerabilities in Microfinance,” a study complied and published by The Consultative Group to Assist the Poor, for more information. 

http://www.cgap.org/p/site/c/template.rc/1.9.42393/

Story of Microfinance Borrower: Meet Ibrahim

Meet Ibrahim...

Ibrahim thought that he understood his loan terms when he signed his loan agreement, but months after receiving his loan he regretted borrowing to support his transport (matatu) business. 

Ibrahim thought that his grace period was one month, so he did not plan to start paying his loan until one month after he received it.  

Three weeks after receiving his loan, a loan officer called Ibrahim asking why he did was not paying his loan on time. The loan officer accused Ibrahim of being a reckless borrower for not understanding his loan terms.

Ibrahim advises all borrowers to seek the assistance of an advocate to review their loan agreements.

What can the microfinance industry learn from this story?

Many borrowers struggle with understanding their loan terms and requirements. Dozens of borrowers, whom I interviewed, accused their lenders of cheating them as the result of the borrower misunderstanding information or the lender misrepresenting information about a loan.

It is extremely important that lenders take the time to verbally explain and issue copies of loan agreements to every borrower. During my research, I found that microfinance programs usually give loan agreements for individual loans, but not for group based loans.

This change might preserve relationships between lender and borrower by ensuring that the borrower understands the risk and investment of borrowing.

How did this story contribute to the manual? 

Ibrahim is not the only borrower who has experienced challenges as a microfinance borrower.

In order to help borrowers address their many challenges, the manual will contain a list of resources, including consumer advocacy organizations, legal assistance providers (advocates), and the Kenyan regulation authorities.

Each organization offers different services, such as financial training, legal representation, and advice on consumer rights.

This portion of the manual will help microfinance borrowers to learn about the different Kenyan organizations that they can turn to when help is needed.

Story of Microfinance Borrower: Meet Rachael

Meet Rachael...

Rachael is a small scale farmer who, due to a drought, was unable to sell enough stock to pay her loan.

As a result, she was jailed by her lender for not making payments. Even though Rachael’s loan repayment period was not finished, her lender told her that she would remain in jail until the entire loan amount was paid. Rachael tried to explain to her lender that she could start paying her loan once again next month, but this was not acceptable to the lender.

Four days later, Rachael’s family was able to collect the amount that she owed. Some of the family members were angry with Rachael for not paying her loan. Rachael tried to explain that her crops were not doing as well as she had anticipated due to the drought.

What can the microfinance industry learn from this story?

Not all borrowers purposely avoid paying their loan(s). There are borrowers who want to pay their loan(s), but many experience emergencies or financial hardships that prevent them from making payments. Rather than running away, Rachael was willing to talk to her lender about her financial hardships.

Microfinance programs should consider changing their credit policies to allow some borrowers (under specific circumstances) to refinance their loan or reschedule their loan payments. All of the seven microfinance lenders that I researched did not allow these options for its members. 

Such credit policy changes might prevent defaults and protect the borrower, such as Rachael, from over-indebtedness and other financial struggles, along with weakening of community relations.

How did this story contribute to the manual? 

Rachael’s rights were violated because she was not arrested with a court order. A borrower in this situation, should ask themselves whether their lender has the legal authority to take this action?

To prevent such a situation in the future, the manual will contain a list of information about the consequences of default, specifically the actions that lenders CAN and CANNOT undertake to recover the debt of a borrower.

This portion of the manual will help to increase the knowledge of borrowers about their rights if their loan is considered delinquent or in default.

As the majority of the borrowers whom I interviewed were defaulters or paid for a defaulter, I think that this section of the manual is extremely important.

Story of Microfinance Borrower: Meet Beth

Meet Beth...

For nearly five years, Beth has been a microfinance borrower to support her passion and expand her career as a tailor. Her goal as a borrower is to pay her loans as quickly as possible in order to prove that she is responsible to borrow bigger amounts.

It was not until her third loan that her tailoring business was earning enough profit to allow her to finish paying one month early.

When Beth tried to settle the remaining balance of her loan early, she found that she had to pay a penalty. She did not understand why the lender would not take her payment without the additional fee. Beth still feels that she was punished by her lender for being a good borrower.

What can the microfinance industry learn from this story?

Similarly to the story of Daniel (in the last post), the lack of preparedness of borrowers and the lack of transparency of lenders often puts both parties at a disadvantage. 

Beth was not able to pay her loan without additional financial hardship, and her confidence as a borrower weakened. The lender lost the trust and confidence of a long term client.

How did this story contribute to the manual?

Beth was not able to pay her loan early as she had hoped.  The ability to pay early is something that this borrower should have known before signing her loan agreement. If Beth had the proper information about the lender fees, she might have planned differently.

To prevent such a situation in the future, the manual will contain a list of information that every borrower should obtain, including ALL lender fees and charges, when searching for a lender and before signing a loan agreement.

This portion of the manual will help to increase transparency of microfinance practices by helping borrowers to analyze what information to obtain about their loan.

Story of Microfinance Borrower: Meet Daniel

Story of Microfinance Borrower: Meet Daniel

 

Meet Daniel...

Daniel borrowed his first loan in order to expand his charcoal business. He was able to pay half of his loan amount until his business was burned in a fire. Daniel was relieved when he remembered that he paid for loan insurance, thus he expected that his lender would forgive his debt.

When the loan officer told Daniel that his debt would not be forgiven, Daniel asked why he had paid an insurance fee. The loan officer explained to Daniel that the insurance only pays the loan balances of borrowers who die.

With this news, Daniel left the lending program because he thought that his lender was lying to him. He is now a defaulter, but he states that he cannot pay the rest of the loan as he must use all his income to start a new business. 

What can the microfinance industry learn from this story?

Often, the lack of preparedness of borrowers and the lack of transparency of lenders puts both parties at a disadvantage. 

Daniel was not able to pay his loan and rebuild his business like he expected, and the lender lost a client and did not recover the rest of the loan amount.

How did this story contribute to the manual?

Daniel did not have the correct information about his loan insurance before applying and borrowing a loan. If he knew this information, he might have joined another microfinance program or planned differently. 

To prevent such a situation in the future, the manual will contain a list of information that every borrower should obtain, including information about loan insurance, when searching for a lender and before signing a loan agreement.

This portion of the manual will help to increase transparency of microfinance practices by helping borrowers to analyze what information to obtain about their loan.

Why are the stories of microfinance borrowers important to consumer education?

I have been told that in microfinance there are no bad borrowers; there are only bad lenders.

The justification for these statements come from the responsibility that is placed on lenders to only lend amounts that they know they can recover. Thus, lenders should ensure that their clients are capable of repaying their loan(s) and able to understand their loan terms before lending any amount.

In microfinance, such responsibility is particularly important as most borrowers in such programs are small business owners usually living day to day and lack the educational background that is necessary to read and understand loan applications and agreements.

But, I also believe that microfinance borrowers are not alone in their struggles. Financial consumers, in the developing and undeveloped world, struggle with financial literacy and the skills necessary to ensure that they will benefit rather than suffer from borrowing.

In the world of finance, such consumers are often blamed when they make bad financial decisions. Unfortunately, the practices of lenders often make the consequences for consumers who are not prepared or unable to protect themselves even worse.

So, who is to blame for the misfortunes of microfinance borrowers?

Below are stories that I documented during interviews with past and current microfinance borrowers in which borrowers and/or lenders did not act responsibly and/or ethically. Such stories are important to the upcoming manual because each allows the reader the opportunity to learn from the past experiences of other borrowers, and illustrates why the sections of the manual are applicable to the lives of microfinance participants.

In upcoming blog posts, you can read such stories to learn about some of the challenges of Kenyan microfinance borrowers, and why the challenges of borrowers are important to understand when preparing a consumer education material to expand protection for microfinance participants.