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.
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.
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