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.
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