I am here to confiscate your property
22 March 2010 at 04:12 Isaac 17 comments
By Isaac Iglesias, KF10, Mozambique
I used to work in the credit card industry for a major bank in London, looking at portfolios in the developed world. One of my biggest surprises when I started working with my MFI was the fact that they are much pushier than their European and American counterparts when it comes to asking for loan repayments. Before approving a loan, an assessment of the equity of the borrower is performed; and some or most of his property is offered as collateral. This is usually a fridge, a television or a piece of furniture. If a borrower starts to fall behind with his payments, different things may happen depending on the severity of the delinquency.
A few days behind: Phone calls and personal visits begin to happen every day, reminding the borrower that the payment is due. Even if the payment happens only a few days late, the interest is recalculated and a small daily fine is applied.
A couple of weeks behind: Phone calls become less informative and more pushy, and unannounced visits to the borrower are commonplace. The possibility of repossession is mentioned.
One month behind: Another payment is due and the one before has not been paid yet. This will generally result in a home visit demanding the payment. If this is not successful, a written warning is left, informing the borrower that the have 24h to show up at the MFI offices or face repossession.
24 hours later: If the borrower is unable to pay, her/his property is taken away and kept safe on the MFI’s premises. The borrower signs a paper confirming his property is being kept, and the MFI signs another part stating the number of days the borrower has to pay his debt and recover the property before it is sold.
After that period: The property is sold and the money put towards the payment of the loan.
Such procedures do not happen in Europe and America not because of banks’ goodwill – but rather because of anti-usury laws non-existent in other countries. However, this struck me with an apparent moral dilemma. If this MFI is a non profit institution whose mission is to alleviate poverty and help develop the area where it operates, do they need to be so harsh? Do they need to take away the only property/luxury this person owns? Is this necessary?
The answer is yes.
The MFI takes extremely good care in making sure the borrower understands how credit works and the consequences of delinquency. Also, they provided very small loans to first time borrowers and only increase the amount once they have a proven track of good repayment – id est, a credit history. However, if the borrower fails to repay, fines and repossessions need to be enforced.
For microfinance to work, these institutions will eventually need to be financially sustainable. They need to operate without foreign aid and donations. The money from repayments is necessary for other loans. A good understanding of credit culture has to be present in the community for it to raise itself out of poverty.
An optimistic note: by enforcing repayments, educating the community about credit and basically being painfully pushy, my MFI in Mozambique has been able to reduce its “Portfolio at Risk” measure from a whopping 51% to a mere 4% in less than a decade.
Entry filed under: Hluvuku-Adsema, KF10 (Kiva Fellows 10th Class), Mozambique. Tags: collateral, deliquency, Mozambique, repossesion, sustainibility.
1. shaun parker | 7 April 2010 at 06:55
well in the UK there is the same problem, this is a story about just one company that used to belong to the Lehman brothers in the USA, the company operates in the UK lending market, read about the misery of their consumers here http://www.shaunparker.info/capstone-mortgages-beware/655283
2. A Microfinance Not-So-Success Story « Kiva Stories from the Field | 5 April 2010 at 15:54
[...] wrote last week about the strict stance his MFI has taken towards delinquent borrowers, threatening these borrowers and even repossessing their assets. MUK, on the other hand, takes on a [...]
3. Fehmeen | 24 March 2010 at 12:56
It’s an amazing book. I just finished reading ‘Banker to the Poor’ a few days ago, and that would explain my stance. In fact, I wrote a review about the book and summarized some key points in a post on my blog. You’re welcome to read it and get a fair idea of what he talks about. Here’s the link: http://microfinancehub.com/2010/03/18/book-review-banker-to-the-poor-by-muhammad-yunus/
P.S. if you Google smartly, you can get a free copy of it online.
4. Julia | 24 March 2010 at 13:15
Thank you. I am always in favor of shortcuts.
Good night!
5. Fehmeen | 24 March 2010 at 10:54
I agree MFIs need to run their setups as a business, but the moral code gets blurred when the difference between sustainability and high-profitability is reduced. If these MFIs face trouble collecting repayments, they ought to screen out potential defaulters beforehand, like Grameen Bank does. Because the way this MFI seems to be handling late payments is pretty insulting. Where did the social dimension go?
6. Julia | 24 March 2010 at 12:09
Fehmeen, I do not understand how the MFI should screen out potential defaulters. I think this is about signalling that it is not okay to keep the money if you could pay it back. Maybe one person really cannot pay but if every second entrepreneur does not pay back it is more likely that people think that there is no need to pay the loan back.
7. Fehmeen | 24 March 2010 at 12:18
Julia, I agree that keeping the money back when the borrower can pay is completely wrong. I’m talking about genuine cases here. If you consider the Grameen Bank model, their selection process is extremely rigorous so only the most dedicated borrowers manage to secure the loan. This goes a long way in preventing defaults. Apart from that, they have an emergency fund that is contributed to by all members of the 5-person group, and dipped into when genuine cases arise.
No need is felt to confiscate property. The poor hardly have anything to hand on to anyway. I’m not saying MFIs should be completely compassionate, but they need to be run differently.
8. Julia | 24 March 2010 at 12:42
Fehmeen, thank you for your prompt reply. In fact I did not read Mr Yunus´ book about his system although I bought it. I guess I should start reading. But I realized that there are bank groups but also single lenders on kiva.
I was wondering too if poor people had to have some possession to back up the loan after all. I thought that the main idea was to give loans to people who do not have anything.
9. Julia | 24 March 2010 at 02:05
Thank you for posting this. I have never been really comfortable with someone being pressured into paying back but I know that some people will never pay you back unless you become at least annoying.
When I know people do not have much it is a problem for me to ask my money back – if I had to do it myself impossible – but I must say I would not lend on Kiva if I had no chance of getting it back. To know that someone intends to pay it back makes me think he will make good use of the money and not just come back for more.
The only thing that irritates me is the short period after which repayments are expected on kiva and how soon they are declared defaulted. Sounds stressful. Why not make the period of time longer?
10. Cameron Morris | 23 March 2010 at 12:02
Great post, I also found this a bit shocking when I was at Hluvuku, but also tend to agree with your conclusion that to some degree this is a necessary practice.
11. majolie | 23 March 2010 at 04:15
je ne veux pas des commentaire je dois me maitre au travaille
ce que je veux c’est que ont m’aide j’ai trop des probleme aider moi meme le seigneur je vous demande cela pour moi j’ai trop des probleme j’ai mie mon nom et mon adresse email vous pouvez ecrit je dois regarder donne chance a tous meci et donne journner bye
12. majolie | 23 March 2010 at 04:08
je ne veux pas des commentaire je dois me maitre au travaille
13. majolie | 23 March 2010 at 04:06
je ne veux des commentaire je dois me maitre au travaille
14. KEG | 22 March 2010 at 14:42
My ex partner now deceased suffered from severe health complications and further experimentations by the same people who said invented the heart transplant. We were given a very much needed new factory second fridge with a two year warranty. When the warranty ran out I threw away the paperwork. In this country it would not necessarily be considered proof of ownership. Nevertheless I would not like to run into your financiers if I were a christian charity or purchaser of such a fridge or item no matter how good of quality because I couldn’t proove that it had already been paid for.
15. Greg Brady | 22 March 2010 at 14:28
Appreciate the honesty in laying it out.
16. Carlos | 22 March 2010 at 06:58
Great post Isaac… an interesting comment that I’ve heard here in Guatemala is that many borrowers do have the resources to pay but just don’t want to. In one of their branch offices the posted pictures of a repossesion of a property to show borrowers that they are serious about repayments.
17. Alberto | 22 March 2010 at 04:29
Really interesting post and good luck in this adventure.
Best wishes from Vigo (Porriño)