February 6, 2012
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January 9, 2012
January 6, 2012
November 20, 2009
Is there collateral-free lending?
Much of the promise of microfinance comes from the fact that people can get loans even if they do not have access to traditional physical collateral such as a house. The idea that people are trustworthy enough to repay loans even without the threat of losing their property makes for an uplifting story, but it is not always true. Guarantors are understandably upset when someone does not repay what they owe, and often try to take something of value from the debtor – such as a gas tank – in order to pay off what they had to guarantee.
Some microfinance institutions encourage and abet this behavior because they know their arrears will be lower if borrowers can recoup their guarantee related losses. I have even seen some cases where a group of clients did not especially want to go to the debtor’s house, but their credit officer insisted because she wanted to make it clear to all clients that defaulters were always punished.
I don't know how widespread this is. I know that some institutions in Bolivia engage in the practice, but there's no data about how often they do it, nor where else it happens. I think it's an important enough question so that we should try to figure out if it's common, since to me it's contrary to the spirit of microfinance.
Themes:
Consumer Protection
Questioning the need for group liability
These vigilante-guarantor stories may or may not be widespread, but they certainly bring into question whether group liability is doing more harm than good. IPA found that in the Philippines, moving from group to individual liability didn't adversely affect repayment. We'll see what the results are in Bolivia.
I would definitely be interested to see future replications find some way to measure this sort of "house-breaking" activity at baseline and followup as well.
Thanks for the links
Ben, do you know how involved the MFIs are in recuperating arrears? I've heard of cases where banks do everything from organizing the posse to provide transport and refreshments, but the credit officers try not the go into the home that's being "robbed" because the bank doesn't have the legal right to seize collateral. Of course, it's also illegal for the members of the communal bank to take things, but the legal system isn't set up enough to prosecute individuals, just potentially the institution.
"Collateral-free"
At least in Africa, recouping of funds paid through the group guarantee is common place. Typically, a "collateral-free" loan means a loan with no formal, legal collateral. Rarely does it mean no collateral at all.
I hardly think "Africa" is
I hardly think "Africa" is that homogeneous. In the small piece of Africa that I know, this is not at all the case. A debt collector might huff and puff, come back with a big man and have him huff and puff, or as a last resort come back with a police officer for more huffing and puffing, but in the end it's all bark and no bite.
house-breaking
Martin, you might track down Lamia Karim, “Demystifying Micro-Credit: The Grameen Bank, NGOs, and Neoliberalism,” Cultural Dynamics 20(5): 5-29 (2008), which I quote in my blog post at http://blogs.cgdev.org/open_book/2009/03/gemeinschaft-neoliberalism-wit.php. The quote describes "house-breaking" in Bangladesh, known as "ghar bhanga." Also see pp. 44-45 of my draft chapter 6 (http://blogs.cgdev.org/open_book/category/about-the-bookoutline/6-develo...) from Sanae Ito, now the wife of Stuart Rutherford. I agree there is a general lack of data on this. It's easy to imagine how it would be under-reported, but also how a few observed incidents could be recounted over and over, out of proportion to their actual frequency.
Lending technologies/collateral
In Latin America MFIs are getting away from group lending and going to individual lending technologies. This is for a variety of reasons, including the fact that groups tend to disintegrate once they've been burned by a member's debts plus the fact that hand-held computer technology and other advances make it easier for one credit officer to handle many clients.
Collateral tends not to be very useful, again for a variety of reasons, but there are some countries in which it is used (even though its legal foundations is often weak).