So, I wanted to take some time to critically reflect on my placement and microfinance on the blog. So far, I've talked a lot about the experiences I've had in Peru, but not really delved into why I'm actually here and what I'm actually doing. If you are reading the blog purely for fanciful travel updates and stories about my adventures, feel free to skip this post. Actually, feel free to find a new blog, because as you've probably seen, I'm more of a "go on long tangential rants" type of blogger than a fanciful-fun-travel blogger.
There are lots of things to do with microfinance that I want to critically reflect on over the course of my placement, and possibly this blog, but for now I want to focus on repayment rates. If you've had any exposure to the field of microfinance, you've probably noticed that these rates are a huge selling point for MFIs (microfinance institutions). Many will state, front and center in any of their advertisements, that they have repayment of higher than 99%. This seems great. Lend money to the poor, "help out", and get all of it back. Score.
Less sarcastically, this makes microfinance a financially sustainable and viable operation. MFIs serve as the middle-men between lenders and borrowers, charge interest rates to cover their operating costs but no more (unless they are a for-profit MFI, a completely different story), and thus facilitate the lending process. High repayment rates minimize 1) the amount of money that needs to be sunk into the organization to keep it afloat or 2) the interest rate charged to borrowers. Given that many MFIs, including my MFI in Peru, do not operate on donations, the former isn't really an option. Thus, high repayment rates are essential. Thus, it's understandable that high repayment and a low rate of non-performing loans (look at me, using the lingo I've been learning) are essential requirements for good ratings and continued funding.
But what does this end up meaning in terms of loans? How do organizations ensure that their repayment rate is high? What I've realized in my time with the organization thus far is that organizations achieve these high repayment rates by avoiding risk. Part of this process is evaluating potential borrowers, which is an important step in lending. However, evaluation is an inexact science, so typically, more is needed to ensure that repayment rates are high than simply a good evaluation. Organizations are forced to lend to those who they are sure will be able to repay, which understandably limits the pool of those who can possibly receive loans.
One way this inevitably ends up limiting who has access to credit is by cutting out those who could be referred to, for lack of better phrasing, as "the poorest of the poor". Those who have next to nothing are typically a much higher risk, because they have less of a foundation to work from and a variety of other reasons that they are generally less reliable (that I won't start to list here, because I fear you are already asleep). Thus, MFIs start making loans to microentrepreneurs who already have established businesses rather than those trying to get started, and the businesses become less and less "small", also pushing things into a higher loan bracket.
The problem I have with this model is that it completely eliminates the allure of microfinance - that it empowers the poor to change their lives - and makes in more and more like a formal bank with a different lending model. I'm not saying this doesn't help microentrepreneurs - there is obviously a demand for loans, and this model of microlending serves that niche. I'm just realising that the rhetoric of microfinance doesn't match up with how it actually works. The story of a woman who buys her first sewing machine, which then eventually leads to her employing others and owning multiple sewing machines in her own business is just that - a story. It happens, but it doesn't represent the complexity or predominant reality of microfinance.
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