Tough Conversations

28 August 2010 at 07:22 10 comments

I started this blog on a scrap of paper during a group visit.  I started writing because, well, I felt uncomfortable.  I wasn´t quite sure what my place in the conversation should be or even what my facial expressions should be.  And this wasn´t the first visit I felt uncomfortable on that day.

I wanted to give Kiva lenders updates, journal postings, on a couple of lenders that had fallen behind in their payments…way behind.  And now, the loan officer, the operations manager and I were at their homes or their places of business trying to figure out why this had happened, and how they could get back on track with their payments.

The conversations were almost formulaic, and all of them were very difficult.  One of the borrowers´ kids had fallen ill, and she had ended up using the loan to pay hospital bills.  Another made a bad investment with a family member and ended up losing her store.  All of them had fallen into hard times and now were faced with a loan that no longer was a way out of poverty, but now (to them) an almost insurmountable debt that they had to repay.  As a Kiva lender myself, I wanted to somehow forgive the loan: tell them, “I know you have done your best, so we aren´t requiring you to repay the loan”.

As Americans, we have a paternal (and arguably good) instinct to help those in need.  However, this paternal instinct has deteriorated into a downward cycle of aid (if further interested read Dead Aid by Dambisa Moyo).  Microfinance, and Kiva, in particular, have begun over the last few years to facilitate a transaction—a loan—between peers.  Through lending, we—as Kiva lenders—are able to give people half a world away a helping hand, and the borrowers in turn are able to escape poverty with honor and dignity: on their own esteem.

By submitting to my previous desire to “bail out” these borrowers, I would be stealing two things: the first, the borrower´s dignity and ability to repay the loan on their own, and the second, the microfinance institution´s credibility to receive repayments.  A decent number of Kiva´s partner institutions do not require physical capital and because of the absence of this barrier, many of the poor are able to receive the credit they require to run their businesses.  The loan guarantee usually takes the form of co-signers and the client´s word that they will repay.  As such, it is difficult to get clients to repay if they realize that other clients have not and have not suffered any consequences.

Being an eternal optimistic, I wanted to see the good side of these conversations.  But, dealing with late payments and with delinquent loans is difficult.  It is important to realize, however, the preventative steps that many institutions take to avoid these conversations (my institution runs background checks through a local microfinance credit bureau to ensure that the borrowers do not have any other outstanding loans and helps borrowers compile business plans to ensure that the profits from their business can cover their costs), and to remember that these loans are only a very small part (generally less than 2%) of an institution´s loan portfolio.

At the end of the conversation, the loan officer and operations manager set up a repayment schedule with the client: a repayment schedule that had more frequent and smaller payments.  Payments that the clients could begin to met.  Being able to repay the loan is an integral part of microfinance client´s ability to receive credit in the future, and finally, I saw the bright side: that Kiva´s partners don´t just work for a bottom line, but they work to really, truly improving the lives of the people they serve.

Eric Burdullis is a wandering Kiva Fellow in Guatemala working with FAPE and ASDIR.  He is currently stationed in Aldea Nimasac and enjoys delicious tamalitos and plantains in his free time.  His afternoons are mainly occupied with a good book and avoiding the torrential downpours that roll in off the pine covered slopes.

Entry filed under: Guatemala, KF12 (Kiva Fellows 12th Class). Tags: , , , , .

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10 Comments

  • […] Fellows Blog: Tough Conversations […]

  • 2. .bootstrap  |  29 August 2010 at 14:27

    Conversations with History: Ernst Haas…

    I found your post interesting thus I have added a Trackback to it on my weblog….

  • 3. Fehmeen | Microfinance Hub  |  29 August 2010 at 12:14

    I think Professor Yunus would handle these cases of non-repayment differently, because it’s a little ruthless to expect borrowers to pay back when such unexpected miseries befall them. Perhaps their interest payments should be forgiven, or perhaps the principle as well. They can start over (if their predicaments are genuine) and they can be given a much smaller loan the next time so they can build their credibility again.

    • 4. Chris  |  29 August 2010 at 23:16

      Professor Yunus actually firmly believed that everyone, including the poor, should always pay back their loans. This is important for their dignity and proof that micro-finance works as a whole. Look in his book: “Banker to the Poor” on pages 237-238 where he mentions this exact thing. ()

      What Grameen does now when borrowers face dilemmas, is to reschedule the loan into a “flexible” loan where the borrower can take longer to pay it back. When they finally start making their new repayments and pay back their loans, they can start borrowing again. They start with smaller loans, but gradually work their way up in loan size.

    • 5. eburdullis  |  30 August 2010 at 07:41

      I think in theory, this is great. As far as a microfinance institution attempting to achieve sustainability in their operations, forgiving interest and capital payments is a lot to ask. I don´t believe that we see this level of grace with credit card payments in the U.S. I personally would like to see microfinance expand from donations, which they would eventually have to take if they pursued this business model, to more stable commercial sources of funding. Kiva helps to facilitate this transition through 0% interest loans, and allows the institution to expand to serve more clients.

    • 6. Fehmeen  |  1 September 2010 at 11:48

      Hi Chris,

      I agree Prof. Yunus was very strict in terms of credit discipline (he said, ‘credit without discipline is like charity) and I’m all for that too. I also know about Grameen’s loan rescheduling technique (part of Grameen 2) and that this would re-set their credit rating. However, in extreme cases, the loan was forgiven, and that’s what I was referring to, because I thought the above case was ‘extreme’. Of course, I may be wrong…

  • 7. Jan & John, Kiva Friends  |  28 August 2010 at 12:06

    Thank you Eric for such a positive post. It truly is unfortunate when bad things happen, however, we all must learn to stand straight and deal with troubles as they come. I used to say I was not doing my children any favours by spoiling them and I feel just as strongly about the massive aid that doesn’t seem to have helped anyone. Kiva loans are one wonderful way to help people help themselves. I am more concerned that the MFI does not take advantage or burden borrowers and that is something to watch for. Quote from Muhammad Yunus says… “If you lend to the poor, do it without concern for profit. (…) Microcredit was created to protect the people from moneylenders, not to create more moneylenders”. We don’t want to make money with our lending, but we sure will need that cash to keep us from moving in with our children in our old age 🙂
    -jan-

    • 8. eburdullis  |  30 August 2010 at 07:33

      Jan,
      Thanks so much for the comment. Before I became a Kiva Fellow, Yunus was my microfinance bible. Now, I am realizing the microfinance institutions here in Guatemala, work “sin fines de lucro” (the equivalent to not for profits in the states), but still pursue a bottom line in order to expand microcredit products to unreached areas, and to expand services (the institution I am working with offers insurance, adult education classes, and convenient bill pay. To that end, garnering repayments is an important step to both Kiva lenders and the institution to continue expanding services!
      -eric

  • 9. fred  |  28 August 2010 at 10:33

    Hey, the borrowers’ word is worth a lot to me!

    I made a few loans through Kiva, but it’s definitely not a handout. I fully expect to get that money back: I can forsake the interest but without the capital I will be in trouble. I don’t need the money now, but I will need it at some point. As a lender I read the profile and took leap of trust on one borrower’s sake because I had faith in her prospects. Now bad things happen and I can be flexible about the repayment schedule. But I’m not about to say it’s no big deal.

    They said they would repay, and I’m going to hold them to their word. They may not have a lot beyond their word, but I put trust in that currency, and to me that means taking it seriously, not just winking it away when things go wrong.

    Now if a borrower would reach out to me personally or through a Kiva fellow to forsake a loan because of exceptional circumstances, that would be a totally different situation, the sharing of an unforeseen burden between equal business partners, made equal by the burden-sharing. In that hypothetical situation I’m not sure who would be responsible for the leveling.

    fred

    • 10. eburdullis  |  30 August 2010 at 07:26

      Fred, I completely agree with your sentiments. Unfortunately, the logistics surrounding the “burden-sharing” between equal business partners and the communication that entails are far to high for a microfinance organization to bear.
      I believe that as technology and the Kiva platform evolves, there will be much more lender-borrower conversations potentially allowing a tool like this to exist. Thanks for your comment!


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