Financial institutions sometimes persist for long periods with behavior that their customers thoroughly dislike. In my own country (the UK) retail banks stuck to short and highly inconvenient opening hours for decades, despite constant criticism. Some conversations I had recently with villagers in Bangladesh suggest that MFIs there may also be irritating their customers with practices that have outlived their usefulness.
S K Sinha and I spoke with 43 rural households in early 2013 as part of research for a CGAP Focus Note, ‘Averting a Microcredit Crisis: the Case of Bangladesh’ (Chen and Rutherford, 2013). Sinha and I have been doing interviews like these since the 1990s , so we’re well-placed to notice changes in the way villagers talk about MFIs.
Readers who are new to interviews with low-income households are often struck by the complexity of their financial lives. They tend to use as many different money-management tools as they can find – formal and informal – and to weave them together to help manage whatever life throws at them. You only need to read a handful of the interviews to see that the original simple story-line of microcredit – that credit goes into microbusinesses that grow profitable and then haul their owners out of poverty – is only one of thousands of actual trajectories.
Photo Credit: Stuart Rutherford
When you’re poor, money-management plays a bigger role in your life than when you’re rich: when did you last save up to buy a pair of socks, or take a loan to buy antibiotic eye-drops? Microcredit loans in countries like Bangladesh enter households juggling with competing claims on cash, claims that come from the need to eat regularly, deal with health problems, educate the kids, mend the roof, bury grandfather, and worry about the future, let alone invest in a business.
Sinha and I are familiar with these patterns, but what struck us in our interviews this year is a souring of views about MFIs. More respondents than ever simply don’t like MFIs. Maybe they are just catching up with the rest of the world: after all, many of us don’t like our banks but put up with them as a necessary part of our lives. So is it with Bangladeshis and their MFIs. A couple of our interviewees said they’d advise their daughters to avoid MFI loans if they could find an alternative, and after that we asked each household what advice they’d pass on to the next generation about MFIs. We got more negative than positive responses.
So what is behind this growing disenchantment with MFIs? Judging from our interviews, there is one dominant reason. Happily it is one that MFIs can do something about.
Microcredit and the art of motorcycle maintenance
Bangladeshi MFIs (like many others) place huge importance on the on-time repayment of loans. Not just ‘on time’, but strictly on-time. They fret if a single payment is late by anything more than few hours. The reasons for this include encouragement from international organizations like CGAP who for many years promoted the growth of strong microcredit institutions and saw high on-time repayment rates as an index of an MFI’s commitment to sustainability. For the Bangladeshi MFIs, especially the three leading brands who each have around 3,000 branches and more than 20,000 staff, the on-time repayment rate is not just a good way to track performance, it is a tool for disciplining staff – signaling clearly what is wanted and providing evidence of success or failure. Like those UK retail banks, they are understandably reluctant to change long-standing arrangements with large numbers of employees. No wonder they focus on what has been called ‘zero tolerance’ of delinquency.
"They say the boss may not bring the wages today, and I have to get some money back to the village by Tuesday or my wife will be in trouble with her NGO bank": Migrant brickfield worker in central Bangladesh
Bangladeshi microcredit started with some famous devices for ensuring high repayment rates, especially the shame that delinquent borrowers faced in the group meetings, and the use of joint liability (making group members responsible for each other’s loans). But as microfinance became more competitive these tools became blunt. The bigger MFIs have renounced joint liability, and many groups don’t sit together each week – clients just meet the MFI worker to hand over their dues. Getting repayments in is now very much the loan officer’s task alone. To help them, the MFIs have coalesced in recent years round a set of field procedures, the most iconic of which is what we might call the ‘honda system’.
In Bangladesh motorcycles are known as hondas, and they have become the symbol of strict MFI repayment regimes. If a client fails to make her repayment in full she risks a honda visit, when the loan officer, often with a colleague or with his boss, the branch manager, arrive on motorbikes, sometimes after dark, ask for the overdue repayment and sit on the client’s doorstep until it – or at least a token payment – is made.
That doesn’t sound too bad, does it? You might consider it as pressure rather than as outright coercion. So why is it so detested, even feared, by clients? We heard several reasons. One is simple incomprehension: why do these MFIs need to have every penny paid on the very day, when everyone knows that we have no intention to escape payment? Given the irregularity of our income, why can’t they accept that I may not have every penny ready precisely at 10 o’clock each Thursday morning? Another is resentment at what seems callous behavior, an idea captured by a comment that can be heard from MFI clients all over Bangladesh: ‘with an MFI, you have to make your repayment even if someone in your house has died that day’ – something that may not be literally true but expresses the feeling that MFIs, who present themselves as on the side of the poor, cruelly refuse point-black to share any of the risks of borrowing, and thereby place themselves outside traditional village morality. Most sharply felt is the humiliation of having debt-collectors on your doorstep, especially after nightfall, and the effect this has on your reputation in the village – which in turn can lead to your losing credit-worthiness with other financial partners.
To borrow and to borrow and to borrow
MFIs compound these problems by their insistence that their clients borrow continuously. Happily, our interviews suggest that this is getting harder to enforce, as more and more clients stubbornly refuse to comply with it. But the practice offends the minority of clients who prefer to form most of the sums they need through saving rather than borrowing. And it puts others into the position of accepting a loan that they didn’t really want and then being pressed to repay it according to a schedule they had no hand in devising.
Maybe the MFIs simply don’t need these unpopular practices. Thirty years of experience (and of extremely high overall, as distinct from on-time, repayment rates) have proved what was not known at the beginning: that clients have a strong propensity to repay loans. Some smaller MFIs in Bangladesh recognize this and report excellent results from far more liberal regimes – we came across some of them when we were interviewing. SafeSave, a small MFI I founded has a profitable 17-year record in the Dhaka slums of offering loans without fixed terms and without a fixed repayment schedule, giving its clients a frequent opportunity to repay instead of a weekly obligation to do so. Internationally, experiments with tolerant regimes are common: the on-line lender Zidisha allows its borrowers to originate their own repayment schedules, and even to reschedule their own loans on line, so far with encouraging results.
So what could the MFIs do? They could test the claims made by those using alternatives to zero tolerance. They could run some pilots for themselves. Encouraging good repayment rates by offering carrots rather than wielding sticks – perhaps by reducing interest rates for the most regular clients – must surely be worth trying out. Welcoming rather than discouraging clients who mainly want to save would help: they can be served at very low cost, represent no risk, provide low-cost capital, and tend to make excellent borrowers when they do take a loan.
Failing steps like these, the decline in the reputation of the MFIs, and the growing trend for low-income clients to seek other financial partners, will spiral into a lose-lose scenario for both partners.
---- The author is the founder of "SafeSave". He would like to acknowledge the following: thanks to CGAP and to my Focus Note co-author Greg Chen for the opportunity to carry out the interviews, to colleague S K Sinha for helping me with them, and to the MFIs who co-operated generously in the research and have been rewarded here with nothing but (well-meant) criticism. As well as thanking the households who participated in the interviews, I would also like to thank some MFI field staff who also shed light, by means of lengthy interviews, on how microcredit works in the field these days.
 Interviewing for the book The Poor and Their Money; using financial diaries (as described in the book Portfolios of the Poor); using multi-year panel interviews (for research on Grameen II commissioned by MicroSave), and over a period of 12 years for the biography of the Bangladeshi MFI ASA (published as The Pledge)
Grameen Bank has institutionalized rescheduling by introducing flexible loan where the borrower half-way though a yearly loan can reschedule the loan by extending the time to repay and changing the installment payment. I am surprised you did not mention it. You have interviewed many Grameen Borrowers in 2005 in the early stages of the implementation of this option. Is it because it is not implemented in the field even though "officially" a borrower have the right to do it?
It is an excellent finding and important writing on Bangladesh MFIs. As a Participatory Action Research (PAR) practitioner and animator last 12 years my observations is very close with this writing. When rural poor diagnosis their cause of poverty through PAR, they identified commonly MC is one of the main cause of their poverty. They identified many cause why MC is the cause of their poverty. That is why MC members are very desperate to get out from MC. But it is not easy task to out from this critical cycle. It is all very interesting and important to understanding of Bangladesh rural poverty.
They have been searching alternative of MC and have found a way as savings group with PAR practice. Presently they organize more then 700 PAR saving group with around 20 thousand member most of them are poorest, their savings more then 50 million Taka. PAR savings group operate their groups efficiently, they save and invest their money at the same time they working for their social cause of poverty. This model working very sustainably for rural poverty eradication of Bangladesh.
Great blog - i'm just sorry its taken me two years to find this! I think the perpetuation of the ''zero tolerance' approach to loan repayment is one of the greatest unremarked issues in microcredit and in my experience still very widespread.
Interestingly talking to the CEO of one of the big international microfinance organisations his response when I raised this point was 'surely MFIs are not still doing this'.
Many organisations still don't distinguish 'can't pays' from 'won't pays' and continue to hound good clients who for good reason have a temporary reason why they can't make a loan instalment. This lack of response to the reality of poor people's lives cause much stress (and often hardship) for clients and staff alike. Systems to create greater flexibility for clients in both accessing and paying back credit should be a priority - why is there only one MFI that I know of that has an effective credit line product?