The poor risk losing access to microloans when they’re most needed

Peter Manu was a microlending success story. For a dozen years, by borrowing a few hundred dollars at a time, he'd been able to buy children's shoes to sell in the central bus terminal in Accra, Ghana's capital. With the proceeds, he paid his debts and had enough left over to provide for his two children. Then Accra's schools closed in response to the coronavirus pandemic. Foot traffic in the bus terminal dried up, and so did Manu's sales. He's switched to handbags, but things are still difficult. "I can't even take care of my kids," he says. Nor can he make payments on his 2,000 cedis ($343) loan.

The microlending movement, which envisions small loans as a lever to raise millions of people out of poverty, has drawn broad support from governments and sizable investments from foreign financial institutions. The small loans can help the poor buy what they need to make a living, and they come from an array of lenders including specialized banks, local credit unions, and partnerships between banks and nongovernmental organizations. In the 15 years since Muhammad Yunus won the Nobel Peace Prize for his work on the concept, the number of microloan borrowers has ballooned to 140 million, with $124 billion in loans outstanding.

A woman offers snacks for sale at a bus station in Accra.PHOTOGRAPHER: NICHOLAS SENU ADATSI FOR BLOOMBERG BUSINESSWEEK via Bloomberg

But the economic fallout from the pandemic has decimated small borrowers' ability to pay. The current crisis compounds reports of abuse and aggressive collection tactics in some countries, including Cambodia, India, and Nigeria. "When a microloan client misses a payment, they are almost always contacted by a credit officer within a couple of days," says Naly Pilorge, a human-rights advocate in Cambodia, where 2 million borrowers owe microlenders about $4,000 on average. "The pressure varies, ranging from reminders to repay, to abusive or threatening language, to direct threats of involving local authorities or police, to threats of selling the client's land without their consent," Pilorge says. Kea Borann, chairman of the Cambodia Microfinance Association, says such accusations are "obviously overstated," though there are "isolated cases."

Part of the problem is that the promise of microcredit relied on local, purpose-driven lenders who'd be forgiving of delinquent borrowers, says Milford Bateman, a visiting professor of economics at Juraj Dobrila University of Pula, in Croatia. Today, lenders tend to be for-profit firms, which often borrow from bigger institutions to make loans. "Covid-19 has really created a problem in many countries, because obviously people can't afford to repay their loans," Bateman says. "That means the microfinance institutions can't afford to repay the banks."

Some governments have tried to intervene. India put a moratorium on collections for six months through the end of August. In Nigeria, where 4 million people owe on average $110, the central bank gave microlenders approval to extend repayment or suspend interest or principal payments. But getting customers to respond and agree to the new terms isn't easy. "We deal with very low-income earners, those at the bottom of the pyramid. Their businesses are very fragile," says Shikir Caleb, executive secretary of the National Association of Microfinance Banks. "If we send a message to them to come and discuss, they think we're inviting them to come and pay the loans, so they don't come."

In Ghana, where about 22% of people carry small loans, tailors' business has slowed down because of restrictions on public gatherings, and taxi drivers aren't earning commissions. "We're talking about a class of people who only make income by going out on a day-to-day basis," says Tweneboah Kodua Boakye, executive secretary of the Ghana Association of Savings and Loans Cos. Some borrowers who lenders believed were safe are defaulting.

That doesn't bode well for inclusion of the poor into formal financial institutions, another goal of microlending. In Asia about 90% of the 180 million poor households lack access to banks, while most formal financial institutions deny the poor their services because of perceived risk, according to the Asian Development Bank.

"We have to distinguish between the right microcredit and the wrong microcredit"

In an interview, Yunus defends microlending as practiced by the Grameen Bank in Bangladesh. There, borrowers don't put up collateral. The bank also has rules to protect borrowers during disasters, such as issuing fresh loans to compensate for lost capital, suspending repayment, or extending a loan period. Many other lenders, he says, are not guided by social principles, and may ask for collateral or push loans for consumer goods. "We have to distinguish between the right microcredit and the wrong microcredit," Yunus says. "Microcredit lenders who follow the social business principle of zero personal profit—and the others who want to make profit for the owners, supported by big investors, and banks, saying, 'We're doing microcredit.' "

Signs of trouble for the microcredit industry were there long before Covid. After years supporting microfinance institutions, the U.S. Agency for International Development in a 2018 report to Congress cast doubt on the loans. For the very poor, defined then as those who lived on less than $1.90 per day, "even small debts—most frequently used to meet immediate consumption needs—can easily become a significant burden that push a family deeper into poverty," the report said.

About a third of microfinance companies say they anticipate "a solvency issue" by early 2021, according to a report from Washington-based Consultative Group to Assist the Poor. If the deterioration continues, the group warns, the sector "could get into global crisis territory soon," leaving strapped governments to bail out lenders.

In India, which instituted microlending reforms almost a decade ago following allegations of aggressive collection practices, the central bank projects that the share of loans in default will jump from 8.5% to 12.5% by March. Lenders are now focused on collections and reluctant to renew loans. That's a big problem for Anil Kumar Gupta, a carpenter in Uttar Pradesh who's subsisted on microloans to feed his family of nine. "No bank wants to lend money without security," he says.

Disclaimer: This article first appeared on Bloomberg.com, and is published by special syndication arrangement