By Mari Miyoshi*
Fez- It was a bright day in Fes, but the streets of Aouinate Hajjaj were still muddy from yesterday’s rain. Yacine and I avoided puddles as we navigated the neighborhood, a poor area whose name is pejoratively used to refer to people with bad manners.
Yacine was a loan agent for one of the largest microfinance institutions (MFIs) in Morocco. I was interning with his organization for my research on microcredit. For three months, I followed loan officers like Yacine on their visits to attract clients, disburse loans, and collect payments.
When Yacine and I reached the stall of the furniture seller we had been trying to find, the neighboring shopkeeper informed us that our client had gone into town. Distraught, Yacine called the furniture seller and asked why he had not been in his shop. Yacine begged him, “I depend on you.”
Yacine was not pleading with the client to hand over a late payment –the furniture seller was a model borrower. Instead, Yacine was trying to convince him to take another loan.
This tactic, in which loan officers pressure clients to borrow unnecessarily, is an unsavory byproduct of the emphasis on expansion that pervades the microfinance sector in Morocco and other developing countries.
To give MFI employees a stake in the growth of the organization’s portfolio, they are incentivized to sign up as many clients as can pay back—regardless of whether the client has a clear plan for the money. End-of-the-quarter bonuses are given to loan agents who meet the set quota for new clients and have less than a handful of borrowers with overdue payments.
Yacine, a recent hire, lagged behind the rest of his office. The branch manager, Fatima-Zahra, yelled at him daily to quit staring into space and increase his numbers. Her bonus was contingent on all loan agents in the branch receiving theirs.
According to Fatima-Zahra, in the early 2000s, everyone—young and old, male and female, business owners and those looking to pay for a wedding –took out loans. Now, after a mass repayment crisis in 2009, people have realized that loans must be handled carefully or avoided altogether.
Despite this decreased demand for loans, MFIs together with the Moroccan government have set high goals for growth: 3.2 million clients and 25 billion dirhams (3 billion USD) in loans by 2020, a nearly 300% increase from the roughly 800,000 borrowers currently serviced by these organizations and a 400% increase from the 5 billion dirhams (DH) of loans disbursed today.
While some of these new clients will come through the projected construction of 676 new MFI branches in mostly remote areas of Morocco, urban metropolises are also expected to register an increase in borrowers.
Microcredit, in Brief
In theory, microcredit is the harmonious merger of charity and profit, the quintessential ‘social business’
Mohamad Yunus, the Bangladeshi microfinance pioneer, has defined a ‘social business’ as: “a self-sustaining company that sells goods or services and repays its owners’ investments, but whose primary purpose is to serve society and improve the lot of the poor.”
In this sense, MFIs sell money for the good of society. They give loans to people who would not otherwise have access to large amounts of capital, at an interest rate lower than what would be charged by informal moneylenders.
Initially, studies on microfinance boasted incredible results. Female empowerment, improved child health, high repayment rates, improved school attendance, and poverty alleviation were also the supposed result of these specialized loans. Unsurprisingly, these outcomes sparked a microfinance boom within international development scene in the early 2000s.
The enthusiasm about microfinance among donors was understandable: microfinance offered an enticing alternative to bulky charities where funding trickles down layers of bureaucracy. Microcredit was also seen as less paternalistic than traditional aid, for allowing borrowers freedom to spend their loan money with very little oversight.
But, by the late 2000s, microfinance was facing a major existential crisis. Suicides in India, mass default in Morocco, and protests in Latin America revealed predatory MFI loan practices. Randomized evaluations like Banerjee et al showed no difference in female empowerment, health, or schooling among residents of Indian slums who received microcredit and those who did not.
The MFI community’s response to these criticisms came in two forms: reforms to microfinance practices, and attempts to rebrand the industry.
Reforms varied from country to country, but common changes included increasing regulation by the central bank and limiting clients to one outstanding loan at a time. In India, interest rates were capped at around 27%.
On the rebranding side, microfinance was no longer celebrated as a panacea. Instead, it was promoted as an important tool to reach more attainable aims like ‘consumption smoothing,’ where loan money is used to cushion drops in income, and ‘financial inclusion.’
Morocco’s experience with microfinance paralleled these highs and lows in the industry’s global trajectory. For a decade, Morocco had been the microfinance leader in the Middle East and North Africa region. Pilot programs were successful, and government policy supportive.
MFIs grew so quickly they competed for clients. As there was no cross-MFI system for sharing client information, borrowers were able to take out multiple loans from different MFIs, often using one loan to pay off an older debt.
In 2008, an estimated 30% of borrowers had taken out multiple loans simultaneously. In 2009, Zakoura, one of the largest Moroccan MFIs, reported that 30% of its clients had loans that had gone unpaid for at least 30 days. Then came the defaults in 2009, triggered by the bloated microcredit system.
In the past few years, reforms have taken these problems into account. Currently, most MFIs in Morocco share a computer system that tracks clients by national ID number and allows organizations to see the entire micro-borrowing history of every client.
The global trend in shifting the focus of microfinance from empowerment to financial inclusion has also hit Morocco. In explaining their plans for expansion into rural villages and southern desert towns, the Moroccan MFI directors I interviewed adopted this narrative. The prevailing assumption amongst these individuals was that providing credit was benefit enough.
Rubbing Microfinance’s Underbelly
Coverage of the microfinance crisis in India revealed appalling MFI practices, including bribery, threats of violence, and public shaming so severe they ended in borrower suicide. This ‘dark underbelly’ of microfinance rebuts the positive news pieces and fundraising pamphlets touting microfinance’s ability to empower the poor and facilitate their economic success.
Protests against microfinance in India. (Photo Credit: G. Krishnaswamy, The Hindu)
While I had expected to find in Morocco a catastrophe similar to India, I observed more banal evils, like high interest rates and confusing contracts. Those who did not make interest payments on time faced the threat of court summonses, which, though not as destructive as the death threats that Indian clients received, caused many clients severe anxiety. In essence, microfinance in Morocco created a system of high-interest debt partnered with legal enforcement intimidating enough to keep poor borrowers’ repayment rates high.
The MFI office where I interned had interest rates for different loans posted by the door. The 1.2 – 2.2% interest rates listed seemed entirely reasonable, especially compared to the nightmarish rates of 15% to even 100% reportedly charged by MFIs in other countries, many of those on the higher end of the spectrum running for-profit operations. Yet after a week of sitting with loan agents during client consultations, I realized figures were not adding up.
Many clients were illiterate and had never attended school, much less learned how to calculate an interest rate. Loan agents usually skipped details about how interest was calculated and told these clients the lump sum interest payment. These interest payments were large, such as 2400 DH (~$289) on a 10,000 DH (~$1204) year-long loan, which is 2% monthly, not annually as I had originally assumed. That annual rate comes out to 24%.
Since the interest is calculated monthly, the longer the loan period, the higher the total interest payment. This was not disclosed to the clients and I watched the loan agents recommend that clients spread their loan out over a longer period to be more ‘comfortable’ that they could make each payment. The annual interest rates for the MFI ranged from 14.4% to 26.4%.
Borrowers were also charged administrative fees of 125 DH (~$15), an insurance cost of 1.5% of the loan amount, and a monthly account fee of 5 DH (~$0.60). While these fees were not exorbitant, they were significant extra costs for the poorest borrowers who tended to take the smallest loans.
When I asked loan agents about the discrepancy in rates, they admitted to confusion between the posted rates and what clients were charged. They said they did not know what the real rates were, as the computer made all the calculations for them.
Though the directors of other MFIs were often reluctant to tell me their interest rates, I eventually found that standard microfinance interest rates in Morocco range from 1.2-2.8% per month, which translates to 14.4-33.6% annually. These rates put these MFIs up there with ‘credit cards from hell’.
In defense of microcredit, rates are higher because microfinance institutions are more expensive to run than banks. Since there are no credit scores available, agents conduct time-intensive background checks on clients.[2] While MFIs have to pay the same overhead costs, like electricity and rent, as banks do, they disburse far less capital in loans since loan sizes are smaller than at traditional banks.
Let’s bracket, for the moment, the fact that some MFIs turn a profit, and take at face value justifications for relatively high interest rates. Is it reasonable to expect poor clients to afford these loans and make enough profit from selling eggs or plastic buckets to pay off these debts and come out ahead?
For the past two years, Amina and Ben Nassar have been insisting the answer to that question is a resounding ‘no’. They are the founders and leaders of “Victims of Microcredit,” a protest group in Ouarzazate that has rallied over 5000 people in the economically depressed south and gathered enough resistance to close a few microcredit offices in the area.
The Victims of Microcredit group argues that the poor face stiff competition for their goods and services from larger businesses. As long as microfinance interest rates remain above 5% annually, the little guys will be unable to create profitable enterprises.
Amina previously owned a furniture shop in a poor part of town. She had taken out multiple loans over a five-year period, but became dependent on these financial instruments to stay afloat and was unable to improve or expand her business.
Soon, her shop emptied out and she was unable to make payments. When she tried to renegotiate her contract with the MFI, she was told she had to pay the original amount.
These events took place in 2011, as the February 20th movement –Morocco’s manifestation of the Arab Spring –begun to march against government corruption and inequality.
Amina and Ben Nassar began talking to people in Ouarzazate and found many other borrowers who were struggling. Some were selling off their belongings, others were hiding to escape the loan officers, and a few women had even turned to prostitution.
Together, they formed Victims of Microcredit and took to the streets with the February 20th movement.
Borrowers in Ouarzazate and nearby towns refused en masse to pay back their loans and ignored court summonses. Loan officers who had once knocked day and night eventually gave up. The loan agents that I spoke with said that their MFIs ultimately had no choice but to write off the loans of the clients who joined the Victims of Microcredit. Those clients are blacklisted from all MFIs in Morocco, but their previous loans are essentially forgiven.
I spoke with several members of the Victims of Microcredit group, which was almost entirely female. They all emphasized they were no longer afraid of loan officers, and knew the MFIs would not be able to prosecute the entire city of Ouarzazate.
Their perspective stood in stark contrast to the interviews I had conducted in Fes and Rabat. In these northern cities, the fear of loan officers and court summonses were the primary incentive for most borrowers to continue paying their loans.
In the Fes-based MFI office where I interned, the loan agents admitted there were looser criteria for giving loans to women because they ‘scare easier,’ meaning they were more likely to believe threats that the courts would confiscate their belongings and jail them for defaulting on their debts.
I observed several incidents in which loan officers collected payments from the mothers, sisters, and wives of male borrowers who had not paid, warning the cowering women there would be legal consequences if they did not cover their relative’s payments. A loan agent confided in me that she ordered a woman to pawn her wedding ring when the woman’s husband, the borrower, fled to the northern city of Nador.
The loan officers privately expressed intense dislike for this aspect of their job, but they were under pressure to meet repayment goals and knew that women are more likely than men to save money.
Pressure was not limited to women, however. At the end of my internship, one client hung himself in his shop. Though the reasons for the suicide were unclear, loan officers at the office were distressed both by his death and by rumors that it was due to stress from the loan.
In some ways, I was relieved that most MFI directors did not mention empowerment. The hypocrisy would have been unbearable.
Amina (right) speaks at the Victims of Microcredit meeting. (Photo Credit: Mari Miyoshi)
Alternatives: Looking back at traditional forms of finance
Occasionally, though less often than expected, I would speak with a shopkeeper who was virulently opposed to microfinance on the basis that charging interest is forbidden in Islam.
One particularly expressive soap-seller told me about darat, a traditional form of finance in which a group of family members, neighbors, and/or close friends agree to each give a certain amount of money per week into a liquid cash pool and to take turns receiving the sum. For example, in a group of 10 people who agreed on 100 dirhams, each person would take 1000 dirhams in weekly rotation.
I asked others in my Fes neighborhood about this, and was surprised to find it was a widespread practice. They said it was better than microfinance because there was no interest and no legal repercussions if they could not pay one week.
However, they also noted that the amount of money they could receive through darat was much smaller than through a microloan, and mentioned the risk that group members might stop paying into the pool after receiving their allotted payout.
While I could not find formalized financial programs in Morocco that included darats, the model could be a promising way for the poor to finance their businesses, healthcare costs, and consumption needs.
If microfinance practitioners are serious about financial inclusion, effort should be made to incorporate traditional forms of finance, especially those without cost to borrowers, into MFIs.
Conclusion
Microfinance holds symbolic currency among academics and development practitioners. Promoters of free-market ideology are infatuated with this financial tool because it supports their belief that entrepreneurship can solve poverty.
Perhaps this explains the continuing governmental and institutional support for microcredit programs despite dwindling evidence of borrower benefit. The loan officers I spoke with were privately cynical about microcredit’s ability to benefit the poor, but the MFI directors enthusiastically explained their plans for broad growth in the future — the two largest MFIs in Morocco are even lobbying to gain for-profit status.
Fundraising campaigns for microcredit initiatives are ubiquitous, so I advise the well-intentioned reader to be cautious. Unless the campaign advertisement specifies otherwise, clients will probably pay between 15-30% interest on their loan.
All development endeavors face unintended consequences. That being said, when client realities differ so greatly from the inspiring anecdotes on organization websites, it is time for those in charge to stop asking where they can expand, and instead reevaluate why they are there to begin with.
Originally published on Muftah.org. Republished with author's consent
*Mari Miyoshi did research in Morocco from 2012 to 2013 as a Brown University Zucconi Fellow. She awaits your comments, criticisms, and eureka moments at mari.ayako.miyoshi@gmail.com.