> Posted by Sergio Guzmán
In November of 2009, we reported that the microfinance industry in Nicaragua is under siege by a politically motivated group of borrowers. Calling themselves “No Payment Movement,” they pressured the government to lower their interest rates, suspend debt recovery trials, and grant grace periods on repayment. On February 24th, 87 out of 92 members of the National Assembly voted to order microfinance companies to sit down with their delinquent borrowers and renegotiate all loans past due since June 30, 2009; microfinance companies were also ordered to suspend asset seizures and trials. Furthermore, the assembly has instituted interest rate caps of 16% per annum on all renegotiated loans. President Ortega has not yet signed the bill, which is a requirement before it becomes into Law, however it is expected that he will.
The Microfinance Association of Nicaragua, ASOMIF, had, in numerous occasions, voiced its opposition to the law, saying that it would institute a culture of non-payment that is bad for both the country and for individual borrowers. Such a culture could make foreign investors wary of Nicaraguan deals, withholding financing for MFIs serving as many as 450,000 clients in good standing.
Some investment funds who had previously spoken out against the law have now said that they are not going to make new investments in Nicaragua. For instance, Incofin, a Belgium-based investment fund, will not renew investments of US$5 million in the country. By making collection of bad debts much more difficult for Nicaraguan MFIs, the Law creates uncertainty about the ability of those MFIs to maintain sound portfolios. Add that to the already tense global capital markets, and you’ve produced a set of very nervous investors.
Investors and microfinanciers agree that this law sends the wrong message to borrowers. In the words of Silvio Conrado, of the Banco Centroamericano de Integración Económica, “This can give borrowers a message that those who pay their loans on time are not very smart. Those who are not paying their loans on time can all of a sudden have better interest rates, even better than those punctual clients, and that is a dangerous thing.”
We will continue to monitor the situation in Nicaragua to see how the industry, investors, and the government proceed.