Nicaragua's Microfinance Crisis: Looking Back, What Did We Learn?

> Posted by Center Staff
The Nicaraguan microfinance industry suffered a profound crisis in 2009 and 2010 as a result of both the international financial downturn and the domestic No Pago (No Payment) Movement. Heightened by political interference, these events took a toll on Nicaraguan MFIs and left them both illiquid and unpopular.  As reported by La Prensa, more than 100,000 clients have stopped receiving credit. The industry served some 324,000 clients before the crisis, while today it serves an estimated 225,000. Total portfolio dropped from US$420 million in 2008 to US$170 million at present. Despite heavy write-offs, members of the Nicaraguan microfinance institution association (known by its Spanish acronym, ASOMIF) have an estimated portfolio at risk of 19 percent. There have been cases of failure.
Although this news is bleak, there are glimmers of improvement. The sector appears to have stopped deteriorating and overt support for the No Pago from the government seems to have lessened. The IMF has put some pressure on the government to support the microfinance sector. A few institutions are seeing signs of recovery. According to an IMF Document, the Nicaraguan government will seek the approval of a Microfinance Law that will enhance “the supervision, transparency, and efficiency of the sector… in particular, the regulatory framework applicable to unsupervised microfinance institutions.”
In previous posts we examined the nature of the No Pago Movement and the Moratorium Law.  Here, we ask: What can the microfinance industry as a whole learn from these events?

  • International investors will not tolerate an unstable environment: Microfinance investors had warned early on that they would not make new investments in Nicaragua if the political environment did not change. They have acted on those words and continue to shrink their exposure to Nicaraguan MFIs. Equity investment in Nicaraguan MFIs was also halted. Unless some conditions change, Nicaragua could have a funding shortage of over US$100 million. Investors have mentioned that they would like to see a law that regulates investment, stronger MFIs, and a more stable environment that doesn’t put their investments at risk.  There is concern about the uncertainty of the economic outlook in Nicaragua among international institutions like the IMF who has mentioned that a key priority for Nicaragua is to better regulate the microfinance and cooperative sector.
  • Demagogy is louder than the law: Even though the Moratorium Law required a renegotiation process between clients and MFIs, only 7 percent (363, to be exact) of clients in the No Pago Movement reached out to their institutions to restructure their loans. Some of these clients remain hopeful that the government will pay their debts or else have threatened to blackmail incumbents in the voting polls.  MFIs fear that the No Pago Movement and the Moratorium Law have weakened the culture of payment among clients. This will make it more difficult for MFIs to properly evaluate willingness to pay.
  • MFIs will fail – As David Roodman blogged recently about the failure of Banex, the No Pago Movement was not the only reason for Banex’s demise. Contributing factors include political, social, and economic circumstances combined with weak governance and credit methodologies, topped by too-rapid growth.  MFIs that better leveraged their lending portfolio might have been better equipped to avert failure. Either way, some MFIs simply will not survive.
  • Is everyone to blame? True, investors are partly to blame for the excess liquidity in Nicaragua that created a lending spree. At the same time, it would be fair to blame MFIs who gave excess loans to people who had not demonstrated the capacity to pay their financial obligations. MFIs like to point to the No Pago Movement and the government’s early involvement in the protests as factors responsible for the uncertain climate. It is important to recognize that the combination of all of these factors culminated in the events that unfolded.

It is critical that the microfinance industry reflect and adjust the way it does business.  For these reasons, we advocate a 6-Point Action Agenda to Recalibrate Microfinance.  It is important that all actors move forward in the creation of a framework that promotes full financial inclusion and at the same time protects clients from future economic turbulence.