Rebel Kiva Microloans: When Borrowers Go Renegade

On Sunday, I wrote to you in dismay that Kiva microloans to third world entrepreneurs, characterized as “low interest”, were nevertheless charging as much as 58% of the principal in interest and fees to those entrepreneurs. You wouldn’t even consider accepting that rate for a credit card; how could we expect distressed entrepreneurs in struggling countries to lift themselves out of poverty under such constraints?

Today, I write to share a different face of the same microloan story. It begins in the same place, with the grassroots No Pago movement by entrepreneurs in Nicaragua:

Last January in northern Nicaragua, as a crowd of hundreds blockaded the Panamerican Highway late into the cool Monday night—soaking tires in gasoline before setting them on fire, hurling rocks at police and TV cameramen, bringing traffic to a standstill for 10 miles—the words once again began appearing in news reports and political speeches and inside the National Assembly debate halls: No Pago, No Pago!

In the months that followed, the refrain was hardly absent from the airwaves—not on May 12, when a group of 20 people smashed the windows of a truck belonging to a local microfinance organization, or in early September, when some loan officers were so harassed by protesters barricading their office doors and badgering the clients who attempted to enter that they decided to stop showing up to work altogether.

These incidents are only a few examples of the bad feeling that microfinance institutions (MFIs) have inspired among a section of the rural population in north and central Nicaragua. Confronted by the bold protests of the Movimiento de Productores, Comerciantes y Microempresarios de Nueva Segovia, or more colloquially as the No Pago (I Won’t Pay) movement, politicians are growing increasingly nervous that the group’s protests are scaring away international investors and could strike a heavy blow against the country’s shaky economy….

The No Pago movement, which has been estimated by the media to consist of somewhere around 10,000 members, has largely been fueled by complaints that MFIs charge interest rates that are too high, leaving borrowers swamped in unmanageable debt. Nicaragua has the greatest number of MFIs in Central America, with an estimated 450,000 clients and an approximate $400 million portfolio. Clients in the economy’s informal sector typically take out small loans in order, for example, to buy an oven to make and sell corn goodies known as rosquillas or start up a fruit-vending stand or purchase some cows and pigs. The 19 institutions that make up ASOMIF, a national microfinance association that has borne the brunt of the movement’s wrath charge, on average, between 10% and 12% annual interest.

Kiva operates with two Nicaraguan institutions in the ASOMIF association — CEPRODEL (reaping 35% on average in interest and fees from entrepreneurs) and AFODENIC (reaping 15% on average in interest and fees from entrepreneurs).

But Kiva also operates with a third Nicaraguan institution that is not a part of the protested ASOMIF association — a lender called ADEPHCA. ADEPHCA issues micro-loans to people living in the very poor indigenous and Mestizo communities along the Caribbean coast of Nicaragua. According to Kiva disclosures, ADEPHCA does not charge interest and allows a high default and delinquency rate. For this reason, Kiva declares ADEPHCA to be a “very high risk” investment for lenders who want to see their money returned. On the other hand, for lenders who don’t want to see their money returned, ADEPHCA might be a reasonable way to go.

Because of the problems with high-interest usury, from this point forward we will shift our donations away from Kiva and instead will send money from our donations program to micro-grant programs that give rather than lend money to help struggling communities overseas. But as our old Kiva microloans are returned to us, we will still have a Kiva balance. We’ll reinvest that microloan cash into ADEPHCA and other no-interest, high-default groups that operate through Kiva (if there are any) until through occasional default our Kiva funds are dissipated.