Small loans can help debt problem in poor countries, agency says

Small loans can help debt problem in poor countries, agency says

By staff writers
19 Dec 2009

The threat of entrepreneurs in poor countries taking on too much loan debt is a growing reality, and a real threat to the rapidly expanding microfinance sector, says the fair finance body Oikocredit – which provides affordable loans to vulnerable but enterprising communities throughout the world.

At Oikocredit’s annual staff and board meetings, regional managers, who operate in almost 70 different countries, raised concerns over the rate of over-indebtedness in some nations.

Those working in the field say cases of over-indebtedness are becoming more common.

Oikocredit says urgent action is needed and its board and staff defined an immediate action plan to address the issue.

Microfinance, which allows poor people and small entrepreneurs to receive financial services they could otherwise not access, has grown at a tremendous pace, the agency points out.

While some regions continue to struggle with inactive microfinance institutions (MFIs) and an unmet demand for financing, others are experiencing the reverse.

MFIs must expand to become financially sustainable, says Oikocredit. They need to aim for scale and strive to reach out to more and more clients.

In some cases, especially with the entrance of profit-driven actors, this leads to an increase in competition and results in institutions reaching out to the same clients in the same (often urban) areas.

Oikocredit regional directors reported stories of clients with loans by more than two, three or even five different microfinance institutions. The over-indebtedness of clients, and sometimes abusive collection practices, are an often-noticed consequence of multiple lending.

As a socially driven organisation, Oikocredit remains “seriously concerned about the consequences of these developments for the microfinance industry, but more importantly for our end clients.”

“Credit is a stepping stone out of poverty - as long as repayment is possible. If repayment becomes an insurmountable burden, a client becomes over-indebted. We do not want MFIs and their clients to fall into this trap. Organisations providing funds have an extremely important responsibility,” says Oikocredit's managing director, Tor Gull.

To address these challenges, Oikocredit has resolved that field staff in its 33 offices around the world will consult and negotiate with local and regional partners.

“The negative consequences of competition can only be effectively solved through agreements on a national level and by joint initiatives,” the agency says.

Oikocredit, an initiative of churches and civil society investors, is also contacting other socially oriented investors to seek collaboration in tackling debt and poverty concerns.

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