By Steve Grey, KF11, Kenya
I got to see a fascinating situation last week in Nairobi when I was with Caroline, a local Credit Officer from SMEP (one of Kiva’s lending partners in Kenya). It was a classic microfinance scenario: What happens when a member of a borrower group doesn’t pay? But it wasn’t theoretical anymore… it was happening right in front of me.
As you probably know, many microfinance institutions (like SMEP) sign up individual borrowers as members of groups, often 10-20 people. Rather than providing collateral for their individual loans, members pledge to be jointly accountable for each other’s loans. So if anyone in the group doesn’t pay back their loan, the other group members have to pay it back. That turns out to be an effective approach because no one in the group can get another loan if all the member’s loans aren’t paid back. And most members want to get additional (and often larger) loans in the future. Signing up borrowers in groups also makes loan collection easier, since the credit officer can meet with 10-20 people at a time. That’s a common way for microfinance institutions to reduce administrative costs, especially if borrowers are in remote locations.
So Caroline and I thread our way through impossibly busy streets of Nairobi, dodging cars (as I try to remember to first look right instead of left when crossing streets where vehicles drive on the left). We walk into a bar and climb up three flights of stairs to the group’s weekly meeting place.
One by one, the women start arriving with the passbooks to record loan payments and contributions to savings accounts. With about half the conversation in English and half in Swahili, I watched as they sorted out the payments for the week. After a half hour or so, it started to seem rather boring, especially as the time dragged by. Why was this taking so long?
Then I started to notice the body language. The women looked stressed. Several people were making phone calls. Then I realized what was going on. One of the members was absent… for the second week in a row. She owed 2,300 Kenyan shillings (about $30). After several attempts to get her to answer her mobile phone, someone reported that she turned it off. Now the temperature in the room was rising. One woman, with frustration and a bit of anger written on her face, said “It’s not fair. She was here to get her money. Why has she stopped coming to pay it back? It’s not fair. It’s too much.”
Over the next hour, the group started making calls to track her down while also trying to come up with a solution. They couldn’t leave without the absent member’s loan payment being made or the group would be in arrears. One of the women present was supposed to get a check today for an additional loan. But she wouldn’t get it if the payment wasn’t made.
Could member’s chip in more money to pay the absent’ member’s payment? They started checking purses and wallets and pockets for crumpled bills to see if they could cover it. No, they didn’t have enough.
One of the women called the absent woman’s sister. Did the sister know where the group member was? “Yes, but I can’t tell you.” Eyes were rolling, worry lines were forming, and hands were wringing as the group tried to deal with this situation.
What could they do? They asked the Credit Officer if the group could force the absent member to forfeit part of her savings account to pay her loan. “No.” The Credit Officer explained that the member’s savings account was not supposed to be used for loan payments. They would have to come up with a different solution.
What could they do? Finally, they agreed on a plan with two parts. First, they would take the money they had brought that day for their savings accounts (rather than their loan payments) and use it to pay the absent member’s 2,300 shillings. Then, they would go as a group to the woman’s business premises and confront her directly. If she wasn’t there, they would talk to her employees. They were convinced they could get the woman back on schedule. Though SMEP would show the woman’s account as current, the group keeps separate books showing exactly who has paid what. When the woman pays up, the members who contributed their savings amounts would be paid back.
So, in the end, all the weekly loan payments were made. What an interesting example of the kind of group accountability that makes microcredit work. This group doesn’t really consider the absent member a deadbeat. They’re convinced she’ll be back in good standing soon. As one woman said, “This is just a storm cloud passing over. It’s not a tsunami. We have always been a strong group and we will recover. We are strong pillars. Our group will not disintegrate.”
This is Joyce, the woman who was anxiously awaiting the outcome for her check. With all the group’s payments made, she got the check for her new loan. This energetic and ambitious woman plans to use her additional loan to expand her handbag manufacturing business. She aspires to employ over 100 people within 5 years and wants her business to be known worldwide via the Internet. Go Joyce!
Steve Grey is a Kiva Fellow working with Small and Micro Enterprise Programme (SMEP) in Nairobi, Kenya. He is working to get the institution from pilot to active stage as a full-fledged Kiva partner.