I went to Mexico last week with the double purpose of seeing how FINCA Mexico is doing and also to give a talk to the microfinance association Prodesarrollo on the subject of over indebtedness. The extent to which our clients may have borrowed too much from too many providers is at the top of the list of “worry beads” for many of us working in the microfinance space these days. There is an enormous irony to this: Those of us who are pioneers in this field went into it precisely because it was impossible for poor people in developing countries to get loans from institutional sources 40 years ago. Today, in some markets with many providers — Mexico has thousands, if you count not only the banks and Microfinance companies, but also the pawn shops and other small credit companies — obtaining loans is easy, especially if you are poor. Why? Because many unscrupulous lenders target the poor and financially illiterate as a source of easy profits — until they ruin their finances.
The consensus at the Prodesarrollo conference is that, yes, parts of the Mexican market — the urban and peri-urban areas — are definitely overheated. Finding a solution, however, is not easy. Even if all the socially responsible microfinance companies took more care not to over indebt our clients, there are other sources of credit that will happily step in and lend to “our” clients, even if they have already reached the limits of their repayment capacity. Here, the only solution is financial education, and regulations which require all participants in the financial sector to make more extensive use of credit bureaus.
One thing organizations like FINCA Mexico can do in the current environment is make extra efforts to reach Mexican families — and there are millions — who still have no access to institutional credit. The FINCA village bank I visited outside of Puebla, Mexico, is an example of a hard-to-reach group that is not in a situation of over indebtedness, but rather is making excellent use of our loans to finance productive activities such as farming, food preparation, and production of embroidered tablecloths and tortilla warmers.
I left Mexico feeling cautiously optimistic that at least the problem of over indebtedness is now out in the open. But there is much to do to begin mitigating the problem. And the socially responsible microfinance sector cannot do it alone.