By Maria Fernanda Rivera

For the past two years, Microfinance Organizations (MFIs) in Nicaragua and some of its clients have been at odds concerning overdue loans. This tension resulted in the creation of the “No Payment Movement” (NPM), which manifested itself in street protests, some violent, and culminated with the creation of a Moratorium Law. Both sides lobbied heavily. Some are more content than others with the resolution, but more importantly this was an eye-opening opportunity for the industry as a whole to recognize some of its biggest challenges for the future.

Source: Wikimages, 2004

The NPM was in great part a result of the financial crisis beginning in 2008. Not only was there a general slowdown in economic activity, but Nicaragua is also highly dependent on remittances, and the sharp decline in these crucial funds affected thousands of people, including many microfinance clients. However, the NPM is only composed of a few thousand microfinance clients who were unable or unwilling to pay their debts, or around 2% of the roughly 500,000 total clients in the country. A culture of non-payment is particularly threatening for Nicaragua, with one of the largest microfinance penetration rates in Latin America, and by far the largest in Central America. The NPM argued that the microfinance sector charges excessively high interest rates and called for MFIs to restructure their debt to allow a 10 year repayment period and a cap of 8% APR, which would create grave financial troubles for MFIs. The MFIs submitted a counter-offer, requesting up to 4 years for repayment on the restructured loans and calling for the government to offer a guarantee mechanism for restructured clients that do not meet repayment conditions. Although only a small percentage of loans were at jeopardy, the looming fear was that the government would mandate conditions that would unleash blatant and widespread disrespect for financial and contractual conditions.

Sources: Active borrower data- Microfinance Information Exchange (2008); Country population data- CIA World Factbbook (2009)

In April of this year the “Moratorium Law” was passed by Congress. It ordered MFIs to renegotiate past due loans with an interest rate cap of 16% and repayment schedules of up to five years. These terms were very similar to those proposed by the MFIs, and in the end the law that had the country’s MFIs preoccupied did not have a terribly negative short-term outcome. The worrying aspect of this situation was the attitude of the NPM, which was at odds with culture of responsible financial and contractual agreements. Nicaragua has relatively high microfinance institutional development and an adequate regulatory framework, however, its investment climate is poor. In fact, a 2008 microfinance report by the Economist Intelligence Unit forecasted the future problem stating, “Nicaragua’s worst score is for its weak judicial system. It is inefficient and highly politicized which means that contractual agreements are often not respected”. Nicaragua’s Achilles’ heel was its culture of non-payment and lack of contract enforcement, and it in fact materialized into a large problem for the industry.

Although the passing of the Moratorium Law can be considered a success since it did not fall prey to the difficult requests of the NPM, it does not deal with the underlying issues. Judicial stability is crucial to the sustainability of any financial system. In the case of microfinance, reliability and trust of clients is especially important since clients usually lack assets or collateral. The Moratorium Law quelled the NMP and provided an option for MFIs to avoid financial turmoil in the short-run. However, all stakeholders must find mechanisms of instilling a culture of repayment in the country, which includes avoiding the habitual bailing out of debtors. The country must encourage financial responsibility, which not only means enforcing financial contracts but also distributing responsible loans. This may be an opportunity for the sector as a whole to assess its condition both from an institutional, judicial and regulatory perspective in order to prevent the rise of future non-payment movements.