Credit Where Credit Is Due

Ever since Winds of Peace first began its microlending practices in Nicaragua in 1994, it has struggled with the balance between making resources available to those organizations in greatest need and the desire to maintain a high rate of repayment.  It’s a difficult balance, because often those in greatest need have the least experience and the toughest obstacles to surmount.  While we have been blessed with a very strong repayment history from our partners over the years, we also have lamented the fact that there did not appear to be any means for effectively researching a group’s credit history, either good or bad.  Sometimes we might be able to speak with other funders, if we knew that they had supported an organization in the past, but such opportunities were few and far-between and often the information offered provided limited insight as to future credit performance.  The result has been to the detriment of both the members of the funding community, who have had to take on greater risk based upon their singular assessments of a group, as well as to the field of potential borrowers who must generate their funding requests under a generic cloud of suspect accountability.  That may be changing.

WPF has recently subscribed to SinRiesgos, a credit bureau servicing the entire country of Nicaragua.   While this organization came into existence in 2004, it began independent operations in 2006 and has really become an active and sought-after service in the wake of the No-Payers Movement in recent years; there is nothing like a period of defaults to get the attention of lenders.  As a result, the database has been expanding with new entries and the users have grown from a few big lenders to now include individual cooperatives seeking to evaluate potential new members.  The service currently serves more than 230 institutions, including banks, microfinance institutions, and cooperatives.

The presence and growth of an organization like SinRiesgos might seem like an unremarkable development to some.  Service companies such as this are common in North America and throughout Western-style economies.  But its presence in Nicaragua marks a threshold of importance for that country in at least two respects.  As an operating tool for use by the credit industry, the service represents a major advancement.  Lenders in Nicaragua have long been hampered by assessing loan-worthiness in the dark, relying on word-of-mouth representations, written proposals which may not always contain accurate credit histories and occasionally personal interviews which can be highly subjective.  The result has been that many lending institutions which once operated broadly across Nicaragua are now much more restrictive in their presence or have left the country altogether.   But there’s a second benefit that carries an even-greater potential, the creation of an accountability tool for the borrowers.

Accountability is often found in the personal character of leaders, those who speak on behalf of their cooperatives or associations.  Their word is their bond and one may rely on that with confidence.  But such reliability is not universal and in any case it is usually difficult to assess in advance.  For hopeful borrowers, the challenge has become not only how to convince a lender of the importance of loaned capital, but also their trustworthiness to receive it. With the credit service, they now have a tool to demonstrate their reliability, something by which to measure the the performance of their words.  And that is an asset to the poor and poorly-connected worth a great deal.  It is measurable credibility.

There is yet another benefit to the emergence of the credit bureau service.  It is in the form of an attitude.  When most people are faced with an objective, there is an inherent desire to achieve it;  it might come from pride or self-satisfaction or self-respect.  But there is also an external drive to accomplish it, emanating from our  knowledge that the people around us are paying attention, and for most of us, that’s a powerful motivation to “measure up.”  If the detriment to defaulting on an uncollateralized  loan is that one can simply walk away from it and on to the next funder, no one is well-served.  The original lender has lost the loan, the borrower has failed to repay and that is the end of the story.  Such a minimal consequence actually harms the borrower when the default is without meaning, without impact.  As a consequence, the lesson learned is that defaulting is painless and therefore not to be taken too seriously.  But if the outcome creates an effect, a cost, an impact- in the marketplace, the community and in the psyche- then a transition is possible.  The essential outcome is not simply that default is painful; the true lesson is that successful performance builds confidence, self-respect and a foundation from which to dream.  And that is what SinRiesgos has the capacity to do for its participants.

I never thought about such impacts as our company worked with credit services in the United States for more than 30 years; it demonstrates the shortsightedness that we all tend to bring to our respective perspectives.  But the people of Nicaragua, and I, are still learning….

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