Markus is currently doing a 3 month internship at Gatsby Microfinance Limited in Kampala, Uganda. Gatsby Microfinance has been a MYC4 provider since 2008.
I am in the sleepy town of Soroti in the North-Eastern part of Uganda. I have accompanied a colleague on a recovery/monitoring trip from the head office to one of our branches. The aim of the trip is to assist in collecting late repayments, monitor practices, and to make sure that the branch is happy.
It is early morning and my colleague from the head office, two local credit officers, a driver, and me get in our 4-wheel drive pick-up truck and head off into the country side. The roads are filled with holes, sometimes there are even sections that have been carried away by floods. So, after being cramped in the back seat with the two credit officers for an hour on a bumpy road with no air condition, we finally arrive at our “in the middle of nowhere”-destination.
We are looking for a man who is three months late on his installments. He owes around 300,000 Ugandan shillings, which is around €90. We find him drinking gin (at 10 in the morning) together with a big group of men that seem to be doing a strange combination of building a house and relaxing in the shade. He seems a little embarrassed to be confronted with his issue in front of his friends, but he claims that he has the money and that we can go and get it from his parents’ house.
Thus, he gets in the back seat and the trip goes on. With the backseat even more crowded, the road even bumpier, and a debt-ridden farmer next to me, it is not a very pleasant ride. After driving for a while we get to a point where we must walk since the road is too narrow. After walking for 20 minutes we get to a small farm. It looks just like something from a discovery channel documentary, with the exception of us four men in shirts and ties with stern faces.
We sit down under a mango tree and wait while he goes into the house to find the money. Then begins a long negotiation. He claims to have only 15,000 shilling. My colleague says that it is not enough. He says we can have a goat instead. We say okay. He brings the goat. It is deemed too young. After much negotiation we conclude that he must pay the money the following day, something he is made to promise on paper with a signature. After this we walk back to the car and drive away.
This is a typical recovery run, tracking down the person who is in debt, and using various means to make him or her pay. Only as a last resort is the security of the loan collected. There is much psychology at play when collecting late repayments, many times people do have the money, but neglect paying because they do not prioritize debts to institutions such as this one. There are several tactics used to pressure people to paying; standing outside the business in suits, visiting their home, making them promise on paper that they will pay, spraying their house with the words “BANK PROPERTY”, or start collecting chattels used as security.
This might all seem a bit harsh, but it is many times necessary to make people pay and to make sure the microfinance institution (MFI) stays in operation. If it were not done, the MFI will eventually go bankrupt, and this would hurt the vast majority that do pay their loans on time and that rely on the capital provided by these MFIs. The fact of the matter is that the number of people that default their loans, or are more than 30 days late with their repayments, is very low (the default rate and PAR30+ is at around 2% and 5% respectively).
If the developing world is to have a working market economy, the same principles must be applied there as those that are at work in the developed world. Ultimately, if the microfinance sector is to become self-sustainable, people need to be accountable for their actions. However, microfinance institutions need to make sure that their clients are given and understand all the relevant information connected to the taking of a loan and that the loan appraisals are done diligently. This is the only way to make sure that loans become good investments for both entrepreneur, MFI, and investor.