Safeguarding Borrower Rights in Crisis-Era Microfinance

CHAD KRAMER—While the Covid-19 crisis has broadly shaken global economic stability, those who borrow from for-profit microfinance institutions (MFIs) have often encountered disastrous financial circumstances. MFIs professedly further global financial inclusion by offering microcredit and other services to the underbanked in developing economies. And MFIs do provide microentrepreneurs otherwise inaccessible capital, frequently empowering them to innovate out of subsistence. Industry success stories are admittedly numerous—$60 for a single mother in Paraguay to inaugurate her dream empanadería; $400 for a widow to jump-start her now-thriving business in downtown Kinshasa; and microloans for a young family to buoy their goat cheese operation in rural Serbia. Despite the modest sizes of individual microloans, the sector in aggregate plays an essential and growing role in emerging markets, with its projected value exceeding $304 billion by mid-decade. Yet, profit-seeking MFIs must balance the industry’s noble social mission with their gainful operating models. Formulating appropriate regulatory solutions to this longstanding ethical concern is now of heightened urgency as ever more MFIs, facing exceptional financial pressures amid the pandemic, have resorted to exploitative loan and debt collection practices. Notwithstanding the pronounced divergence among various international microfinance regimes, universal human rights principles should nevertheless uniformly sway policymakers everywhere.

Of greatest consequence in the MFI regulation debate is the welfare, particularly during crises, of the borrowers whom microfinance avows to uplift. At-times inadequate domestic consumer protections have likewise been exposed by recent mass borrower insolvency. Some MFIs have allegedly chosen, instead of suspending or restructuring loan payments, to informally pressure newly unemployed borrowers, as well as those unable to work due to pandemic policies and those sick or caring for sick family members, to liquidate their assets as a debt alleviation measure. A furloughed garment factory worker in Cambodia, for instance, can purportedly still be compelled to hand over her farm (and with it, a vital means of sustenance) merely to satisfy a secured microloan. The issue is further complicated insofar as regulatory agencies in developing countries like Cambodia legitimately fear over-regulating MFIs and thereby eliminating the industry altogether. Resorting to non-binding suggestions for MFIs to take more lenient approaches to debt collection, as Phnom Penh has done, evidently allocates undue discretion to lenders. And even when borrowers are able to make payments, MFI liquidity—and consequently borrower welfare—is needlessly diminished by at-times inflexible operational schemes (namely, a lack of digital collection and distribution options), as was the case among certain MFIs early on in the crisis, when quarantines halted in-person transactions.

While each country ought to forge a regulatory convention suited to its own unique socioeconomic conditions, all should root their policies in shared human rights principles. Recognizing increased threats to “economic and social rights” in the Covid-19 era, Human Rights Watch released a set of recommendations, grounded in international law, for governments to ensure they do not violate their “minimum core obligations” towards constituents facing insolvency. Of central import in the recommendations is Article 25(1) of the 1948 Universal Declaration of Human Rights (UDHR) (a non-binding document, though many of its provisions are seen as de rigueur under customary international law), which proclaims a common right to a standard of living sufficient to maintain one’s “health and well-being[.]” The right is further elaborated on as including “adequate” housing in the subsequent International Covenant on Economic, Social and Cultural Rights (ICESCR), which has been ratified without reservation by 139 General Assembly members (and which the United States has signed but is assertedly not bound by).

In addition to upholding such broad values, any truly effective microfinance regime must also center the unique predicament of individual microentrepreneurs, whose personal debts are commonly intermingled with those of their respective micro and small enterprises (MSEs). In July 2021, the United Nations Commission on International Trade Law (UNCITRAL) adopted legislative recommendations emphasizing the need for “simple[r], [more] expeditious and low[er]-cost” insolvency regimes. Governments should heed such concerns and develop creative administrative or legislative solutions to fortify borrowers’ rights. To ensure continued access to shelter and basic amenities, leadership should be proactive in enabling financial assistance, payment deferrals, debt restructurings, and eviction moratoriums, as well as crafting benevolent tax policies for susceptible micro-borrowers. Other commonsense administrative or legislative measures could include imposing justifiable interest rate ceilings and requiring microcredit transactions that involve highly susceptible debtors to be noncollateralized, or at least more reasonably configured. Prudential regulations such as requiring MFIs to implement digital and other alternative operational arrangements could also help mitigate avoidable disruptions.

The most vulnerable yet resilient among us are contending with dire preexisting challenges that the onset of Covid-19 has only magnified—acute healthcare emergency, hyperinflation, economic collapse, civil war, and militant insurgency. Despite its shortcomings, microfinance continues to promise enterprising microentrepreneurs a path to prosperity. They merit a more sensible and consistently rigorous MFI regulatory framework—one that is both custom-tailored to the exigency of this moment and immunized against future crises.