The non-payment culture in Nicaragua. Is it back?
Streets blockaded by members of the “non-payment movement”. Photo by Mark Aumann.
Only few years ago, Nicaragua’s microfinance institutions were internationally recognized for their outstanding performance and for having some of the most well run microfinance institutions in Latin America. Today, there is a growing concern about the health and future of the Nicaraguan microfinance industry. What has happened? Why this sudden turn of events? The reason is simple. Around April, 2008 a politically-motivated movement of borrowers of microfinance institutions and banks — known popularly as the non-payment movement — started protesting, most of them violently, against those institutions and putting pressure on fellow borrowers to not repay their debts1. Originally they were supported publicly by President Daniel Ortega. As a result, defaults at several microfinance institutions in Nicaragua has reached levels not seen in the industry since their early years.
During 2009 the actions of the non-payment movement have taken place in a very volatile political and economic environment that has exacerbated the problem. The protests of the non-payment movement have coincided with an increasing erosion of the rule of law in Nicaragua, severely affected by substantiated allegations that the Sandinista Government performed massive fraud in the municipal elections of November, 2008. Additionally, the protests of the non-payment movement have also coincided with the deepening of the global economic crisis, which has made it easier to recruit adversely affected borrowers, mainly among small and mid sized cattle ranchers in the Eastern part of the country, which were severely affected by the plummeting international price of meat.
As a result, despite the open and flexible attitude of microfinance institutions to restructure debts of borrowers affected by the current economic global crisis, the non-payment movement has refused to negotiate, and instead it has violently attacked the offices and the personnel of several microfinance institutions. As you can imagine, 2009 has been one of the most challenging years for the microfinance industry in Nicaragua since its inception in 1991. I think it is important to see the current critical events with an historical perspective. In this article I will elaborate on three main issues. 1) I will look at the historical background of the problem. I will show how the practice of debt forgiveness during the 1980s created an unhealthy culture of non-payment of debts in the Nicaraguan society, which not only had a very negative impact in the economy, but also made the economic recovery of the country more difficult; 2) I will elaborate on the hypothesis that the practice of massive subsidies and debt forgiveness during the Sandinista Revolution did not only create a non-payment culture among the population, but also created a kind of “handout mentality” among some political leaders and parties; 3) Finally, I will analyze if the actions of the non-payment movement are reviving the culture of non-payment in Nicaragua, and I will refer to the future of its microfinance industry.
1. The origins of the non-payment culture and its impact during the 1980s
The Sandinista Revolution of 1979 is without a doubt one of the most important events in Latin American history of the twentieth century. It was a social revolution with an initial overwhelming support by the majority of the population. Despite all its accomplishments, the Revolution became trapped in its own mistakes and by the Contra War — fueled by the political, monetary and logistical support from the U.S. Government, which wanted to remove the Sandinistas from power.
The Sandinista Revolution wanted to make credit available to the majority of the population, especially in rural areas which had been historically overlooked by the financial system under Somoza’s dictatorship. However, the issue of credit also got trapped into the logic of the armed conflict with the Contras. As a result, debt forgiveness became the norm. It became a weapon in the political fight to win the hearts and minds of the population. Debt forgiveness was also possible because there were no privately owned financial institutions, but all the banks were state-owned and at the service of the revolutionary government.
A road block by protesters from the “non-payment movement” last January. Photo by Mark Aumann.
In their study of credit policies during the Sandinista Revolution, Laura Enriquez and Rose Spalding have highlighted that: “In most banking systems, repayment of principal and interest from previous loans is a major source of revenue for new loans. In Nicaragua, however, interest rates were far below the inflation rate; they constituted a subsidy to borrowers instead of a return for the bank. Low recuperation rates in some sectors and the clearing of the peasants and APP [state-owned farms] debts further limited the return flow of bank resources. This undermined the traditional process through which loanable funds are generated for the next cycle”2. By the end of the 1980s state-owned banks were broken, and credit was completely unavailable.
2. The evolution of the “handout mentality” in Nicaraguan politics
I believe that the practice of debt forgiveness during the 1980s in Nicaragua not only created a non-payment culture among the population, but also originated something even more dangerous, which could be called a “handout mentality” among political leaders. Under this mentality, it is believed that the poor cannot take its own future in its own hands and cannot find ways out of poverty by itself, but instead needs the paternalistic intervention of politicians, through the use of the state, that should pay for everything even though there are not resources available to be able to afford those expenses. Regarding the issue of access to credit, politicians with a handout mentality believe that poor people cannot repay loans for the simple reason that they are poor. As a result, the easy solution that they offer is subsidized credit. For this reason, despite the fact that the microfinance industry in Nicaragua was able to develop in one of the most challenging political and economical environments, and even though by the beginning of this century it has become one of the most successful in Latin America, many Nicaraguan politicians were never impressed. Followers of the handout mentality always looked at the microfinance industry with suspicion and were, by nature, very skeptical about its positive social impact. As a Nicaraguan politician once said to me, “I don’t understand why all that excitement with Muhammad Yunus and the Grameen Bank if Bangladesh is still a poor country.”
WCCN has conducted two social impact studies of microfinance in Nicaragua, one in 2002 and a follow-up in 2007. Even though our studies clearly found a very positive impact of microfinance in the overwhelming majority of borrowers and their families, we were not able to convince politicians who strongly believed the opposite, and who were not open to changing their minds based on findings from an academic study. Unfortunately this kind of attitude is very common among the entire political spectrum in Nicaragua, from the left to the right. According to politicians it is better to provide subsidized credit to a few thousand people because supposedly it is the “fair” way to do it, rather than allow hundreds of thousands of people the opportunity to access credit under market conditions, because supposedly it is impossible for the poor to repay their loans under those conditions. However, microfinance has proven that it is possible.
If we look at the approach that the current government has taken on credit we can find a very similar pattern. I believe that the vision of President Daniel Ortega has moved from the years of his debt forgiveness mentality of the 1980s to the handout mentality. During the Presidential Campaign of 2006 in meetings with small- and mid-size producers, several times Daniel Ortega made reference to the need to restructure debts. In a public rally in Estelí, on September 11, 2006 Ortega stated: “We will not pardon debts anymore, what we will do with everyone with debts is to review and restructure them. However, everyone should pay their debts. Financial institutions should not worry, as the state will make deals with them.”3 A few days later in a political rally in the town of Somoto, Ortega said: “Our plan of government is serious because we are talking about restructuring debts, creating a development bank to provide financing and to open markets.” 4 At that time his comments were not taken seriously nor were they challenged because over indebtedness was not an issue in the sectors of banking or microfinance. Today, it seems like a self-fulfilling prophecy.
3. Is the non-payment culture back in Nicaragua?
Borrowers like this chayote farmer in La Conception are worried that the “non-payment movement” will hinder their ability to purchase seeds and fertilizer for next year’s harvest. Photo by Mark Aumann.
It is still early to conclude that the non-payment culture has made its way back in Nicaragua. ASOMIF has documented 2,500 borrowers that are active members of the non-payment movement, but estimates that it could total around 5,000 if unidentified and passive supporters of the movement are included. To put things in perspective, an estimated 500,000 Nicaraguan regulated and non-regulated institutions are currently receiving microfinance services.
Can the microfinance industry survive the current crisis? I strongly believe it can. However, it will survive with wounds, and some organizations may fail. It is important to keep in mind that the microfinance industry in Nicaragua started from scratch at the beginning of the 1990s in a more difficult and uncertain political and economic environment than the current one. WCCN was there from the very beginning, as the pioneer international credit provider to CEPAD-PRESTANIC, the first microfinance institution in Nicaragua. Additionally, there is a lot of talent and expertise among the heads of the different microfinance organizations, as most of them have been involved with their institutions from the very beginning.
There is no doubt that the current crisis will reshape the microfinance landscape. It is possible that most commercially minded funders will “cut and run”. WCCN is taking a very proactive approach to deal with the crisis and manage the increasing risk in Nicaragua. Diversifying into other countries and reducing our exposure in those partners most affected by the non-payment movement have been some of the actions we have taken over the last year. However, we believe that with our 18 years of experience supporting microfinance in Nicaragua, we can successfully navigate those turbulent waters. WCCN, along with many of our investors, remain deeply committed to supporting the Nicaraguan poor during good and difficult times.
1 WCCN has published several articles on this topic during the last year and a half. See: “Open letter to the Nicaraguan microfinance industry.” Nicaraguan Developments. Fall 2008, page 6; Arenas, Carlos: “Nicaraguan government pulls back attacks against microfinance institutions.” Grassroots Connections. Spring 2009, page 4; Aumann, Mark: “Stuck in the middle of the road.” Grassroots Connections. Spring 2009, page 7. All our newsletters are available at www.capitalforcommunities.org.
2 Enriquez, Laura J. and Rose J. Spalding (1988). “Banking Systems and Revolutionary Change: The Politics of Agricultural Credit in Nicaragua”. The Political Economy of Revolutionary Nicaragua. Edited by Rose J. Spalding. Allen & Unwin, Inc.: Boston. Page 123.
3 Morales, Pedro Noel. “Ortega ofrece reestructuración de deudas” La Prensa. Managua, September 12, 2006.
4 Radio La Primerisima. “Daniel Ortega promete financiar y reestructurar deuda de los campesinos”. Managua, September 17, 2006.
By Carlos Arenas
WCCN Executive Director