After the Nicaraguan Non-Payment Crisis: Alternatives to Microfinance Narcissism

After the Nicaraguan Non-Payment Crisis: Alternativesto Microfinance Narcissism

Johan Bastiaensen, Peter Marchetti, Rene Mendozaand Francisco Perez

ABSTRACT

This article argues against ‘microfinance narcissism’ and calls for a re-politicization of the microfinance paradigm. The dominant verdict onmicrocredit has undergone a damning transformation, from ‘magic bulletfor poverty reduction’ to ‘cause of suicide’. Nowadays, both radical criticsand mainstream voices deplore microcredit’s negative impact on micro-entrepreneurs. They argue for a reorientation where credit is targeted atestablished small and medium-sized enterprises, particularly in rural areas.The crisis in microfinance worldwide, including burgeoning protests, areviewed as proof of the commercial derailment and/or misplaced faith inmicrofinance’s positive social and economic impact on the poor. This ar-ticle engages with this debate through a study of the Nicaraguan micro-finance crisis. It challenges existing analyses that pin the crisis on agricul-tural over-indebtedness, lack of due diligence, or Sandinista populist politics.Illustrating the dangers of neglecting the diverse nature of microfinance, itreveals the paradoxical outcomes of the crisis: a refocus on the urban at theexpense of agricultural credit for small and medium enterprises and a consol-idation of the power of national processing elites. Nicaragua’s Non-PaymentMovement is also shown to be both a product of elite manipulation and anexpression of legitimate resistance to an industry that turns a blind eye to themanner in which markets and politics constrain clients’ potential.

INTRODUCTION

During the International Year of Microcredit (2005), microfinance waswidely regarded by the international community as a sustainable and po-tentially powerful tool to effectively eradicate poverty. Such appreciationreflected the initial success of non-profit microcredit institutions in reachingmicro- and small entrepreneurs while operating their credit businesses in a

We would like to thank Arturo Grigsby, Julio Flores and Jennifer Casolo, as well as threeanonymous reviewers for their useful comments. Opinions expressed as well as any remainingerrors are exclusively our responsibility.

Development and Change 44(4): 861–885. DOI: 10.1111/dech.12046C© 2013 International Institute of Social Studies.Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and350 Main St., Malden, MA 02148, USA

862 J. Bastiaensen, P. Marchetti, R. Mendoza and F. Perez

close-to-profitable, or at least cost-recoverable, manner. That same ‘interna-tional year of microcredit’ paradoxically also marked a decisive turn to whatsoon came to be known as the ‘microfinance industry’. Since then, advocatesof the ‘financial systems paradigm’ have argued for incorporating viable mi-crocredit institutions as for-profit enterprises within the mainstream bankingsystem and/or, if possible, for downscaling operations of established banksfor poor clients (Helms, 2006). These moves, designed to facilitate access tointernational capital markets, would also allow expanding services beyondcredit to include savings, payment services, transfer of remittances, etc. Thispathway of microfinance development would consolidate companies up tosufficient scale, and ensure adherence to sound principles of corporate gov-ernance and financial management, as well as unquestionable professionalstandards, which in turn would be supervised by competent financial author-ities. Mobilized by this strategic vision, a global coalition of actors set outto reach 100 million poor microfinance clients, a target set during the firstMicrocredit Summit in Washington (1996). By the end of 2010, a vastlyexpanded microfinance industry had reached over 205 million clients; ofthese, 137 million were claimed to be poor and 113 million of these werewomen (Maes and Reed, 2012: 3). Initial ambitions were thus spectacularlyexceeded.

From the very beginning, critics and advocates raised concerns about the‘commercial turn’ of microfinance which manifested in an increasingly ur-ban focus and lack of inclusion of poor agricultural producers. Emerginglargely from socially motivated and locally embedded non-profit organiza-tions, many of the original institutions did not feel at ease with the excessivefocus on financial indicators, the radical changes in corporate culture or theinstitutional practices that it implied (Yunus, 2011). The threat of ‘missiondrift’ was denounced, giving rise to an industry-wide double bottom-linemovement, which at least in principle committed itself to finding a bal-ance between financial sustainability and social impact.1 A critical issuewhich drew less attention from international actors was how the emphasison commercially viable, fully market-based microfinance seemed to makeagricultural microfinance an even more distant dream, and how this shift ofemphasis could grow despite the knowledge that 70 per cent of the world’spoor live in rural areas and depend mainly on agriculture for their livelihoods(IFAD, 2011).

With growing awareness that ‘microcredit only’ was not a panacea forpoverty reduction, many microfinance institutions (MFIs) started to combinefinancial services with complementary non-financial services articulated instrategies to strengthen the participation of less capitalized microenterprisesin value chains. They did so either on their own or in collaboration withother actors such as supportive government organizations or in alliance with

1. See the website of the Social Performance Task Force: http://sptf.info/spmstandards/universal-standards.

After the Nicaraguan Non-Payment Crisis 863

social movements and other social or private enterprises. The way aheadfor microfinance seemed to lie with ‘Microfinance Plus’, the combinationof microfinance with additional services within broader strategies of change(Bastiaensen and Marchetti, 2011; Karlan and Valdivia, 2011; Sievers andVandenberg, 2007).

More radical critics argue that the newly emerging microfinance modelsuffers from genetic flaws on a more fundamental level. Weber (2004) andBateman (2010) describe it as the ‘Trojan horse of neo-liberalism’, consti-tuting the expansion of capitalism in yet another market niche, ‘largely an-tagonistic to sustainable economic and social development, and also to sus-tainable poverty reduction’ (Bateman, 2010: 1). Bateman particularly targetswhat he calls ‘new-wave’ microfinance: the ‘reconstitution of microfinanceas a for-profit business model’ and he adds: ‘Just as on Wall Street, we nowfind “new-wave” microfinance increasingly defined by unethical profiteer-ing, greed, irresponsible risk-taking, speculation and microcredit bubbles’(ibid.: 3).2 This line of argument also denounces the new financial business asa ‘poverty trap’. It makes the poor individually responsible for their own wel-fare while condemning them to cut-throat competition with other poor in anover-financed but demand-constrained informal petty trade sector (Batemanand Chang, 2012: 22–4). The latter analysis sets out how microfinance ispolitically convenient for neoliberalism; discouraging social organizationamong the poor and diverting attention away from needed structural eco-nomic reforms. Moreover, Bateman maintains that microfinance entails eco-nomic costs as scarce capital funds are misallocated towards unproductive,excessively constrained micro-enterprises (mainly in trade and services),while agricultural and industrial small and medium-sized enterprises withmore significant growth potential are starved of needed (investment) capital.Bateman (2010: 206) even speaks of an ‘Iron Law of Microfinance’: theinevitable weakening of small and medium-sized enterprises through mi-crofinance’s excessive focus on the over-crowded, petty commercial sector.Criticism levied by the Inter-American Development Bank (2010) convergeson this point, decrying an over-supply to poor micro-entrepreneurs with littlegrowth perspective accompanied by a lack of finance for established smalland medium-sized enterprises. The World Bank’s 2008 policy document,‘Finance for All?’, similarly argues for a strong conventional financial sys-tem that is supportive of formal economic growth and employment creationwhilst expressing doubts about what could be expected from microfinanceservices to micro- and small entrepreneurs (World Bank, 2008: 11). Poverty

2. Among others, Young (2010: 606) concurs that microfinance was a lynchpin of neoliberalismin underdeveloped countries but cites more nuanced arguments about ‘microfinance as acontradictory development tool, one that creates possibilities for both the contestationand continuation of unequal social relations at multiple scales’. Young also highlightsthe profounder implications of the ‘financialization of development’ which led to particularforms of mobilizing capital and to a tendency towards the masculinization of social mobilityin an industry where the majority of clients were women.


reduction, the report claims, needs to be achieved mainly through remu-nerative job creation in the established enterprise sector. Yet there mightstill be room for a particular type of microfinance — one that is focused onthe viable segment of small and possibly medium-sized enterprises. Thusthe radical critique of microfinance and the mainstream shift away frommicro-enterprises seem to coincide in prophesying the end of the dream ofmicrofinance opening the doors to development for micro-entrepreneurs.

In the context of severe microfinance crises in several countries, the morecommercial segment of microfinance has also raised concerns about the dan-gers of market saturation and often-violent client rebellions in response togrowing over-indebtedness as well as unacceptable commercial practices.These recent problems gave rise to additional efforts in the industry to im-prove due diligence,3 control reputational damage and invest in the financialeducation of clients.4

Along with the expansion of the microfinance industry we can identify adeepening identity crisis and a lack of clarity about the desired future evolu-tion. In Nicaragua, for example, key and still largely unanswered existentialquestions have emerged. Nicaragua is one of the countries that turned frombeing a poster child of mainstream microfinance success into a veritablenightmare. The political aspect of the nightmare emerged before the currentmicrofinance crisis hit. From 2004 onwards, politicians challenged MFIsas usurious profit-seeking businesses causing hardship and impoverishmentamong the poor. In 2008 clients began denouncing the MFIs and vigorouslyresisting them by refusing to pay their debts and contesting legal seizureof collateral (land in particular) as illegitimate dispossession. The volumeof private microfinance loans collapsed to less than half of the pre-crisislevel. Although the worst of the storm had passed by the end of 2011, theremaining institutions have continued to struggle to recover and survive.Like many other Latin American countries with large microfinance sectors,Nicaragua is a country where a left-wing ‘socialist’ government returnedto power, adding ideological elements to the questioning of the ‘neoliberalapproach’ of microfinance.

Drawing on primary sources and in-depth participant-action research span-ning over a decade, this article provides a critical analysis of the Nicaraguanmicrofinance crisis. With a particular focus on the rural area, we arguefor a less self-centred, re-politicized developmental microfinance. We arenot distant analysts of Nicaraguan microfinance: Peter Marchetti and ReneMendoza are co-founders of the non-regulated microfinance institutionFondo de Desarrollo Local or FDL (Local Development Fund); the other au-thors have also engaged in research linked to the FDL. The background of ourinvolvement in and experiences with the FDL thus influences our analysis;

3. See www.smartcampaign.org4. Roodman (2012) links these tendencies with a radical argument to refocus on non-credit

financial services and abandon lending to the poor, given the dangers of impoverishment.


but we would like to emphasize that our analysis is independent of the FDLand that the views we express are not necessarily shared by the institution.Beyond the Nicaraguan case, we seek to relate our analysis to the identitycrisis of microfinance worldwide.

The first part of this article depicts the genesis of Nicaraguan microfinanceand describes its atypical rural-productive characteristics. It shows how itssuccess sowed the seeds of subsequent crisis and how crisis differentiallyaffected urban and rural large, medium and micro-entrepreneurs. The nextsection then analyses the multiple causes of the crisis arguing that, contraryto dominant belief, the financial dynamics are less salient than structuralpolitico-economic forces which turned the terms of trade against agricul-tural and cattle producers. The third section analyses the rebellion againstmicrofinance as an ambiguous political alliance: in part it expresses a socialmovement reacting against the negative effects of the new free regulation andthe re-establishment of national oligopsonistic control over the processingindustry, and in part it reflects local and national elites’ opportunistic manip-ulation of market shocks for their own interests while supporting the ruralproducer’s rebellion against microfinance. This section also documents howthe Sandinista government ultimately abandoned the microfinance rebelliongiving precedence to its alliance with national urban elites and prioritizingcommercial-processing interests over those of cattle farmers. The final partconcludes with a summary of the paradoxical outcome of the client rebellionagainst ‘neoliberal’ microfinance and the lessons learned from the crisis.

NICARAGUAN MICROFINANCE: FROM SUCCESS TO CRISIS

As in other Latin American countries, Nicaraguan microfinance emergedin the context of financial liberalization. Until the return to power of theSandinistas in 2007, the Nicaraguan government was almost completely ab-sent as an actor in microfinance development. Private initiatives aimed toremedy the financial vacuum created by the closure of the state developmentbank and its partial replacement by private banks which left large parts ofthe economy under-served (Jonakin and Enriquez, 1999). In Nicaragua, fi-nancial liberalization started late. It was nevertheless drastic, forming partof the post-revolutionary shock therapy following the electoral defeat of theSandinistas and intended to align Nicaraguan economic policies with theneoliberal mainstream. As recovery set in, a sector of viable MFIs graduallydeveloped. Despite the cooperative boom of the 1980s, only a few finan-cial cooperatives lingered on in the new pond of microfinance, notably theSandinista CARUNA cooperative.

By 2000, this myriad of private institutions had started to consolidatetheir position in this new niche in the financial market. The post-1990sgovernments timidly enabled this development through legal initiatives thatliberalized financial activities between private parties. In 2004, the National

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Congress adopted a general microfinance law, but it never became opera-tional. In contrast, an anti-usury law, sponsored by Sandinista and Liberalcongressional representatives in 2001, was equipped with penal codes in2007. This law imposed mandatory interest rate ceilings for ‘loans amongprivate agents’ pegged to commercial banks’ average interest rates for largeloans.5 The definition of this cap on microfinance interest rates was a purelypolitical decision disconnected from reality. Differing from later politicalaction against microfinance, this first detrimental law was not a reactionto any repayment crisis, but rather a smokescreen strategy in a context ofrecurrent corruption scandals involving both Liberals and Sandinistas. It canalso be viewed as a first populist reaction by clientelistic politicians againstthe growth of, and the increasing popular support for, microfinance whichserved to erode their political control over their dependent constituencies. Atthe time, there were no indebted clients galvanizing a massive social move-ment, nor did politicians try to jump-start such a movement. The law wasultimately passed because MFIs could evade the unrealistic cap on interestrates up until 2007. This evasion of the law, nevertheless, had a detrimen-tal effect on the transparency of interest rates, since MFIs felt obliged toinvent creative additional fees (commissions, administration costs, contri-butions for technical assistance, etc.) in order to recover their inevitablyhigher costs, compared to conventional banking for richer clients (Helmsand Reille, 2004: 7). MFI operations teetered on the verge of illicit activity.Congress finally resolved the tensions around caps on interest in 2011 byreplacing the anti-usury law with a completely new microfinance law.

Inspired by the global enthusiasm for microfinance, international donorsstrongly supported the new microfinance sector as an alternative to the ineffi-cient past of public involvement in development banking. Partly a heritage ofthe revolutionary era, many development NGOs and social investors took thelead, later complemented by bilateral and multilateral donors, who steppedup their participation once a few MFIs transformed into regulated com-mercial institutions. Between 2000 and 2008, and in particular after 2004,the microfinance industry experienced spectacular growth. The regulatedsegment grew by 42 per cent each year and the non-regulated sector, withless multilateral support, still grew by 28 per cent per year. At its apex, theNicaraguan MFIs disbursed a total loan amount of US$ 560 million (around16 per cent of the total credit supply in Nicaragua) to over half a millionclients (some 10 per cent of the total population).

Nicaraguan microfinance has one essential atypical characteristic. Notonly does it have a significant rural outreach, but it also includes an im-portant portfolio of productive agricultural and cattle credit. This sets asubstantial part of the Nicaraguan MFIs apart from both the typical urban

5. The Central Bank’s registered monthly maximum interest rate varied between 4.3 per centand 23.3 per cent per year, while formal banking interest rates for smaller loans throughcredit cards oscillated around 50 per cent.


and/or rural petty trade-oriented commercial microfinance and the usuallysmaller and often less commercially viable rural financial cooperatives orNGOs. This distinguishing feature can be traced back to the heritage ofmassive rural credit from the state development bank (BANADES) duringthe Sandinista era, as well as to the influence of the FDL as an innovativeand successful pioneer of viable rural and agricultural microfinance.6 Theseachievements have to be attributed to the non-regulated MFIs organized inthe Nicaraguan Microfinance Association (ASOMIF). By the end of 2008,the latter had provided US$ 129 million in agricultural and cattle credit tosmall and medium-sized farmers, equivalent to 52 per cent of their totalportfolio.7 To a great extent, Nicaraguan non-regulated microfinance there-fore does not correspond to Bateman’s image of the ‘new wave’ commercialmicrofinance focused on fast-rotating, short-term and very expensive loansfor petty commodity production. This stereotype might apply to some urbanmicrofinance, but not to most ASOMIF institutions.

In the regulated MFIs, the focus on the urban and the commercial sectorwas much more pronounced, even when increasing saturation in the poorersegments of urban petty merchants drove the regulated institutions into themore well-to-do segments of urban merchants and also into the rural market(mainly larger size cattle loans). By the end of 2008, the outstanding portfolioin agricultural and cattle loans of the regulated MFI banks (Procredit, Banexand Fama) remained limited to US$ 27 million, 9 per cent of their portfolioand in absolute terms only a fifth of the ASOMIF portfolio. The averagerural loan size from MFI banks was US$ 1,393 for Procredit, US$ 3,101 forBanex and somewhat paradoxically US$ 6,383 for the few loans disbursed byFama. By contrast, the commercial portfolio reached 60 per cent in Procreditand Banex, and 80 per cent in Fama. Overall, Banex had the highest averageloan size (US$ 3,891), followed by Procredit (US$ 1,655) and Fama (US$1,089).

Despite mainstream policies of bilateral and multilateral actors whichactually applied pressure on the agricultural MFIs to integrate into thebanking system without regard for the consequences for productive outreach

6. The IADB recognized the FDL’s achievements with its Prize for Excellence in Microfinance(in the unregulated category) during the International Year of Microfinance (2005). TheCentral American Bank for Economic Integration (CABEI) awarded the FDL the Prize forExcellence in Microfinance Management and Capitalization of Small Enterprises (2006).

7. Seven member institutions of ASOMIF, representing 67 per cent of the total portfolio,disbursed between 57 per cent and 79 per cent of their loans in agriculture or cattle raising.Most of their loans were directed towards cattle, considered to be a profitable and a low-risk,secure activity; 24 per cent of ASOMIF loans had a term of more than 24 months, and 33per cent between 18 and 24 months. In FDL half of the agricultural loans had a term of morethan 24 months. Loans of ASOMIF averaged US$ 965, with cattle loans at a higher averageof US$ 1,872. In the FDL, the effective annual interest rate — including all implicit costsand commissions — for these rural loan products was calculated at between 16 per cent and25 per cent. It was in part enabled through cross-subsidizing from the more profitable urbanproducts with interest rates of 26 to 41 per cent (Bastiaensen and Marchetti, 2011: 469).


(Bastiaensen and Marchetti, 2007),8 important investments from NGOs,social investors and the Central American Bank of Economic Integration(CABEI) made the atypical focus on productive rural finance possible. Upto 2009, the mainstream funding strategy was inspired by the financial sys-tems paradigm. The main policy guideline was the 2005 ‘Country LevelEffectiveness and Accountability Report’ elaborated by the ConsultativeGroup to Assist the Poor (Flaming et al., 2005). This report took stock of theadvances of Nicaraguan microfinance, but also disapproved of its ‘obses-sion with credit’ and neglect of other financial services. It criticized bilateraldonors for subsidizing targeted rural financial initiatives, even though theseinitiatives contributed to the atypically strong outreach of Nicaraguan mi-crofinance into agricultural production and cattle raising. The report urgeddonors and stakeholders to form an alliance around a financial system per-spective policy to be coordinated by the International Finance Corporationand the Inter-American Development Bank (IADB). This policy prescrip-tion implied that bilateral and multilateral donors urged ‘mature MFIs’ ofASOMIF to transform into regulated MFI banks. By 2007, the smaller non-regulated MFIs began to feel the consequences of these policies as theirfunding gradually declined compared to the fast growth of the regulatedsector and the larger non-regulated FDL (see Table 1).

In 2008, amidst this substantial growth, a severe crisis hit the Nicaraguanmicrofinance sector. In several regions, clients started to default on repay-ments and arrears soared. MFIs needed to reschedule and restructure loans,and collateral of defaulting clients was legally confiscated. Clients never-theless often retained control over their assets, as the government did notenforce court decisions. Some of the MFIs went bankrupt, including theregulated commercial bank Banex. Procredit, the reputable German micro-finance initiative, lost tens of millions of dollars and retreated from agri-cultural lending. International funders grew nervous about country risk andmassively and abruptly withdrew their investments. We analyse the back-ground and multiple causes of this crisis below, but here we can alreadydiscern the impact of the three-year crisis. Table 1 shows that total micro-credit experienced a drop of 52 per cent: more than half of the portfoliovanished in three years! The crash of the regulated commercial MFI bankswas most spectacular — mostly due to the bankruptcy of Banex — with two-thirds of their portfolio evaporating. Somewhat paradoxically, the allegedlyless consolidated non-regulated sector rode the crisis better, decreasing its

8. Mainstream policy is biased towards financial-sector development and suffers from anti-rural and anti-productive bias. Given existing prudential rules, regulation almost inevitablycurtails productive rural outreach as many smaller loans are likely to be classified as ‘high-risk’, ‘unsecured portfolio’ for lack of adequate business plans, or ‘formal collateral’,independent of the intrinsic portfolio quality (Bastiaensen and Marchetti, 2007). Theserestrictions were the reason why the FDL remained hesitant about transforming into aregulated institution despite strong pressure and significant incentives from the IADB since1996.

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Table 1. Evolution of Microcredit Portfolios, Nicaragua 2007–2011(US$ millions)

Institutions 2007 2008 2009 2010 2011 % change 2008–11 % change 2007–11

Banex 125 139 115 0 0 −100% −100%Procredit 124 134 114 87 82 −39% −34%Fama 32 41 30 23 22 −46% −31%Sub-total Regulated

MFI Banks281 314 259 110 104 −67% −63%

FDL 53 69 69 62 56 −19% 6%Asomif 211 177 142 118 108 −39% −49%Sub-total

Non-regulatedMFIs

264 246 211 180 164 −33% −38%

Total Private MFIs 545 560 470 290 268 −52% −51%Savings and loan

cooperatives*13 n.a. 20 32 146%

Total Microfinance 558 n/a 470 310 300 n/a −46%State banks 41 43

Source: Calculated from databases of the Superintendencia de Bancos and Asomif.* Precise data on cooperatives are not available. For 2007, we use Pasos (2009); for 2010 and 2011, theestimates are based upon IMF (2011) and refer mainly to ALBA-CARUNA. For 2011, an estimate for the20 de Abril Cooperative is added as it left ASOMIF. ALBA-CARUNA probably also lends to cooperativeenterprises associated with the ALBANISA-network, but these data are not available.

activities by around a third. The Sandinista-controlled state developmentbank Produzcamos re-emerged, managing existing project portfolios ratherthan providing fresh funds. The Sandinista cooperative CARUNA, reformedinto ALBA-CARUNA, received additional money from a solidarity fundlinked to Venezuelan oil deliveries. These advances in public microfinanceonly partially compensated the loss of private portfolios with their new fund-ing adding up to US$ 75 million at most, or a 25 per cent of portfolio loss. There-emergence of government and party-related sources of productive credit,however, changed the political dynamic, heralding the return of clientelisticstate financing so strongly repudiated in the CGAP report (Flaming et al.,2005: 7).

Over half of the non-regulated segment’s portfolio and slightly less thanhalf of its clientele disappeared. The most telling negative impact was onagricultural and cattle credit — the cornerstone of the unregulated sector(see Figure 1 and Table 2). Average loan terms also decreased signifi-cantly.9 Regulated MFI banks moved in the other direction, increasing loansize but eliminating almost entirely agricultural and cattle credit (down by85 per cent), redirecting what remained to only a few larger clients. Theiraverage loan went up 147 per cent to US$ 4,215. Three years of turmoileventually also affected the agricultural and cattle portfolios of the commer-cial banks. Their total number of clients decreased from 9,483 to 3,085 (see

9. In the six most agriculture- and cattle-oriented MFIs, the proportion of loans with a term ofmore than 18 months dropped from 53 per cent to 34 per cent of total portfolio.


Figure 1. Evolution of Agricultural Portfolios 2008–2011

0

100

200

300

400

ASOMIFMFI Banks

Private banksProduzcamos

Coopera�ves

129

27

278

0 13

63

4

352

4332

Por�olio 2008 (US$ millions) Por�olio 2011 (US$ millions)

Source: Calculated from databases of the Superintendencia de Bancos and ASOMIF.

Table 2. The Impact of the Crisis on Agricultural and Cattle Portfolios(2008–2011)

Dec 2008 Dec 2011 % change

Average AveragePortfolio No. Average Portfolio No. loan Portfolio No. loan(m. US$) clients (US$) (m. S$) clients (US$) (m. US$) clients (US$)

FDL 43 40,404 1,064 26.9 24,663 1,091 −37% −39% 2%Non-regulated

MFIs (ASOMIF)128.6 112,434 1,144 62.9 62,302 1,010 −51% −45% −12%

Procredit 18.2 13,064 1,393 3.9 929 4,198 −79% −93% 201%Banex 8.2 2,644 3,101 – – – – – –Fama 0.6 94 6,383 0.02 1 20,000 −97% −99% 213%MFI Banks 27 15,802 1,709 4 930 4,215 −85% −94% 147%Citibank 8.7 262 33,206 1.8 40 45,000 −79% −85% 36%BAC 47.7 564 84,574 26.4 509 51,866 −45% −10% −39%BDF 7.1 150 47,333 7.1 107 66,355 0% −29% 40%Banpro 97.7 1,977 49,418 107.8 1,008 106,944 10% −49% 116%Lafise–Bancentro 116.4 6,680 17,425 58.2 1,528 38,089 −50% −77% 119%Finarca 0.7 27 25,926 0 0 0 −100% 100% −100%Private Banks 270.5 9,483 28,525 194.2 3,085 62,950 −28% −67% 120%Total regulated

banks297.5 25,285 11,766 198.2 6,237 31,765 −33% −75% 170%

Produzcamos n.a. n.a. n.a. 43 n.a. n.a. n.a. n.a. n.a.Cooperatives (13) n.a. n.a. (32) n.a. n.a. n.a. n.a. n.a.

Source: Calculated from databases of the Superintendencia de Bancos and ASOMIF. See Table 1 for sourceof data on cooperative credit. The data for Financiera Finca, transformed into an MFI bank in 2011, havenot been incorporated for lack of relevant comparison with 2008. Finca had an agricultural portfolio ofonly US$ 0.6 million and 343 clients in 2011.


Figure 2. Agricultural Clients 2008–2011

0

20000

40000

60000

80000

100000

120000

ASOMIF

MFI Banks

Private banks

112434

15802

9660

62302

930 6437

number of clients 2008 number of clients 2011


Figure 3. Average Loan Size 2008–2011

0

10000

20000

30000

40000

50000

60000

ASOMIF

MFI Banks

Private banks

1144

1709

2881010104215

54684

Average loan 2008 (US$) Average loan 2011 (US$)

SOMIF.


Figure 2), while the total portfolio declined more modestly from US$ 270million to US$ 194 million, thereby more than doubling the average loanto US$ 62,950 (see Figure 3). This indicates that the crisis had differentialimpacts along class lines with reduced access to credit for the middle strataof the agricultural sector. Commercial banks increased finance to wealthy


clients.10 What we call the ‘iron law of crisis’ seems to be confirmed as morecapitalized sectors (clients and institutions) tend to profit at the expense ofthe more vulnerable enterprises. The effect of this structural change can beseen, for example, in the coffee sector, where increasing credit constraintsfor smaller producers have contributed to a significant surge in ‘forwardsales’ to coffee companies like CISA and Atlantic (Mendoza et al., 2012).The paradoxical outcomes of the microfinance crisis are therefore a weak-ening of direct productive credit to the rural middle sector, a concentrationand strengthening of the participation of old and new elite enterprises inrural finance,11 and a redirection of Nicaraguan microcredit (in both MFIsand cooperatives) towards expensive commercial or subsidized short-termcredit for the poor. The latter evolution of microcredit is supported by a newLaw of Microfinance, which was introduced as a kind of ‘point final’ to themicrofinance crisis (see also below). The crisis thus not only reduced privateNicaraguan microfinance, but also distanced it from productive investmentcredit, not only to micro farmers but also to middle-sized enterprises.

THE MULTIPLE DIMENSIONS OF THE CRISIS

The microfinance and funder communities have identified two dimensionsto the microfinance crisis (Accion, 2011). The first is a lack of due diligence,related to excessive growth and competition which created a ‘financial bub-ble’ that temporarily would have masked urban–commercial and rural–cattlemarket saturation. The second is the political dimension, associated withclient rebellion in certain northern rural areas in 2008 and later spreading.Interestingly, the Nicaraguan microfinance community has laid responsibil-ity for the crisis upon the alleged agricultural–cattle financial bubble and itslinks with the Non-payment Movement. Combined, these dimensions sup-posedly justified post-crisis portfolios becoming much more urban. Radicalacademic critique of over-saturation, however, mainly focuses on saturationin the demand-constrained urban–commercial sector. Following this lead,we will demonstrate that the hypothesis of agricultural over-indebtednessneeds to be qualified. In addition, we will show that the increasing com-petition for the limited better-off segments of the cattle market did notproduce similarly widespread market saturation as occurred in the popularurban sector. This urban saturation helps explain why Nicaraguan MFIs havehistorically ‘voted with their feet’ and moved to agricultural lending in the

10. Additional growth in the larger loan segment was probably also produced by an increasein ALBA-CARUNA loans directed at the coffee export enterprises and second-level coop-eratives associated with the ALBANISA network of Sandinista enterprises (unfortunately,data are not accessible).

11. This strengthening arises together with the political alliance between the Sandinista gov-ernment and the traditional entrepreneurial elites at the service of the economic interests oftheir respective economic holdings.


face of earlier urban saturation problems. In 1996, the FDL was the first tolay out a strategy with a limited urban portfolio. By 2001, several other non-regulated MFIs, soon to form ASOMIF, were following the FDL into theriskier but more structurally transformative support for agriculture, and par-ticularly cattle raising, while Nicaragua established its regional comparativeadvantage in meat and dairy.

A closer analysis of the microfinance crisis reveals a differentiated pictureof a crisis with multiple causes and dimensions as well as a high, but notstraightforward, political content which helps explain its paradoxical dy-namics and outcome. First of all, we believe it is necessary to distinguishbetween the underlying causes of the crisis, on the one hand, and the reactionto the crisis, on the other hand. We start by analysing the underlying (mainlyeconomic) causes of the crisis, then proceed to show how the Movimiento deComerciantes, Productores y Artesanos del Norte (MCPAN),12 a defensivesocial movement, morphed into launching an aggressive attack on microfi-nance, commonly known as the Non-Payment Movement. Finally, we returnto a discussion about the political content of microfinance.

A first element that draws attention in analysing the Nicaraguan microfi-nance sector is the fast growth of all MFI portfolios. Attracted by the pos-itive overall reputation and the positive rating reports about microfinancein Nicaragua, the historically high profitability of the Nicaraguan MFIs(returns on equity of 20 per cent or more were no exception), and/or thesignificant rural productive penetration of the MFIs, an increasing numberof international investors queued up to finance Nicaraguan MFIs.13 As wesaw previously, growth was most pronounced within the regulated segment.The regulated institutions concentrated growth in the urban sector whileunregulated institutions prioritized productive rural investment. A kind ofdivision of labour between different types of external funders accompaniedthe rapid growth. While bilateral and multilateral investment vehicles chan-nelled substantially larger and slightly cheaper funds towards the mainlyurban and more commercial regulated institutions, NGOs, social investorsand even some private investors provided more expensive funds to the muchmore rural, non-regulated segment.

Table 3 provides an overview of the funding sources for the five most im-portant MFIs and demonstrates the privileged access of the regulated MFIsto bilateral and multilateral funds.14 The majority of the limited multilateral

12. Movement of Merchants, Producers and Artisans of the North.13. In 2007, for example, the FDL turned down an additional loan of US$ 10 million from an

international commercial investor. It was absorbed by Banex, an MFI bank that subsequentlywent bankrupt.

14. This funding architecture illustrates the well-known paradox that bilateral and multilateralpublic funds have served to consolidate commercial microfinance, crowding out privateinvestors (Abrams and von Stauffenberg, 2007; von Stauffenberg and Rozas, 2011), ratherthan support innovations at the microfinance frontier, particularly those benefitting ruralproductive microfinance.


Table 3. Structure of Liabilities of the Five Most Important MFIs inNicaragua, end 2008

Multilateral Bilateral Social Commercial Privateinvestors* investment funds** investors MFI funds banks Other

Regulated MFI banksProcredit 60% 29% 11% 0% 0% 0%Banex 22% 20% 13% 39% 6% 0%Fama 15% 20% 16% 23% 15% 10%Non-regulated MFIsFDL 13% 14% 36% 29% 2% 5%Prestanic 12% 26% 37% 8% 0% 17%

Source: Calculated from data collected by Pablo Acarbar, quoted in Roodman (2010).Notes: * Multilateral institutions (IFC, IADB, CABEI) and investment funds supported by different bilateraldonors and/or investment funds. For Procredit, this support includes additional loans from the motherholding.** MFI investments through the Nicaraguan public investment institutions and projects financed by bilateraldonors.

and bilateral investment sources for the non-regulated MFIs came from thetargeted rural development programmes of CABEI — the only multilateralactor apparently not complying with CGAP recommendations. In priori-tizing the regulated MFIs, mainstream policies contributed to an intendeddichotomy in the Nicaraguan microfinance sector between an emerging ‘Ma-jor League’ of regulated MFI banks and a ‘Minor League’ of non-regulatedMFIs–NGOs. In the mainstream view, some of the latter might be expectedto graduate to the ‘Major League’ (and also some donor support) while manyothers are destined to be outcompeted by the regulated MFIs or to survivein specific limited market niches.15

This division of work and the non-alignment of mainstream and so-cial/private investors not only contributed to uncoordinated growth of thedifferent segments of the microfinance industry, but also to an unhealthycompetitive process in which the more abundantly funded regulated MFIstried to exploit their competitive edge to the detriment of the non-regulatedsegment.16 The bad record of the regulated MFI bank Banex and the non-regulated microfinance institution Asociacion de Consultores para el De-sarrollo de la Pequena y Mediana Empresa (ACODEP)17 regarding clientprotection and transparency bears witness to how ‘Wall Street-type greed’

15. Interestingly, some of the NGO investors were fully aligned with this policy, includingclauses in their loan contracts with non-regulated MFIs conditioning them to move towardsregulation. This illustrates the hegemony of the mainstream policy advice, a point alsomade by Bateman (2010: 17): ‘Importantly, even though many MFIs still operated (andwanted to operate) as not-for-profit NGOs, they were still encouraged to at least try to movein the direction of “new wave” respectability if they possibly could, particularly by usingmarket-based interest rates’.

16. Wiesner and Quien (2010) argue that such negative impact can be discerned more generallyaround the world.

17. Association of Consultants for the Development of Small and Medium Enterprises.


(Bateman, 2010) can take its toll on both regulated and non-regulatedmicrofinance. This harshly competitive — and often unethical — strug-gle also explains why the credit bureau Sin Riesgos (‘without risk’), initi-ated by non-regulated MFIs in 2007, was not successful until the crisis of2009. MFIs preferred not to report that they had ‘stolen away’ clients fromother MFIs. As a consequence, nobody had a clear idea of the extent ofpossible over-indebtedness in particular segments of the market. There areindications, however, that competition and pressure to transform the gener-ous international funding into new loans has stimulated the phenomenon ofmultiple loans and recycling of debts in which old, often problematic andexpensive debts are cancelled with new and ever-larger loans, in particularin the overcrowded petty trade and service sectors.18

The international aspect of this hypothesis shows international fundersproducing a ‘commercialization-induced oversupply’ associated with newwave, Wall Street-style microfinance (Bateman, 2010: 122). In this scenario,the 2009 microfinance crisis would be the result of a financial bubble wait-ing to burst on the heels of the 2008 US financial crisis. Indeed, with themicrofinance crisis in Nicaragua the flow of new funds stopped abruptly.Overnight, creditors became distrustful, rigid in the approval of new loans,and quick to reclaim outstanding debts — international investors towardsMFIs, and MFIs towards their clients. This cut-off of funding explains theexplosion of legal actions against defaulters, including confiscation of col-lateral, and even imprisonment from the end of 2008 onwards. In turn, theNon-Payment Movement pointed to these actions as proof of ‘profit-hungry’MFIs’ inhuman treatment of its clients.

The hypothesis of a widespread oversupply-cum-over-indebtedness prob-lem, however, needs qualification. We are not aware of any systematic studyon market saturation and debt recycling in Nicaragua, but a thorough econo-metric study using the database of the credit bureau Sin Riesgos indeedidentified multiple borrowing as one of the explanatory variables of default(De Franco, 2010). In a worldwide comparative study, Viada and Scott(2011) refer to Nicaragua as one of the typical cases of a negative corre-lation between increasing numbers of (foreign) investors and severe over-indebtedness problems. Thus, indications of an over-indebtedness problem,at least partially generated by the success of the microfinance industry it-self, do exist. Nevertheless, some caution is warranted with all too simplegeneralizations. In a study by the Fundacion Internacional para el DesafıoEconomico Global (FIDEG),19 Barrios and Sanchez (2012: 27) acknowledge

18. As opposed to the standard Ponzi investor schemes, in Nicaragua new microfinance in-vestors’ funds were used to finance MFIs, with excellent returns on equity and assets thatare in part guaranteed by the abundant new loans allowing clients with repayment problemsto repay their pending debts . . . which guaranteed the excellent returns in microfinance andattracted even more funding.

19. International Foundation for the Global Economic Challenge.


problems of market saturation at the height of microfinance expansion. Theyunderline, however, that it is mainly focused in certain well-covered urbanareas and is related to personal loans for consumption. FIDEG had alreadyfound traces of urban market saturation in a 2008 study, but that study alsoclaimed that the market could and should still be expanded to SMEs in therural areas (FIDEG, 2008: 99). We share the view of Bateman and Chang(2012: 22) that there are clear limits to the expansion of the trade and serviceactivities of the poor urban micro-entrepreneurs due to demand constraintsthat leave few opportunities for longer-term structural growth. This thesis,however, does not hold for the productive agricultural and cattle producerswho form a significant part of the Nicaraguan non-regulated microfinanceclients. As our analysis below shows, the repayment crisis of the cattle andthe agricultural loans is not so much to be found in an oversupply of loans butrather in a straightforward profitability crisis due to socio-political factors.

OLIGARCHIC CONTROL OF AGRICULTURAL VALUE CHAINS ANDPRODUCER VULNERABILITY

The absence of an oversupply of credit does not automatically guaranteean absence of repayment problems. This holds especially for poor ruralproducers who by definition have little control of their socio-economicenvironment and therefore face considerable additional ‘social risks’ ontop of their climate risks. Some MFIs have made timid efforts towards amore integrated agricultural value-chain approach that combines financialwith non-financial services (Bastiaensen and Marchetti, 2011). However,the predominant ‘finance-only’ approach, combined with the lack of anysignificant socio-political incidence in markets and value chains, tends toleave clients vulnerable to the impact of the socio-political vagaries of theireconomic environment. Much more than any improbable oversupply-cum-over-indebtedness problem, substantial structural shocks particularly under-mined rural clients’ profitability and repayment capacity. Perez et al. (2010)point to the negative evolution of the prices for both food staples and cat-tle. They rightly argue that neither development is a simple consequence ofabstract worldwide market dynamics linked to the 2009 crisis. Rather, theyare intrinsically related to the oligopsonistic stronghold of Nicaraguan elitegroups within domestic agricultural value chains which represents the insti-tutional core of unequal rural growth. In 2008, the world energy and foodcrises struck severe blows to agriculture, translating into soaring prices foragricultural inputs and transportation, but not into equally higher domesticproducer prices. Oligopolistic control over input and oligopsonistic controlover output markets caused a disadvantageous transmission of border in-put and output prices to producers. Red beans were the exception until theNicaraguan government decided to ban exports in order to protect consumersin 2010.


Negative shocks in the cattle sector were even more pronounced. Accord-ing to Perez (2011: 6): ‘While there was indeed a small dip that year (from$ 3.32/kg in 2008 to $ 3.23/kg in 2009), prices were actually much higherthan in 2007 ($ 3.02/kg). Nicaragua actually exported more meat in 2009,and at a good price, enjoying a volume increase of 15% (71,310 tons) anda 9.5% increase in value over 2008’. Nevertheless, in 2009–10 the internalprices for cattle delivered at the gates of the four national slaughterhousesdropped by about 20 per cent and those of young live cattle plummeted bymore than half, in particular in the northern part of the country. Thus, theoligopsonies of meat packaging and export were enjoying a boom whiletheir suppliers from the lower end of the supply chain (the cattle raisers whoprovide younger cattle to larger ranchers for the final stage of fattening) werefacing a serious price shock that led them to default on their loans. The reasonfor this development was only tangentially related to the international crisis.More specifically, the cause lay with one consequence of the final phase ofa free-trade agreement concluded ten years earlier: the 2009 prohibition ofexport to Mexico of live cattle weighing less than 330 kg. The prohibitionvirtually eliminated the massive purchase of younger live cattle in (mainlythe northern part of) Nicaragua by Salvadorian and Mexican cattle tradersconnected to the Mexican beef industry, working for export to the US. Itsimultaneously substantially enhanced the internal market power of the fournational slaughterhouses who operate as a price cartel, as proven by the oth-erwise inexplicable price changes (Perez, 2011: 6).20 The use of free-tradeagreements by more powerful market actors is not new, nor is it surprisingthat cattle producers were largely defenceless against these manoeuvrings.Those at the bottom of the value chains, operating mixed milk–beef cattlesystems and only raising male animals for a year or so, suffered most as theywere at the exclusive mercy of their local fatteners, themselves subordinatedto the slaughterhouses. These developments explain why it was primarily thesubstantive cattle portfolios that were hard hit by the crisis and also why theNon-Payment Movement (MCPAN) grew predominantly as a movement ofnorthern cattle producers.

Analysing the client rebellion, one has to distinguish between its economicand political motivations. The former has to do with genuine repaymentproblems, which affected many producers who, in the face of plummetingcattle and agricultural prices, were reluctant to de-capitalize their enter-prises just in order to avoid default. The second aspect has more to dowith political manoeuvrings of rural elites after the return of the Sandinista

20. With the entry during 2011 of a Mexican integrated beef-slaughterhouse operation (Vix-SuKarne) internal cattle prices gradually recovered, pointing to increased competition.This recovery, however, already seemed to have been eliminated in 2012 given the severetensions between slaughterhouses and beef cattle producers after new significant pricedecreases, even leading to an unprecedented delivery strike organized by the main producerorganization, CONAGAN.


government. Largely disconnected from the economic earthquake affectingcommon cattle raisers, emerging rural producer elites sought to accumulatewealth (mainly land) through extra-economic political means. Manoeuvringthe state, particularly in order to get away with massive defaults on bankloans,21 is a not uncommon means of land concentration and economic ad-vancement among elite groups in Nicaragua (Mendoza, 2012; Roux, 2010).22

It explains why the MCPAN had its origins before the start of the 2008 cattlecrisis.23 Mainly larger producers with substantial and multiple cattle loanshad fallen into arrears with commercial banks, regulated MFIs (Banex andProcredit) and, to a lesser extent, also non-regulated MFIs (ACODEP andFUNDENUSE). Partially triggered by a hiccup in the cattle contraband toHonduras after the Sandinista electoral victory, financial flows and incomestreams ceased to provide sufficient liquidity to honour outstanding debts. Asdictated by the national financial laws, regulated MFI banks responded withaggressive legal action, confiscating properties and cattle. As some of thepledged cattle had already been sold in Honduras (technically a fraudulentact) twenty-seven defaulters were jailed.

This crackdown provoked a strong reaction and served to justify andbolster the first mobilization of the MCPAN in defence of the defaulters.The ex-Sandinista mayor of Jalapa, not a debtor himself but a skilful politicalentrepreneur who had also been accused of corruption, saw an opportunity tocreate a movement against the ‘MFI usurers’ who, according to the rhetoric,were stealing away the land, houses and even the personal liberty of the ‘poor’in order to safeguard their ‘usurious profits’.24 Sandinista as well as Liberalpatronage networks mobilized to protest the bank’s actions. The mobilizingcapacity provided the political currency with which the leadership of theMCPAN negotiated with the new Sandinista leaders, keen on expandingsupport after winning the 2007 election with only 38 per cent of the votes.The political strategy of the returning Sandinista government was to solidifytheir relations with wealthy entrepreneurs. An interview25 with a Sandinistaparty militant revealed the strategy as explained by the First Lady, Rosario

21. After the state development bank (BANADES) foreclosed due to a disastrous repayment per-formance, four private banks linked to different emergent elites went fraudulently bankrupt.

22. This tactic was not merely a Sandinista phenomenon. In the anti-Sandinista strongholdRıo Blanco, liberal leaders of the Non-Payment Movement were heavily involved in landpurchases financed by multiple cattle loans.

23. This analysis is based upon information collected during interviews in November andDecember 2009 with Alfredo Alaniz and Julio Flores, respectively the director and presidentof ASOMIF, and during extensive field research of Rene Mendoza in the framework of hisPhD research at the Institute of Development Policy and Management (IOB), University ofAntwerp, Belgium (Mendoza, 2012).

24. ‘The microfinance institutions take our properties, they impose usury interest rates, theyput us behind bars and the producers are in crisis. They [the MFIs] make money and theydo not want to negotiate’ (O. Gonzales, main leader of the debtors, talking through RadioSegovias, 23 July 2008; authors’ translation).

25. Interview conducted by R. Mendoza in Rio Blanco (20 August 2007).


Murillo — considered the second most powerful person in the country —during a local party meeting in a neighbouring municipality:

She told us that Aleman [the contra-revolutionary Liberal president] had invested in thepeople of his party, that the [Sandinista] Front hadn’t done that in the 80s; that now we hadto be realistic, that we shouldn’t worry about winning the municipal election, that we wouldbe able to better help the party, by gaining the loyalty of well-to-do members in order tohave a better economic base; that Daniel [Ortega] already understood this and that they hadorganized the cooperatives in order to channel state resources.

Still, the Sandinista government did not immediately provide MCPANwith decisive support; rather their actions were inconsistent and contradic-tory. Initially, in light of no government response, the movement was forcedto negotiate a restructuring agreement with the MFIs mediated by local mem-bers of parliament from all political parties. The agreement they reached,however, was never implemented because Sandinista president DanielOrtega unexpectedly torpedoed it during a visit to Jalapa in July 2008.In his speech to those blocking the roads, he said:

I told you to protest, to make demands; I understand your demands, because it is not easy tobreak the chains imposed by the governments of the oligarchy and the Empire in only oneyear and six months. They have chained us from all sides . . . . You have done well to protestagainst the usurers, but instead of protesting on the roads it would be better to protest in frontof the usurers themselves; go posting in front of their offices. Be firm, we will support you.(El Nuevo Diario, 2008)

One day later MCPAN militants set the office of the MFI Fundenuse onfire. A political confrontation, including a loan strike on the part of the MFIs,ensued. Nevertheless, the movement did not start to spread rapidly until theoutbreak of the cattle crisis in 2009. At this critical juncture and throughoutthe rest of the crisis, the main structural cause of the clients’ repaymentproblems lay with the powerful cliques of meat packers and export houses,whose oligopsonistic position was further strengthened through the new FreeTrade regulations. Immediate punishment, however, came from the MFIsthat urged repayment and threatened confiscation. Rather than confrontingthe drop in ‘market prices’, it was easier and more promising to turn againstthe MFIs with the apparent political backing of the new government.

Practically throughout the whole crisis, the government was ambiguousin word and deed. The MCPAN clearly received political and economicsupport from Sandinista circles and in March 2010 the president approveda law, demanded by the Non-Payment Movement and widely repudiated inthe microfinance and funder community, installing a temporary repaymentmoratorium and a compulsory five-year restructuration plan at an interestrate of 18 per cent. Yet, in June 2010, a negotiated solution seemed toemerge when ASOMIF and the government concluded a formal agreement,including a government promise to support a repayment culture in exchangefor responsible MFI practices. The conditions for responsible MFI practiceswere also to become part of a new microfinance law, which would lay a more


appropriate legal basis and guarantee stability for the microfinance industry.For months, this agreement remained a dead letter as MCPAN continued toprotest, raise roadblocks and harass MFI personnel while the governmentlooked the other way. State ambiguity, however, came to an abrupt haltin August 2011, right at the time when the MCPAN was mobilizing fornew national protests. ASOMIF and representatives from the private bankswho were also concerned about a deteriorating credit culture brokered adecisive deal with Rosario Murillo, President Ortega’s wife, followed by anunexpected but clear signal from the presidency for MCPAN to desist frompolitical mobilizations. Ortega thus abandoned the leaders and membersof the movement, leaving them to deal individually with their debts andconfiscated properties. By early 2012 MCPAN members found themselvescut off from access to new finance. As even the Sandinista-sponsored statedevelopment banks and cooperatives refused them credit, many turned backto the MFIs in a desperate attempt to renegotiate debts, usually with littlesuccess as rural portfolios had decreased drastically because of the clientrebellion.

The MCPAN leadership’s intention to position themselves as gatekeepersof the Sandinista rural economic networks was frustrated by the govern-ment’s prioritization of its alliance with traditional economic elites and ofits own economic interests in ALBANISA to bolster its power and strengthenits position as an elite group (Grigsby, 2012: 17). Despite President Ortega’sinitial rhetoric, his government chose to mend relations with the microfinanceand banking industries, rather than support the producers against the pro-cessing and commercial oligopsonies. Tellingly, four of the five known newgovernment investment projects, financed through soft loans from Venezuelaas part of a generous agreement for petroleum deliveries, are related to cattle:two slaughterhouses and two dairy processing plants (ibid.: 16). The mostrelevant feature of the entire episode might therefore be the masqueradingof a structural conflict between slaughterhouses and cattle producers as amicrofinance crisis. Moreover, the narcissism of the microfinance industryenhanced this concealment by refusing to look beyond factors within the fi-nancial sector. In the end, the MCPAN paradoxically created a smokescreenenabling the traditional and Sandinista entrepreneurial elites to regain andstrengthen their control over — and thus extract value added from — therural economy.

It was against this backdrop that by the end of 2011 the government ap-proved a new Microfinance Law as part of the agreement with the MFIs.It remains to be seen how this law will be put into practice, but there isa danger that it will support a return to ‘neoliberal’ microfinance. Thiswould lead to two broad categories of finance becoming dominant: (a)large-scale investment finance directed at the traditional and the Sandin-ista entrepreneurial sector provided by private banks, the Sandinista coop-erative ALBA-CARUNA and the state bank Produzcamos; and (b) fast-rotating, short-term, subsidized loans (from ALBANISA sources as part of


clientelistic redistribution policies)26 or reasonably priced commercial mi-crocredit (from the private MFIs). Bateman (2010: 33) argues that the pur-pose of neoliberal microfinance is ‘to promote self-employment as a wayof disempowering organized labour in particular, and the lower classes ingeneral, thereby to (re)empower the narrow business class’. In SandinistaNicaragua, the primary objective of financial policy seems to be to promotepolitical control over popular organization through the provision of subsi-dized short-term ‘social’ credit, and to (re)empower the Sandinista businessclass alongside the oligopsonistic networks of the traditional elite families.

The government-sponsored client rebellion and the ensuing crisis clearlystruck a significant blow to productive agricultural and urban investment mi-crofinance which was strategically tied to market-based rather than clientelis-tic exchanges. Its ultimate aim was to empower viable small and medium-sized entrepreneurs, expanding opportunities for them to emancipatethemselves from clientelistic dependence. The non-regulated private MFIsfrom ASOMIF, who were supporting these economic strata, had alreadydiscovered that the less powerful producers needed well-articulated non-financial services that could make value chains more amenable to agriculturalfinancing (see Bastiaensen and Marchetti, 2011). The political outcome ofthe microfinance crisis shows that beyond such Microfinance Plus strategies,developmental microfinance needs to be re-politicized. It should deliberatelyaim to construct and be part of alliances addressing the political challenges ofneoliberal and, for that matter, ‘New Left’ anti-popular biases and practicesin Nicaragua.

LESSONS FROM THE CRISIS

The first important lesson from our analysis of the Nicaraguan case is thatmicrofinance is variegated and diverse, particularly in a country where profit-oriented commercial MFIs, specializing in fast-rotating, expensive loans topetty traders and micro-entrepreneurs do not necessarily represent the ma-jority of the sector. Pre-crisis Nicaraguan microfinance was not exclusivelydominated by ‘new-wave’ commercial microfinance, but was challenged inimportance by MFIs providing productive credit aimed at small and medium-sized agricultural and cattle enterprises. Governance structures deviated fromthe stereotype; the entire sector had clearly not succumbed to the principlesof what Bateman (2010: 3) describes as a new wave, Wall Street-style mi-crofinance. As illustrated by its deep rural–productive outreach — clearlynot a profit-enhancing strategy — many Nicaraguan institutions struggled tofind a balance between financial sustainability and development objectives.These achievements contributed to a reduction in dependence of small and

26. The presence of this kind of politically conditioned, cheap credit continues to underminerepayment culture of poorer clients.


medium rural entrepreneurs on elite-dominated market structures. Our anal-ysis of the Nicaraguan crisis demonstrates that an all-encompassing, largelyideological critique of microfinance that fails to acknowledge diversity inmicrofinance could be quite counterproductive. It generates an ideologicalargument that helps to destroy structurally transformative microfinance forSMEs which was the original objective of microfinance — and often alsothe ultimate goal of the radical critique itself.

Our findings also point to a need to go beyond ‘microfinance narcissism’,that is, the tendency to view microfinance as disconnected from its broaderstructural and political environment. As illustrated through the analysis ofthe oligopsonistic control over the cattle–meat value chain in Nicaragua,the structural causes of poverty and exclusion are not limited to a problemof access to finance alone. Microfinance clients, and thus also MFIs, arevulnerable to political risk and market manipulation. In Nicaragua, bothclients and MFIs turned out to be the victims of populist politicians whowere ultimately serving elite interests. Addressing these political risks is aprecondition for improving the social performance of microfinance for theclients, and for the MFIs to avoid repayment crises. Bateman (2010) is correctin denouncing many current forms of microfinance as part of a neoliberalpolitical project. Indeed, we argue that it is crucial that the debate aboutmicrofinance and microfinance itself be re-politicized. By politicization wesuggest a shift from tendering political support for neoliberal economic goalsto creating the material and discursive basis for a political critique of theconcentration of wealth under neoliberalism. Microfinance is not a panaceafor poverty, inequality or exclusion. At most it could serve as one toolwithin a broader strategy of socio-economic and political transformation thatcreates room for SME-based development pathways and protects both clientsand MFIs against unjustified privileging oligopolistic elites. Proponents ofmicrofinance need to cease presenting microfinance as a ‘pull-yourself-up-by-your-own-bootstraps’ anti-poverty pill based on neoclassical individualresponsibility that does not question prevailing ‘market forces’. If linkedinstead to the social mobilization of its clients and the building of alliancesfor structural transformations, microfinance could cease to function as a‘neoliberal’ political poverty trap.

The Nicaraguan microfinance crisis that we have analysed in this articlealso raises questions for those who place blind faith in the Latin Amer-ican ‘New Left’ governments without examining the models of economictransformation that these governments actually promote. Ultimately the San-dinista support for the MCPAN served to divert attention away from theirmanipulation of trade policies and collusion with privileged commercialelites, while reducing the scope of opportunities for rural SME develop-ment. Paradoxically, the troubled members of the MCPAN, the harassedMFIs and critical social movements could better realize their diverse inter-ests as allies, jointly facing off rural elites who stand in the way of equitableand integrated rural development.


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Johan Bastiaensen is senior lecturer at the Institute of Development Pol-icy and Management (IOB), University of Antwerp, Prinsstraat 13, B-2000Antwerp, Belgium (e-mail: [email protected]). His research fo-cuses on institutional change for rural development through microfinanceand other interventions. He has coordinated academic cooperation with theNitlapan Institute, Universidad Centroamericana, Managua, Nicaragua,since 1988.

Peter Marchetti coordinates the research teams of the Rafael LandivarUniversity, Lomas de Ciudad Vieja Dos, Guatemala. He is co-founder andboard member of the microfinance institution Fondo de Desarrollo Local inNicaragua. His publications focus on land reform, rural development and


microfinance, peasant economy and agrarian social movements. He can becontacted at: [email protected]

Rene Mendoza is director of the institute Nitlapan, Central American Uni-versity (UCA), Rotonda Ruben Darıo 150 mts. al oeste, Managua, Nicaragua(e-mail: [email protected]). He is a research associate at the Instituteof Development Policy and Management (IOB), University of Antwerp. Hisresearch and policy interests focus on social change in rural territories.

Francisco Perez is senior researcher at the institute Nitlapan of the Cen-tral American University (UCA), Rotonda Ruben Darıo 150 mts. al oeste,Managua, Nicaragua (e-mail: [email protected]). His research and policyinterests focus on governance of agricultural value chains and microfinance.

Documents

After the Nicaraguan Non-Payment Crisis: Alternatives to Microfinance Narcissism