No one usually likes to get “no” for an answer. However, a recent Wall Street Journal article regarding irresponsible lending practices in India demonstrates why it’s important for microfinance institutions (MFIs) to put their foot down with debt-ridden borrowers. Mission-driven MFIs (the most popular kind here in the U.S.) must be wise enough to acknowledge that a microloan brings nothing but further hardship to a borrower that is already indebted beyond his or her capacity to repay.
Here at ACCION USA, this realization has meant an increase in the number of loan declines as the economy has worsened. It’s a necessary evil in remaining true to our mission of empowering, not burdening, individuals with access to credit. But it’s not an easy message to deliver to financially strained borrowers, especially when they feel like a microloan is their “Hail Mary” – their one, last minute attempt at business survival.
I’m acquainted with one ACCION USA borrower, who has benefited greatly from this tough love policy. Originally seeking capital to pay debts to vendors for her printing business, her loan consultant realized that taking on more debt wasn’t the answer to boosting sales and income to get out of the red. Instead, ACCION USA staff worked with her on low-cost marketing, and her business is getting back on track.
As the recession continues to strain local small businesses, U.S. MFI’s face a complex challenge. There is an unprecedented opportunity to support struggling small businesses, but the duty to do so responsibly remains. Saying “no” to a financially strained small business owners and instead focusing on providing them with the financial education resources needed to get their debt in check actually provides their best chance at staying afloat. Nobody ever said that small business ownership was an easy road.