In Haiti, Microcredit May Be a Fragile Lifeline

In Haiti, where an already fragile banking sector was crippled by a devastating earthquake in January, microfinance provides a crucial lifeline — even when a lender's financial situation is almost as precarious as those of its clients, the New York Times reports.

In the past year, the share of microcredit clients in Haiti who have defaulted or are at risk of defaulting has more than doubled, to 18 percent, compared with the international rate of almost 3 percent. As a result, very small microfinance institutions (MFIs) could be forced to close, consolidate, or scale back their operations if their portfolios do not improve, industry experts told the Times. According to an analysis by Greta Greathouse, a consultant with the United States Agency for International Development's microsavings and lending program in Haiti, of the $38 million in microcredit loans outstanding in the region, fully a quarter could end up in default.

FINCA Haiti, one of the country's largest microcredit groups, wrote off nearly a third of its portfolio of twelve thousand loans after the January earthquake. With a grant from the Citi Foundation, it added back a thousand clients this summer, but 35 percent of its borrowers are more than thirty days behind on their payments.

In 2004, another Haitian MFI, Fonkoze, started a for-profit bank (in addition to its nonprofit arm), which operated at a loss before stabilizing this year after receiving $15 million in donations. Following the earthquake, Fonkoze wrote off nearly a quarter of its portfolio with funds donated by the American Red Cross and others, then gave each borrower a new loan and a one-time payment of $125, at a cost of $8.5 million. The organization has since broadened its services and expanded a $25 loan program for poor families. According to a senior financial officer with the organization, only 5 percent of its loans are at risk.

"You are dealing with a very vulnerable and fragile population," said Greathouse. "[The banks] need to get stronger on a permanent basis so they can offset the operational risks that come with Haiti because of the earthquake and the inherent risks that are unfortunately a way of life for the country and its people."

Daniel Costello. "Can Microlending Save Haiti?." New York Times 11/13/2010.