One of the things that make blogs particularly interesting are series. The “series” series recommends series at related blogs.

When Daniel Rozas warns, I listen. Rozas forecasted the crisis of microfinance which broke out in India in late 2010, warning as early as November 2009 that Andhra Pradesh was the most saturated microfinance market in the world alongside Bangladesh, and mass defaults could begin any time.


I can’t predict whether the microfinance bubble I believe exists and continues to grow in Andhra Pradesh and other south Indian states will deflate quietly or burst spectacularly. […] In their pursuit of growth, many MFIs have continued to add large numbers of new customers in Andhra Pradesh and other highly saturated regions – I believe that is irresponsible. […] The spark that sets off a large-scale delinquency crisis can be anything and could come at any time – a rapid drop in economic growth, a populist political movement, a religious decree, or a collections effort gone bad.  One can’t control the spark, but one can control how much fuel that spark can ignite.

Since this February, Rozas has been outlining the scenario of a possible further repayment crisis in a series of posts (links to parts 2 & 3) on the Financial Access Initiative Blog. He says self-regulatory efforts over the past years have been important, but perhaps not enough to stem lending excesses in certain countries (I would agree). Looking at indebtedness and lending at the sub-national level, Rozas reveals a fairly alarming picture in the Mexican state Chiapas, which shows similar patterns to Andhra Pradesh in 2009.

But it is Rozas’ attunement to the political economy of microlending which sets him apart from most sector consultants.


In Andhra Pradesh it was suicides; in Chiapas it may be something else, but the stories will be there. It takes more than just those stories to get people’s attention. Chiapas has it all: high interest rates, large profits, official connections, and finally, the strong multi-level connections between Mexico and the United States. […] It’s not just interest rates that are high in Mexico. The profits of Mexican MFIs are among the highest anywhere. This is particularly highlighted by Compartamos, which has held the title of the single most profitable large commercial MFI in the world for five of the past six years. […] To be sure, there’s nothing new here – the argument over Compartamos high interest rates and very high profits has been around since before the company’s IPO in 2007. But these two factors would become downright toxic when juxtaposed with media reports of impoverished and suffering borrowers coming out of Chiapas, where Compartamos has extensive operations. 

Despite being coddled with state money for decades, the microfinance industry is only waking up very slowly to the reality that its operations are as much politics as business. Political favour may swing suddenly, but “political risk” events have not been as arbitrary and exogenous as most in the sector perceive them. These events tend to appear in microfinance “success” locales like Bolivia (2000), Bosnia (2008), Nicaragua (2008) and India (2010): all countries where the success of MFIs at bringing debt to borrowers was so great, many borrowers ultimately could no longer sustain the debt. Then politicians tuned in.

Rozas’ final point about Mexico is how deeply it is linked with the USA. Stories of violence and overindebtedness there would generate bad news at a scale far larger than other, more exotic countries. Yet as in 2009 with India, it isn’t that a crisis in Mexico or elsewhere is predictable or inevitable; but signs are there. The question is whether MFIs will add more fuel before a spark comes, or together take a step back and try to disentangle the webs of debt many clients are entangled in, before the clients and politics finally entangle them.

P.S.: Daniel Rozas is also co-author of the aptly named “MIMOSA Index” which models the capacity of countries to absorb retail credit (including microcredit) and identifies a total of 20 countries which may be at or above their limits.