Microfinance industry breeds corruption

Where there is a large infusion of money a "mafia" soon develops around it

Local NGOs subcontracted by a multi-million-dollar microfinance programme are taking bribes from borrowers, according to the fund’s directors.

Aboubacar Aboudou, the first director of the government-run “microloans to the poorest” programme, told IRIN a lack of oversight and the programme’s rapid growth since its creation in February 2007 has left it open to “unscrupulous intermediaries” hired to process loans.

“They squander funds and try to hide their crimes. It is immoral. They want to make the poor even poorer.”

Profiting from poverty

The fund’s current director, Komi Koutche, told IRIN that subcontracted local community associations are benefiting from borrowers’ desperation. “Instead of taking US$2 in processing fees, they are charging [borrowers] up to $7. As long as the borrowers pay this willingly, we cannot stop it. It is only when they protest that we can intervene.”

Benin’s Minister of Microfinance Reckya Madougou told IRIN recent studies revealed that loan intermediaries “collect loan payments from borrowers promising to remit them to the fund’s partners [banks], but then do not do so.”

The maximum loan amount is $60. Borrowers have six months to repay the government-backed loans with a five-percent interest rate. The fund’s five partner lending institutions reported more than $1 million in unpaid loans in 2007, according to the UN.

The banks subcontract to 20 NGO microfinance institutions.

Too much, too quickly

The microloan fund has awarded more than 500,000 loans worth $31 million, according to Minister Madougou. She told IRIN these loans “are a solution to fight poverty and are a wise investment in human capital.”

''...Because the fund wanted to have a rapid impact, people closed their eyes to irregularities...''

Benin consistently ranks among the bottom 20 countries of a UN index of living conditions in 179 rated countries.

But the government microcredit program took on too much, too quickly, said the fund’s former director Aboudou. “Because the fund wanted to have a rapid impact, people closed their eyes to irregularities. There was a lot of money, which opened the door to the fraud. It is normal that there would be fictitious loans [which the intermediaries pocket], while the truly needy are left by the side.”

He added that the program should handle only 50,000 loans per year.

Calls for reform

Where there is a large infusion of money a “mafia” soon develops around it, said Martin Assogba with the non-profit organisation Action Against Regionalism, Ethnocentrism and Racism. “I would not be surprised to learn if it is family members - godmothers and godfathers [of borrowers] - who are processing the loans.”

Assogba said it would be better if borrowers went directly to the lending institutions. “We need to look again at how the loans are distributed and cut out the middlemen. This way money will reach the beneficiaries. We need to stop this mafia.”

National Microfinance Fund director Koutche told IRIN the fund is seeking to eliminate intermediaries.

There are 500 microfinance institutions - community-based lending groups that do not include banks - in Benin, less than half of which are recognised by the state, according to the government.

Who is poor?

In addition, Koutche said that until now the fund has not had a standard for deciding who deserves a loan. “We have gone on a subjective case-by-case analysis. If someone comes in to apply for a loan with a cell phone, we will turn down the application. Anyone with enough money for a phone does not need a loan. If someone’s house is sparse and lacking in amenities, that person will get a loan.”

Microfinance Minister Madougou told IRIN the guiding principle of the government loans has been to loan to borrowers “among the poorest without consideration to ethnic or political affiliation”.

But without concrete criteria, fund director Koutche said the programme is open to favouritism and corruption. He said the fund is drawing up loan criteria.

Microfinance institutions have been working in Benin since the 1970s. According to the National Association of Microfinance Practitioners in Benin, the ALAFIA Consortium, there were more than 730,000 borrowers in 2004. In 2005, ALAFIA calculated more than $200 million in outstanding loans.

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