Microlending killing economy development in Nicaragua.

Response to article on http://www.miller-mccune.com/business-economics/whats-in-a-label-6842/comment-page-1/#comment-2310

The plight of Nicaraguan farmers (which are very small to medium coffee farmers, cattle rangers, cocoa farmers, etc…) is caused by a 3 flank assault from greedy banks, other lenders, and an ideological orthodox government. One, government-connected banks, which in fact are owned by politicians; Two, are loan interest rates and fees pushing upwards of 45 to 65 percent annual interest rates; and three, crippling inflation. The banking and cooperative system in Nicaragua is broken and poor farmers can’t compete against local currency devaluation, crippling inflation, and government corruption.


I have observed, first hand, how banks and government have carried out this assault on the small farmers in Nicaragua. And I mean very small farmers. These were people with 10 to 50 acres that saw their lands foreclosed by banks, with backing from the government.

Lenders in Nicaragua charge a minimum of 2% monthly interest rate = 24% APR. Coupled this with loans processed in dollars, but borrowers get local currency. The farmers have to pay back with local currency at the going dollar exchange, as of the day they make payments. At times the local exchange fluctuates as much as 20 to 45 percent in the life of the loan, DUE TO CURRENCY DEVALUATION, PLUS INFLATION. Therefore, by the time the farmer sells his product in the local markets, they recover only part of the total of the loan and are faced with mounting debts, which accumulate interest on the total amount, not just the balance, until the total is paid in full.

This practice of loan amortization and loans given in local currency, but expected to be paid back in dollars, was in particular of interest to me. The monies given to farmers are in local currency, while the loan amortization is configured in dollars; a one- two punch that cripples farmers, regardless of their productive capacity in local currency, which devalues its buying potential daily. Add to this crippling inflation, which in Nicaragua in 2009 reached nearly 20 percent.

Another key factor crippling borrowers are Loan Application Fees. Loan fees alone are a cause to shake anyone with a high school education. Take for example a $1000.00 dollar loan. Borrowers receive only 80% of the loans extended, while the other 20% is charged to the farmer as processing fee, upfront, before they see any monies. This is a standard practice and is non-negotiable.

The banking and cooperative system in Nicaragua is broken. Greedy lenders and unscrupulous politicians have crippled farmers in Nicaragua, who pay as much as 45% to 65% percent in interest rates and fees. If this trend continuous, more and more farmers will default and social unrest and financial instability will once again resurface.

In January 2008 I visited Rio Blanco, in the North of Nicaragua, where over 300 farmers had lost their land to lenders. I saw the fragile peace and free markets take a turn for the worst. If the oligarchs in the country continue serving only their needs, I am afraid we will see another human catastrophe like we saw in the 80’s and 90’s.