Crisis Hits Micro-Loans in Eastern Europe

May 2009
London, United Kingdom, May, 21 2009 - The global financial crisis is reducing the pool of small unsecured loans for the poor, particularly in eastern Europe, just as state resources for supporting the worst-off are dwindling, an expert said.

Microfinance -- which typically provides loans to small entrepreneurs whom traditional lenders consider too risky -- has grown rapidly in recent years, helping lift an estimated half a billion people out of poverty.

But the credit crisis has crimped the ability of mainstream commercial lenders and some donors to fund microfinance lenders.

"The worst-hit region in terms of microfinance has been eastern Europe," said Mary Ellen Iskenderian, chief executive of Women's World Banking (WWB).

WWB is the world's largest network of microfinance institutions. The majority of microfinance users are women.

The sector is closely integrated with the broader financial system in eastern Europe, and as the economy there has been hit hard it has led to lower repayment rates, shrinking deposits and a "dearth of financing available for microfinance institutions," Iskenderian told Reuters in an interview.

A March survey by industry body the Consultative Group to Assist the Poor made similar conclusions. Three quarters of micro-lenders in eastern Europe and central Asia said borrowers, hurt by high food prices, job losses and economic contraction, were struggling to repay loans.

Europe's emerging economies have suffered more in the crisis than western Europe and are looking to cut spending as growth and budget revenues fall.

By contrast, the microfinance sector in India has remained relatively shielded from the global crisis, partly because tiny lenders there are not allowed to borrow from external sources, Iskenderian said.

Some Latin American lenders had also managed to reduce their reliance on external funding by attracting deposits, protecting them more from the downturn.

Microfinance has proved itself as an effective tool to alleviate poverty and reduce the burden on the state, said Iskenderian, a former manager at the World Bank.

"(Microfinance) is not a charity. It's about making a loan that a business can repay and keeping people gainfully employed by institutions that themselves are self-sustaining."

The economic slowdown has also dented stellar repayment rates in microfinance. Repayment rates have fallen to "high 80s-low 90s" percent, from traditional levels of 97-98 percent, with the steepest fall seen in eastern Europe, Iskenderian said.

But micro-lenders tend to have delayed payments where mainstream banks would have an outright default, she added.

The sector continues to grow globally even if the pace has slowed, and Iskenderian forecasts slower growth this year and possibly in 2010. 

"My network member in Bangalore ... is holding his head in his hands and is very sad that he is only going to grow by 100 percent in 2009 and has had to reduce his projections from 300 percent," she said.

Source : Reuters

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