Key Stories 2009: Can Microfinance Beat The Credit Crunch?

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Feb 2009
Germany, February, 06 2009 - Microfinance institutions have weathered the global financial storm remarkably well, but in 2009 the credit crunch and global recession could hit the sector hard.

Microfinance has a habit of beating the cycle of boom and bust. Microfinance institutions (MFIs) prospered during the financial crises in Asia and Latin America in the 1990s and have so far dodged the worst of the current economic turmoil.

The microfinance sector is not fully integrated into mainstream banking and so MFIs are partially insulated from financial markets contagion. Moreover, unlike the sub-prime market in the United States, microfinance repayment rates are very high due to close contacts between lenders and borrowers. 

From the humblest of beginnings, the sector has expanded into a global community of over 3000 MFIs serving 125 to 150 million customers in developing countries with 25 to 30 billion dollars in loans. The industry has consequently attracted mainstream banks like Citigroup, Standard Chartered, and BNP Paribas. SKS Microfinance, India's largest MFI, recently raised about 75 million dollars from private equity sources.

This increasing commercialization, however, exposes MFIs to greater risks. “Microfinance is far more connected now,” says Elizabeth Littlefield, CEO of think tank the Consulting Group to Assist the Poor (CGAP). “While it still has deeply shock-resistant roots, and many places seem unaffected today, there is little doubt that there will be an impact.”

Gathering Clouds

Littlefield was speaking after a virtual conference of over 600 microfinance institution (MFI) managers, central bankers, investors, and advisers from 34 countries convened by CGAP in November 2008. Many participants said that they had not suffered yet, but “there is a great deal of anxiety about what will happen in 2009,” reported CGAP.

The most immediate worry is that the global credit crunch will affect the cost and availability of funding. The most vulnerable MFIs will be those that get their money from foreign banks. Credit is now tighter, slower, more conservative, and more costly. Furthermore, these MFIs are exposed to foreign exchange shocks as they are borrowing in dollars or euros.

By contrast, MFIs that fund themselves by taking deposits in local currency are better protected. “The 800 microfinance banks are unperturbed by the global happenings due to…the fact that we are all savings- and deposit-led with less dependence on government, bank and external funding,” said Chimaobi James Agwu from the Integrated Microfinance Bank in Nigeria.

But even savings-led institutions are not immune to a global economic crisis. MFI managers from places like India, Mongolia, Pakistan, Mali, and Rwanda now report that high prices for food and fuel, a lack of demand for microenterprise products and decreased remittances from family members working overseas are hurting their clients. More and more clients withdraw their savings or have trouble repaying their loans.

Silver Lining 

But MFIs could also find opportunities within the crisis. Microfinance’s relatively reliable business model could attract investors looking to spread risks and diversify their portfolios.

The downturn could also force MFIs to grow less aggressively and focus on consumer protection, transparency, and governance. “Are we building a ‘bubble’ of over-indebtedness? If so, then a slowdown in growth will provide the opportunity to reconsider the basics of underwriting,” said Cecelia Beirne of MicroVest at the CGAP event.

Muhammad Yunus, founder of Grameen Bank, has also warned that the increasing commercialization of microfinance risks creating a subprime-style crisis for the world’s poorest people. To counter the threat, last year he helped establish a watchdog—MicroFinance Transparency—to avoid high interest rates and misleading credit offers.



Source : Allianz
 

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