Microfinance and the Financial Crisis

Nov 2008
Washington, United States, November, 18 2008 - In most financial crises – especially those of the 1990’s - Mexico, Asia, Russia - financial services for poor people have shown remarkable resilience to shock. Nevertheless our present crisis is like no other, and microfinance is far more connected now.

In most financial crises – especially those of the 1990’s - Mexico, Asia, Russia - financial services for poor people have shown remarkable resilience to shock. In fact, the loan portfolios of microfinance institutions (MFIs) in Asia during the Asian crisis and in Latin America during various banking crises barely quivered while corporate portfolios collapsed.  This is of course because these banking or currency crises had little relevance to subsistence-based economies in closed ecosystem markets. Our present crisis is like no other, and microfinance is far more connected now. It still has deeply shock resistant roots, but there will be impact - both on the institutions and the clients they serve. The medium and longer term effects of global recession are likely to be punishing to poor people.

Before highlighting the financial pressures on microfinance institutions, let's remind ourselves of the financial pressure on our clients. Low income people in many places have already been suffering from high food and fuel prices. A recent CGAP survey of MFIs revealed that many clients were withdrawing savings, cutting back on non-food expenses and in some case struggling with repayment. While prices have come down in recent months, inflation is poised to surge. Making matters worse, remittances from the US and Europe are down sharply. We knew of Mexican remittances from the US slowing significantly, and now the same is happening in Europe - Africa corridors and elsewhere. So, in many places - not everywhere - clients are feeling serious pressures.

Microfinance institutions will likely feel the effects of financial market turmoil most immediately in sharply curtailed funding. From domestic and international lenders, investors and depositors, money will become more scarce, more conservative and more costly. Refinancing risk is a serious concern for some institutions.

Tighter bank financing conditions: Many MFIs are dependant on financing from local and international banks. They face more pressure today than MFIs who have built a deposit base. Some are already seeing their banks withdrawing loan offers, cutting credit lines, or raising rates. Some banks are even asking for loan prepayment and offering to waive prepayment fees. Steep rate increases are being announced - from 250 basis points in Eastern Europe, to 450 basis points for top tier institutions in South Asia. While the immediate reactions have come from international banks, domestic ones may well pull back too.

Currency pressures: A stronger US Dollar and steep local currency depreciation in developing countries means the cost of Dollar financing for MFIs has increased dramatically. While the Dollar may well soften, unhedged principal and interest payments in dollars will be difficult for MFIs to fund in the interim.

Equity financing: A few private equity transactions have closed even in the past few weeks, but these have been in the very deep and heated Indian market. For the most part, we are sensing that most private deals are slowed up and the few planned IPOs are on hold.

More withdrawals and fewer savings: Financial pressures on families may lead to less savings and more withdrawals from deposit taking MFIs. Also, some clients may understandably worry about the safety of their life savings and decide the mattress is safer. In previous banking crises depository MFIs fared well, but we worry that this one is different. Thus far, we have seen only a few isolated deposit runs, and these seem to have been triggered by a combination of factors beyond the crisis. But we worry about how rumours could shake confidence even amongst microfinance clients in todays globally connected and wired world.

Source : Crisis Talk

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