Jul 10, 2009

Microfinance Not Immune to Problems in Global Economy

by Laura Starita

The second annual “Banana Skins” report from the UK-based Center for the Study of Financial Innovation (CSFI) suggests that the microfinance sector is not as impervious to the negative impacts of the global financial crisis as had been previously suspected. The results from a survey of more than 430 industry observers, practitioners, and banks, representing 82 countries from all regions of the world, show that credit risk, liquidity and macro-economic trends topped the list of industry concerns in microfinance. In short, microfinance institutions are burdened by the same challenges causing the tightening of credit from traditional banks in the developing world. Yet these results will come as a surprise to many, given the received wisdom in microfinance circles that the sector is protected from the hardest knocks of the global financial crisis. This wisdom was grounded in the logic that the poorest countries in the world are not engaged in active trade with the richest, and that the poor themselves operate mostly within informal economies, a dynamic which creates a double shield against the collapse of global economic markets.

That shield is a mirage. This was predictable, as well as predicted. Logic alone dictated that the same people who were rioting over the price of food last summer may have found it increasingly difficult to pay their debts; ditto for remittance recipients who saw their transfers plunge in disproportion to developing world unemployment rates. My colleague Tim Ogden posed some interesting questions back in October about the impact of high food prices, currency fluctuation and the availability of credit on the microfinance sector. Now that the early evidence shows that those impacts are significant, the question for donors is whether this information changes anything for them.

It is not necessarily bad news that microfinance institutions will find it more difficult to secure financing and service their debts. Microfinance was arguably in something of a philanthropic and developing world markets bubble, with funds coming in dramatic disproportion to good, available investments. The US and Europe is seeing first hand what happens when too much credit is extended to people without the proper limits and practices in place. The impacts of the crisis could serve simply as a correction to prior over-exuberance. Investors may be more selective about the banks they choose to support. And microfinance institutions may address, as a consequence, some of their known challenges, namely that they often lack professional staff, that they’ve generally been offering one type of product to one type of client regardless of whether it was the ‘right’ product, and that they know very little about why clients take loans, what those loans are used for and whether they do any ‘good.‘ The greatest risk that both investors and banks face in this time of correction is that it amounts simply to less: Less investment, less experimentation, less measurement, exactly at a time when the willing soul-searchers of microfinance need to do more.