The turmoil in world financial markets has drawn a lot of media attention. Yet very little has been written about its impact on microfinance, neither from the perspective of the MFIs nor that of their clients. Given how much we still have to learn about borrowers and their use of credit, there are a number of open questions. Among the most salient include:

1) How is food inflation affecting MFIs and borrowers?
In theory, inflation is a boon to borrowers. The relative cost of a loan falls as inflation rises (presuming it’s not pegged to inflation, and we don’t know of an MFI who does this). MFI clients as a population tend to be both at the lower reaches of the economic ladder and disproportionately affected by higher costs, however. As a result, even as the cost of a loan falls, borrowers may simply run out of cash to repay. Or rising prices may increase the inherent value that microfinance customers place in their access to credit, which may cause them to make sacrifices elsewhere in order to remain in good standing with their lender. On the positive side, some borrowers may benefit from higher commodity prices, such as those who grow cash crops, or are involved with other commodities at the source. The one thing that seems implausible is that double-digit food (and until a few weeks ago, fuel) inflation rates have had no impact on borrowers or MFIs. What that impact might be depends upon a few things we’d like to know more about: How do micro-borrowers react to rapid changes in inflation? At what point, if any, do microbusinesses pass on price increases to customers? How do MFIs price inflation expectations into loans? Do MFIs in countries with hyperinflation, such as Zimbabwe, cope differently?

2) How are volatile currency markets affecting MFIs’ profitability and ability to repay loans?
The US dollar fell dramatically against the Euro and other major currencies over the last year, though it has recovered somewhat in the last few months. This is relevant to MFIs because an increasing number of them, both for-profit and non-profit, borrow money to fund their lending, and those loans are almost always denominated in dollars. Yet the loans the MFIs make are almost always denominated in local currency. While the dollar fell, the MFIs could sit pretty, since the cost of their own debt was falling at the same time that the value of the assets they held in the form of issued loans/payments on those loans held steady. As the dollar has recovered, however, and the credit crises goes global, many emerging market and frontier currencies are falling. That means that the MFIs dollar-denominated debt is potentially getting more expensive while the value of their loan assets is falling, a point made in a recent Op-Ed piece in Microcapital. Questions worth exploring on this subject include: How do MFIs price currency volatility into their loans, if at all? What percentage of MFI loans are funded by loans denominated in dollars or Euros?

3) Will credit to MFIs dry up along with the rest of the global credit market?
Microfinance came into its own as a nonprofit social intervention, but the dramatic increase in the amount of capital that has flowed into the sector over the past five years has also raised the profile of those institutions and individual investors that are viewing micro-financial services as a for-profit industry. The global financial crisis may provide fertile ground for examining the balance between social motive and profit-seeking as it applies to the capital flows into the sector, since profit-oriented investors will likely cut back on loans to for-profit MFIs in the same way they are cutting back on loans to more established, developed-world businesses. The consequences of any capital contraction will allow exploration of: How access to capital affects the way MFIs set interest rates; How access to capital affects the way MFIs select clients/make credit available; Whether the importance of achieving social benefit be measured by changes in the flow of capital to MFIs vs. the flow of capital to other investments.

If anyone has information or evidence that can answer some of these questions, please let us know.

Update: We posed these questions, and others to Roger Frank of Developing World Markets, one of the original microfinance investment managers. You can see his answers here.