MICROCAPITAL STORY: New Insights Into The Impact of The Global Credit Crisis Envisage A Slow in Growth for Microfinance According to Reuters, World Bank, ACCION and YES Bank

Two stories on how the global financial crisis will impact microfinance were released this week, by Reuters and the World Bank. These reports are only the latest in a slew of reports and analyses on how microfinance will be impacted by the credit crisis, ranging from extremely cautious pessimism to undaunted optimism. While these new reports remain mostly speculative, with little documented evidence of actual changes, they offer fresh insights by experts in the microfinance industry into whether any impacts have been experienced a few months into the credit crisis. As there have been a myriad of articles on the topic, this article highlights the unique or new information addressed in the two reports, with a list of past articles on the topic listed in the Additional Reading section below for further information.

The Reuters article focuses on the impacts of the credit crisis on microfinance institutions (MFIs) in South Asia, speculating on what would happen if microfinance were to go under in South Asia, given how widespread microfinance has become in this area. Siddhartha Chowdri, a manager for ACCION in India acknowledged with less money changing hands globally, there is less money for MFIs. She also mentions that the costs of funds have gone up for MFIs, but they are under pressure to keep lending rates low, which is not a sustainable way of operating. Despite this, the article highlights the strength of the microfinance industry. Somak Ghosh, group president of corporate finance and development banking at Yes Bank is quoted in the Reuters article as saying, “if banks could overcome the jitters, then the case for lending to MFIs for small, high-margin loans with low defaults is stronger than ever, this is actually a good time for banks to raise lending to MFIs, as their business model is a lower risk than large loans for a few big corporates, which are anyway seeing a slowdown.” Roy Jacobowitz, managing director of development and communications at ACCION International suggested that a well-managed MFI with a strong portfolio of borrowers can grow stronger in a crisis, due to the fact that microfinance funds needs that are so fundamental and basic that demand for them is unaffected.

Elizabeth Littlefield, director and CEO of the Consultative Group to Assist the Poor (CGAP), authored the article on the World Bank’s Crisis Talk, analyzing the extent of the impact of the financial crisis on microfinance. The article identifies tighter bank financing conditions, currency pressures, equity financing and more withdrawals and fewer savings as the main factors which will create negative impacts on microfinance. She acknowledges that MFIs were not greatly affected during economic crises in Asia and South America because microfinance was not nearly as connected to the global market as it is now, and despite the fact that microfinance has “deeply shock resistant roots”, the medium and longer term effects of a global recession is likely to impact the people involved in microfinance. While the effects will come in the medium to longer term, the most immediate effects will be in limited funding as money becomes more “scarce, conservative and costly”.

In addition to these recently released articles, the Grameen Foundation‘s Knowledge Sharing Roundtable discussed the issue in Washington D.C on November 12^th.

By Lori Curtis, Research Assistant

Additional Reading:

CGAP: “MIV Survey 2008: High growth and improving returns for microfinance funds“

MicroCapital Excerpt: “Blogger Chronicles Effect of Financial Crisis on Indian Microfinance Institution’s Interest-Rates and Customer Service“

MicroCapital Guest Editorial: “Global Credit Crunch Crushes Socially Responsible Investment in Microfinance?“

MicroCapital Story: “Cambodia Microfinance Association Lowers Microfinance Growth Targets Due to Effects of Global Credit Crunch“

MicroCapital Story: “How Far Will the Credit Crunch Affect the Microfinance Industry?“

MicroCapital Story: “Bill Clinton Extols Microfinance Amid Global Credit Crisis at 2008 Clinton Global Initiative Summit“

Reuters: “Global Credit Crisis Hurts Tiny Loans in South Asia“

World Bank Crisis Talk: “Microfinance and the financial crisis“

Yes Bank: “Home“