MICROCAPITAL STORY: The Global Financial Crisis And Microfinance

As financial markets struggle internationally, some microfinance institutions (MFIs) have begun to see downstream effects in the form of rising lending rates. Royston Braganza, chief executive officer of Grameen Capital India observed “the demand for funds is high because microfinanciers have drawn up aggressive growth plans” and “the cost of funds remains a concern due to the 2 percent increase in just the last quarter.” These factors could make fundraising very difficult for microfinance institutions in cases where they have not built up proper reserves according to K. Vinod Kumar, Assistant Vice-President of member services at SKS Microfinance.

Despite these calls for concern, some key microfinance practitioners and advocates are publicly voicing their support for microfinance as a stable alternative investment. Muhammad Yunus of the Grameen Foundation said, “The financial crisis has not hit the microfinance system” and that “in the middle of all these bad news: microfinance still works.” Bill Clinton said last week that investors should “consider the poor of developing nations as viable investment alternatives to today’s turbulent markets.”

If history serves as any lesson, one might look back to the late 1990s when a recession hit Southeast Asia and Latin America. Although the current crisis is substantially larger and affects markets globally, there are some similarities in their effects; declining investor and consumer confidence can create a lack of funding. In Indonesia, the center of the 1990s financial crisis, the currency collapsed and the economy decreased 13 percent in 1998, impoverishing much of the middle class. But the country’s network of People’s Credit Banks -2,200 institutions serving the low end of the microfinance market with loans averaging US$77-held their collective loan portfolio more or less steady throughout the crisis.

David Roodman, a research fellow for The Center for Global Development (CGD), noted that a factor worth considering is that most foreign investment in microcredit still comes from people and institutions motivated by charity and already primed to accept great risk. Yet even if foreign investment decreases and delays a shift some had foreseen toward commercialization in microfinance, it is just one source of funding. Grameen Bank, which used to borrow heavily from foreign sources, was experiencing excess liquidity from client deposits as recently as 2007 and in many African countries the predominant microfinance model is savings-led financial cooperatives that do not even take foreign investment.

Benjamin Kahn and Tor Jansson of The Inter-American Development Bank (IDB), argue “the fate of an MFI, like that of any firm, will hinge on countless factors both internal and external, some predictable and some not. But all else being equal, there is little doubt that MFIs will benefit from close ties with their local communities, from knowing their borrowers well, from having an ownership structure that includes shareholders with a strong interest in their well-being, from conforming to local financial regulations and from making good use of local savings.”

In spite of these arguments that microfinance will remain stable, the likelihood is that MFIs in their early stages (that depend on government donor agencies, foundations, NGOs, or apex institutions for funding) are more likely to be negatively affected. Laura MacInnis of Reuters observed “Charitable giving and foreign aid flows are likely to dry up as the global economy sours.” Steve Radelet, a senior fellow at CGD, said “Washington in particular would be under severe pressure to pare its international aid spending after agreeing a $700 billion financial rescue package.”

The Inter-American Development Bank, founded in 1959, is a multilateral institution with 47 member countries. Although the main focus of the organization is to provide funding to development initiatives, the IDB also provides research and consultations in addition to hosting conferences. A list of donors to the IDB can be found in the organization’s 2007 annual report.

SKS Microfinance was established in 1997 is the largest and fastest growing microlender in India. In 2007 SKS grew by nearly 300 percent, expanding its loan portfolio to USD 64 million, all while maintaining a 99.97 percent on-time repayment rate. As of March 2007, SKS held total assets of USD 78.8 million, had a debt-to-equity ratio of 379.22 percent and return on assets of 1.75 percent.

Grameen Capital is a collaboration between Grameen Foundation, IFMR Trust and Citicorp Finance India Limited, created in January of 2008 to increase the outreach of MFIs and number of livelihood finance providers in India by integrating them into the formal financial markets.

CGD is an independent, not-for-profit think tank that works to reduce global poverty and inequality by encouraging policy change in the U.S. and other rich countries through research and engagement with the policy community.

By Scott Everett, Research Assistant

Additional Resources:

IADB: Home, “Tough Enough: Microfinance Defies Recession”, December 27, 2007

SIFI FINANCE: Home, “Global Credit Crunch Affects Microfinancing”, September 28, 2008

CENTER FOR GLOBAL DEVELOPMENT: Home, “Microfinance Likely to Weather the Storm (Development Impacts of Financial Crisis)”, September 22, 2008

CGAP FOCUS NOTE: Home, “Foreign Capital Investment in Microfinance”, July 12, 2007

REUTERS: Home, “Credit crisis threatens disastrous squeeze on aid”, October 6, 2008

MicroCapital article, October 2, 2008, “Bill Clinton Extols Microfinance Amid Global Credit Crisis at 2008 Clinton Global Initiative Summit”

MicroCapital article, August 1, 2008, “Nobel Laureate Muhammad Yunus Speaks Out Against For-Profit Microfinance from Asia-Pacific Microcredit Summit”