A recent article in the US Banker journal [1] sets out some observations about the much discussed topic of the impact of the global financial crisis on the microfinance sector. Reporter Mr Joseph Rosta makes references to the ‘Microfinance Banana Skins 2009’ [2], a publication by British-based think tank CFSI [3] that measures the risks facing the microfinance sector, and reiterates the view held by some market participants that the sector ‘could face a fall in growth and funding because of the global recession and declining investor confidence’. The survey, which forms the basis of the Banana Skins 2009 report, is based on interviews with more than 400 microfinance lenders, investors, regulators and analysts in 82 countries. The report states that of the top 10 risks now facing the microfinance sector, nine are directly or indirectly related to the economic meltdown, including the two biggest: credit risk and liquidity.
Nonetheless, the article in the US Banker stated that ‘no microfinance institutions have failed as of early August’, according to observers. Mr Bob Anibale, global director of CitiMicrofinance [4], was quoted as stating that ‘many MFIs have nimbly adjusted to these pressures’ and have refocused on the needs of their customers and returned to local markets as the preferred source of funding. Multilateral institutions such as the Inter-American Development Bank [5] and national agencies, such as the U.S. Overseas Private Investment Corp. [6], have been stated to have provided backstops and support for some troubled MFIs. In addition, the impact of the crisis on microfinance varies from region to region.
According to the article in the US Banker, liquidity is a less important issue in big microfinance markets, such as India and Bangladesh, than cross-border funding problems. On the other hand, there are severe liquidity problems in the Balkans and central Europe. Ms Laurie Spengler, president of ShoreBank International Ltd. [7], was quoted as stating that MFI borrower defaults are increasing ‘at roughly the same rate that we see defaults rising at the consumer level in OECD [8] countries’. Even so, Mr Rosta observes that the microfinance sector has not seen defaults such as in the U.S. subprime mortgage market in 2007 and 2008 and that ‘most MFIs tend to continue working with borrowers who are in default to reschedule or restructure payments, resulting in fewer writeoffs than those experienced by traditional banks’.
Growth in the microfinance sector has nevertheless slowed. According to CGAP director Ms Elizabeth Littlefield [9], ‘this is a welcome change’ as ‘a lot of external investment fueled a very fast pace of expansion that outstripped institutions’ financial and management capacity’. The withdrawal of liquidity has forced some MFIs to reduce costs and strengthen internal controls. Private-equity money is still available thought these are mostly directed at pre-IPO institutions. The microfinance sector continues to depend on its core sources of funding: social-purpose funding from institutional investors, foundations, and personal investors. MFIs are also refinancing and restructuring loans, in view of their clients’ new vulnerabilities such as lay-offs and rising food prises, according to Ms Littlefield. Mr Anibale adds that MFIs also are offering a wider array of financial services, expanding their focus from credit to deposits and insurance, and the integration of remittances. Ms Spengler addes that much of the growth in borrowers and portfolios in recent years coincided with the rise of larger MFIs who ‘remain well capitalized, well managed and supported by donors and investors’. She adds that ‘the weakness in the market is more evident in the Tier 2 and Tier 3 MFIs that don’t have the same access to resources’.
Related publications on the impact of the global financial crisis on the microfinance sector have been set out in the Bibliography section below [10], [11], [12], [13], [14].
By Chinq Yee Chong, Research Assistant
Bibliography
[1] Article in the US Banker entitled ‘Trickle-Down Effect’: http://www.americanbanker.com/usb_issues/119_9/trickle-down-effect-1001271-1.html
[2] Microfinance Banana Skins Report 2009: MICROFINANCE PAPER WRAP-UP: Microfinance Banana Skins 2009: Confronting Crisis and Change by David Lascelles and Sam Mendelson
[3] CSFI: www.csfi.org.uk/
[4] Citi Microfinance: www.citibank.com/citi/microfinance/
[5] Inter-American Development Bank: www.iadb.org/
[6] U.S. Overseas Private Investment Corp: www.opic.gov/
[7] Shorebank International Ltd.: www.sasbk.com/
[8] OECD: www.oecd.org/
[9] CGAP: www.cgap.org/p/site/c/template.rc/1.26.1315/
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