MICROFINANCE PAPER WRAP-UP: Elevated Food Prices – Impact on Microfinance Clients by Zaved Ahmed and Camilla Nestor

Written by By Zaved Ahmed and Camilla Nestor, Grameen Foundation. Micro?nance Information Exchange, Inc. Microbanking Bulletin, Issue 18, Spring 2009. http://www.themix.org/publications/elevated-food-prices-%E2%80%94-impact-microfinance-clients

This article focuses on the effects of the ongoing food crisis on microfinance clients and institutions in the developing world. According to the International Food Policy Research Institute, increasing food prices in mid-2008 have had the most severe consequences on food-insecure populations, which are low-income households in developing countries that spend 70 to 85 percent of income on food. The authors argue that the world has focused solely on the effects of the credit crisis, rather than also considering the impacts of the food crisis on the poor as well.

Despite a decline in prices of food after the mid-2008 highs, the developing world continued to face increasing prices in food commodities. To show illustrate this effect, the Grameen Foundation compared quarterly retail prices of rice in 10 developing countries from 2007-2008, as listed on the Food and Agriculture Organization (FAO) website, and indexed it against first quarter 2007 prices. Though prices fell on average starting from mid-2008, the findings from the Grameen Foundation show that the price of rice increased in the 10 developing countries by 50 percent between late 2006 and 2008, forcing families to eat less or find other ways to earn more income. The article further states that the World Bank projects that prices of food commodities will likely remain high through 2015.

The authors first explicate how the food crisis is having a definite impact on microfinance clients. The increase cost in food is forcing clients to decrease food consumption, which can lead to permanent health damage in the long run. Microfinance institutions (MFIs) have also reported a decrease in voluntary savings rates among clients, which reduces the ability for savings to act as an insurance mechanism in the clients’ futures. Clients that are most severely affected have diverted loan funds to be spent on essentials for consumption. In addition, many families have stopped sending their children to school and have begun putting them to work, in order to decrease their expenditures and increase their income streams. Finally, the food crisis has also impacted demand for loan sizes in different ways. In some countries, borrowers are requesting larger sized loans to finance the increasing costs of their ventures, while in other countries, MFI clients are reducing their loan size demands because they believe that their businesses will underperform during these rough economic times.

The article continues to describe how MFIs, themselves, have also been impacted by a combination of inflation, the financial crisis, and the food crisis. MFIs expect an increase in portfolio risk if food commodity prices continue to remain high. Due to increase in risk aversion among lenders and decreasing liquidity in local bank markets and microfinance investment vehicles (MIVs), MFIs are facing refinancing risk, which will slow down growth. Finally, the authors state that the microfinance industry is structured such that wages and salaries are the largest expense component. Thus, as inflation continues to increase, leading to a rise in wage expenses, MFIs might have to increase interest rates to compensate for increased operating expenses.

Overall, the authors contend that global attention is focused on fighting the financial crisis, as the world fails to realize that the food crisis is still a pressing issue for the developing world. They conclude by saying that though clients have shown a great deal of resiliency during these times, this crisis may very well have long term effects on their quality of lives.

By Radhika Chandrasekhar, Research Assistant

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