MICROFINANCE PAPER WRAP-UP: Microfinance Still Hums, Despite Global Financial Crisis, by Jeremy Caplan

Ms. Mary Ellen Iskenderian, CEO of Women’s World Banking, a global network of 54 microfinance institutions and banks in 30 countries, spoke to Time magazine’s reporter Jeremy Caplan regarding the impact of the recent financial crisis on the microfinance industry. The conversation also addressed other key trends and challenges for microfinance. The article was published in Time during December, 2008. The full text is available at: http://www.time.com/time/business/article/0,8599,1863443,00.html

What follows is a summary of the paper:

The Credit Crunch and Microfinance

There is evidence that the microfinance industry is resistant to volatility in financial markets. The reason is that the small amounts lent in microfinance projects are usually not affected by the travails of large-scale, global banking. Studies have confirmed the reliability of borrowers at the bottom end of the global income scale, with repayment rates quite often remaining between 97 and 99 percent. Accordingly, there should still be equity available for microfinance.

However, with the rising cost of borrowing, micro-entrepreneurs may see higher interest rates. The global credit crunch will likely require microfinance institutions (MFIs) to raise interest rates as funding becomes more scarce. Additionally, MFIs are scaling back expansion plans. Finally, a triple threat of finance, fuel, and food issues may manifest itself in microlending. Economic crisis combined with rising food and energy prices may exert pressure on the poor, who are in turn faced with the choice between paying back their microloans and purchasing essentials for daily living.

Trends and Challenges in Microfinance

One major trend that is shaping the microfinance industry is commercialization, as microfinance is increasingly seen as a distinct asset class and a profitable business opportunity. In 2006, over $2 billion USD in commercial capital was ingested into the microfinance industry. In 2007, the investment reached to over $3 billion USD. At the same time, non-profit microfinance institutions are transforming themselves into for-profit organizations under stricter financial regulations. With commercialization, microfinance can expand services to more people globally. However, as microfinance moves toward a for-profit model, one potential risk is a decrease in the proportion of women being served by MFIs.

A challenge to the industry is that microcredit must be supplemented with diversified products, such as savings and insurance, if the ultimate goal of microfinancing is long-term poverty alleviation. Housing loans, insurance, and savings products help create and preserve assets, leading to broader benefits for the borrowers as a whole. A diversified product line would allow low-income households, especially women, to save and pay for their children’s’ education and invest in healthcare for their families.

Another significant challenge is the move from group to individual lending. While group lending is an excellent starting point for micro-entrepreneurs, borrowers’ businesses tend to remain small and oftentimes income-generating activities can barely grow to scale. Individual lending, as compared to group leading, is a further step that allows micro businesses to prosper by offering larger, cash-flow based loans. Usually, individual lending is based on the household’s capacity to pay, and it does not require the borrower to have collateral.

Marketing is another area that might be a focus of the microfinance industry. As MFIs increasingly offer diversified insurance and savings products beyond credit, and as the industry becomes increasingly competitive, understanding customer behavior is becoming more important for service providers. In this sense, more and more traditional business practices can be popularized in microfinance industry.

By Yanni Hao, Research Assistant

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