Wednesday, February 11, 2009

A Word Of Caution - Microfinance and the Global Financial Crisis

. Wednesday, February 11, 2009

Since the current financial crisis was aided, among other factors, by access to cheap credit for those who could not afford it; one may wonder how microfinancial organizations are faring.  While many microfinancial advocates and practitioners - including Dr. Muhammad Yunus -insist that microfinance remains largely unaffected by the global economic downturn, there's reason to be a little more cautious.  

The deleterious effects of global economic strife on microfinance institutions seems three-fold.  First, in many developing countries, rising inflation means food prices and other necessities will quickly consume a larger amount of household budgets.  This could decrease repayment rates as well as gross deposits.  

Second, and often overlooked by many more sanguine commentators, ailing developed economies mean a decrease in remittances.  Remittances often help families with loan repayment and also contribute to savings deposits.  The drop in remittances could really be a big problem, especially since remittances topped $300 billion in 2008 (3 times global aid) and account for 25% of GDP in some developing economies.

Third, and perhaps most important, the recent trend of commercialization of microfinance is stalling.  It's harder for microfinancial institutions to secure bridge loans, especially in local currencies.  Commercial securitization, when it is available, is now more expensive and more risky if the terms require lending in dollars or euros (since many local currencies are experiencing instability).  Institutions that focus on lending rather than savings are most at risk, since they do not have diversified sources of credit.

The World Bank and Germany have announced intentions to support ailing microfinance institutions through the global downturn, but I think it is right to re-evaluated the usefulness of microfinance given the lesson of the global financial crisis.  In particular, it is important to remember that access to credit is not a panacea.  Credit is one facet of a healthy financial crisis.  Perhaps, going forward, the microfinancial industry should place more emphasis on the often neglected aspects of finance - savings and insurance.  Will's last blog post mentioned the great success of African microsavings institutions, particularly interesting since successful microcredit is often an enigma on that continent.  As microfinance matures, let's hope that emphasis will move towards the safety of savings and insurance, with the understanding that credit can help - but not drive - people out of poverty.


A Word Of Caution - Microfinance and the Global Financial Crisis




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