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Volume 6, Issue 2: October 2008

Addressing the global financial crisis and fluctuating food and fuel costs

The Microcredit Summit Campaign asked microfinance leaders (MF) and investors to respond to a series of questions on the global financial crisis and fluctuating food and fuel costs.

Microfinance leaders were asked:

1. How has your microfinance institution (MFI) been affected by the global financial crisis, or how do you see it being affected, and if it is being affected what are you doing to address it?
2. How is your MFI being affected by rising food and fuel prices? What are you or your clients doing to address those challenges?

Investors were asked:

1. How do you see the global financial crisis affecting your institution's work as an investor in microfinance?
2. If you see a negative affect what, if anything, are you doing to address it?

These responses received the week of October 13, 2008 are just a snapshot but they give a sense of what the field is currently facing and some steps that are being taken to address these challenges. We are grateful to the respondents for their rapid replies.

ASIA
Shafiqual Haque Choudhury President, Association for Social Advancement (ASA)
M. Udaia Kumar Managing Director, Share Microfin Limited
L.H. Manjunath Executive Director, Shri Kshethra Dharmasthala Rural Development Project (SKDRDP)
Roshaneh Zafar President, Kashf Foundation

#1

MFIs have been affected in many ways due to the Global financial crisis. Most Bangladeshi MFIs, however, borrow from PKSF, our national wholesale microfinance fund, so bank borrowing challenges are not applicable to them. But, there are a few MFIs who do borrow from banks. These MFIs will be affected by fund constraints. Previously, it was not so difficult to manage loan funds from banks, but currently it has become very difficult to manage these funds. Given that ASA is a self-reliant MFI, it has not yet faced many difficulties in managing loan funds.

Another challenge is the challenge of clients borrowing from multiple MFIs [Do you think rising food and fuel prices are pushing this higher?]. The rate of the overlapping among the MFIs is increasing rapidly, and the number of overdue loans is rising sharply. Consequently, the rate of loan recovery is decreasing gradually among most microfinance service providers.

In order to address this situation, ASA has adopted several policies such as rescheduling loan installments, increasing the size of loans, and strengthening the teamwork among staff members.

#2

All NGOs, especially those dealing with microfinance for the poor, have been more or less affected by rising food and fuel prices, ASA included. The rate of clients’ daily wages, as well as income from other sources, has not increased to match these rising costs. As a result, many poor borrowers are not in a position to pay back their weekly loan installments on a regular basis and it has affected the total loan portfolio of the organization. At the same time, MFI salaries and other costs have been increasing. This is reducing surpluses and causing a downward trend in sustainability.

ASA has been managing this situation through reorganizing and rescheduling loans through analyzing the overall financial condition of the overdue borrowers on a case by case basis. This has worked for us. I think, given these circumstances, MFIs should follow a “go slow principle” especially in respect to rapid expansion.

#1

SHARE is facing reduced access to funds due to the liquidity crunch faced by banks and other financial institutions. Though ‘In-Principle’, SHARE has sanctions to the tune of USD 155.6 million with lower interest rates, we face a peculiar situation from bankers and financial institutions trying to bring in new covenants like raising interest rates exorbitantly and asking for personal guarantees from our directors which is not allowing SHARE to utilize the funds.

The situation is alarming in India for MFI’s, particularly for SHARE, since it affects our credibility and strains the trust built over a period of two decades with our clients. This may result in clients not making timely repayments etc. Currently, SHARE’s relationship with our clients is good.

In addition to the above, some lenders are compelling MFI’s to cater to their needs of achieving their agri-lending targets fixed by regulators at terms and conditions suitable to them.

Because SHARE is a non-deposit taking Company, it is not affected by any panic withdrawals. Presently, equity investors are showing interest in MFI’s which is a good sign, but this may be adversely affected over a period of time. Further, valuation of MFI’s is very attractive due to the buoyancy in the market.

SHARE urges its clients to use loan funds effectively in order to get through the present global financial crisis.

#2

SHARE’s operating costs spent on daily staff travel for meetings with clients have increased due to increasing fuel prices. This has affected the bottom line of the company. In spite of this, SHARE has not increased its interest rates to the end borrowers.

To contain rising prices in India, the government has imposed strict export bans on rice to ensure that food remains available for domestic consumption. SHARE’s clients have devised newer methods of bargaining in the markets in order to purchase commodities at cheaper rates and sell their produce at higher rates by eliminating middlemen.

Some State Governments are providing free electricity to the public in order to raise productivity and help contain inflation. Recent reductions in global oil prices are beginning to bring down costs.

People who were already living at subsistence levels when oil was relatively cheap are extremely vulnerable when oil prices rise, and may simply be unable to afford enough food to survive. However, a few have mitigated the effect of oil on mechanized agriculture by using bio fuels to power their farm equipment and others have increased their loan sizes to maintain their subsistence levels.

SHARE is educating its clients to mitigate inflation by identifying alternate sources of fuel and food supplements to sustain themselves.

#1

At the management level the financial crisis has created a lot of apprehension about the future of microfinance itself. As an organization this apprehension has affected our expansion policy. We wanted to introduce a pension product to our stakeholders with the help of mutual funds. We have had to shelve this initiative.

While we are still not facing a financial crunch, an inflow of fresh funds has been delayed. The interest rates have gone up by at least 250 basis points. SKDRDP has so far been lending to its clients at bank rates. This has created an adverse affect.

#2

The food and fuel prices in the country have caused a sharp rise in inflation. This has not affected many of our working class clients because they have been able to get a compensatory remuneration to offset the inflation. However, it has affected a large number of our clients who are engaged in small activities like farming, business, trading, and service providers as their profit spread has really come down. This has also affected their borrowing power. Overall, our repayment rates in urban areas have also been affected as the effects of inflation are felt most sharply in those areas.

#1

The first impact has been the lack of liquidity in the capital markets, which has curtailed our ability to raise additional funds for the year. Given the financial melt down, the first thing we did in March of this year was to revise our growth plans from 500,000 to 350,000. Over the past 9 months the Foundation has actually grown at 6%.

The second impact has been a substantial rise in the cost of doing business. As mentioned above, due to constrained liquidity, the cost of funds has increased by over 450 basis points, while, at the same time, due to the energy crisis, the cost of transport, electricity, etc have also spiked. This has been combined with the expectation that salaries should also increase in line with inflation. A recent survey of staff has shown that over 50% of our current staff are not happy with the salary structure and there is a visible expectation that the cost of living adjustments should be given to staff. This will again have an impact on loan officer productivity and overall efficiency and sustainability.

The third impact is on the quality of the portfolio. This is linked to greater exits as clients businesses are failing, combined with a constrained ability in terms of servicing loans.

What the MFI can do:

• Be prudent and grow slowly during this period
• Remain in close touch with clients
• Look at ways of enhancing efficiency – to counteract rising prices
• Improve overall compliance and monitoring
• Remain liquid

#2

By the end of August 2008, food prices in Pakistan had increased by 34% since the previous year. Kashf Foundation has taken a proactive stance in tackling the issue of food price inflation. They conducted a survey of 100 households in August 2008 to gauge the impact of the food crisis on clients’ daily lives in an effort to devise strategies to protect clients from future food price volatility. Ninety percent of clients in Kashf’s recent survey said current food prices have placed a significant financial burden on their families.

Kashf’s survey found that their clients were using three main coping strategies:

1. Clients have been eating less. Seventy-eight percent of clients surveyed said they now eat significantly less than before the current inflationary trend began.
2. Clients are working hard to make ends meet. The food price spike has forced many Kashf clients to take on another job, or start an additional business, in order to increase contribution to the family income.
3. Rising food prices reduce client households’ ability to save. This situation can quickly lead to over-indebtedness.

AFRICA
Tony Fosu Executive Director, Sinapi Aba Trust (SAT)
Mekonnen Yelewem Wessen Managing Director, Amhara Credit and Savings Institution
John de Wit Managing Director, The Small Enterprise Foundation (SEF)

#1

The global financial crisis has certainly affected most African Economies and most MFIs on the continent. At present, however, the effect of the crisis seems very minimal, but we expect it will have a significantly negative effect on the availability of funding for Sinapi Aba Trust going forward; both loans from its bankers and grants from donors.

#2

The adverse effects of rising food and fuel prices have been much greater on MFIs in Africa including SAT and its clients. In Ghana, rising prices have affected the national economy badly, pushing inflation higher (a year to date increase >8%). This has led to a rise in the inter-bank lending rates of about 10% in 5 months. The cost of funds from banks to SAT, and for that matter to all MFIs has also risen and unfortunately poor clients have to pay more for microfinance products. Since microfinance brings ‘banking to the door-step of the clients,’ the costs of operations including transport and fuel costs have increased significantly, putting many MFIs, including SAT, under stress.

With high inflation many clients are facing dwindling inventories since it costs more to replenish them. There is an increased number of client defaults and glaring signs of ‘client distress' at group meetings.

Moreover, food price hikes have increased the cost of feeding families, especially among the poor. In many cases clients spend more than their daily profits on food. This is causing rapid 'capital erosion' among poorer clients.

Some clients have reduced the number of family meals from 3 to 2 times a day and changed the make-up of meals from more nutritious but expensive foods to less nutritious, cheaper foods. SAT has put in place measures to increase efficiency in order to keep its prices as stable as possible and to maintain its operational and financial sustainability.

#1

The current global financial crisis has resulted in bank failures and a sharp reduction in the value of equities and commodities worldwide. MFIs like Amhara Credit and Savings Institution (ACSI) cannot avoid the effects of this global problem. Though there are currently no clear indications as to the effect of the crisis on ACSI’s operations, given the current state of affairs, some risks are likely and require that we prepare for potential turmoil.

Maturity mismatches between our lending and savings withdrawals are among the risks related to the crises, requiring ACSI to diversify its loan structure. Maturity mismatches can lead to “bank runs” in which depositors can force an MFI into a crisis even though the MFI is economically viable. As the crisis has already produced a “domino” effect around the world, there is a need for ACSI and its regulators to find thoughtful responses to the crisis.

In addition to the above, some lenders are compelling MFI’s to cater to their needs of achieving their agri-lending targets fixed by regulators at terms and conditions suitable to them.

#2

The increase in the price of food and oil can have a deteriorating effect on the MFI’s portfolio and/or equity. The effective loan interest margins have been lowered as a result of the new market situation. Savings have also been declining as a result. The repayment capacity of productive borrowers has been encouraging so far. Loan demands have increased impressively.

In response to the challenges, ACSI has attempted to create improved linkages with the Commercial Bank of Ethiopia (CBE) to bridge the liquidity gaps facing us. ACSI has made a temporary decision to slow down aggressive loan disbursements that might have arisen due to the inflationary factors. Loan size adjustments made to fit the increased price of commodities involved in clients’ businesses is among the helpful measures we have taken. It helps to expect good loan repayments to come from sound clients’ businesses. Other challenges are yet to be felt.

#1

Thus far we have not been able to identify any clear future impact of this crisis in terms of our organisation. We have consulted with several of the financial institutions who provide the Small Enterprise Foundation (SEF) with borrowings for on-lending and have been informed that they have not been directly affected by the crisis and do not anticipate any changes in the way they work with us.

It is likely, however, that some potential new sources of funds, especially private sector institutions with little understanding of microcredit, may now withdraw from initiatives to on-lend to institutions such as SEF or will introduce much stricter and probably more onerous appraisal criteria.

#2

Until now we have not picked up any direct concerns from our clients on these issues. After receiving your email we made some further inquiries and it appears that whereas the price of some food, such as cooking oil, has risen dramatically there has not been a major increase in the price of the staple food, maize. It appears that our clients (and their own clients) are shouldering the increases which have occurred by eating a little less meat with their meals.

It appears that the poor in South Africa are not being as badly affected as those in other countries and that they are facing the increasing prices with stoicism.

LATIN AMERICA
Francisco Dumler General Director, Consorcio de Organizaciones Privadas de Promocion a la Pequena y Microempresa de Peru (COPEME)
Santa Isabel de Euceda Executive Director, Organizacion de Desarrollo Empresarial Femenino (ODEF)
Carmen Velasco Co-founder and Director, Pro Mujer Bolivia

#1

My first thought is to evaluate how the rise of the interest rate would change the exchange rate between the sol and the dollar, and the immediate impact in the MFIs in respect to currency risk.

Also, the rise of the Libor rate, and the impact of this for the MFIs (and their clients): If for example, CONFIDE, the IDB, the CAF and other sources for the MFIs have their funds in the international banking market (or if they adjust their rates to match this), we will have to see if the risk is transferred to [the MFIs].

On the financial side, although there is not an imminence of bad debt provisions on the part of the banks (or in the MFIs), the main banking issue is the liquidity for increasing programs and attention for clients. This is on account of the diminishing international funds, the exit of migrant capital (and major depositors), on account of the major guarantees that now offer other instruments, gold, or outside banks that are protected by the government. If the banks were to lower their liquidity, the government would have to act so that the depositors (big and small) stay calm, with US/European style strategies (raising the cap on federally insured bank deposits for small investors and guarantees for large investors, etc.) MFIs are included in this as banks.

The MFIs that are not funded in the Libor foreign market (or by ad-hoc funds for MFIs) will have fewer problems than the banks, as the interbank market is expensive and dry. This would include the possibility that the banks would prioritize microfinance in favor of the other sectors or include instruments other than credit, like the US/European banks. On the macro side and in the cash sector, like we know, all of this is already having an impact in the dollar (and the reserves), and there is a key issue in the commercial balance and the payments, that will have the tendency to show a deficit, that the international demand of commodities and manufactured goods will lower (as well as the prices).

#1

The global financial crisis is affecting the clients of ODEF and the institution itself, because a large portion of our clientele live in areas dominated by assembly plants. This sector has been one of the first to feel the effects of the crisis because the products these plants make are for export to the US. The crisis has caused a decline in incomes as well as layoffs, diminishing the sales in the micro and small businesses that these workers support. This in turn reduces local borrower’s capacity to pay off their loans and has caused us to make adjustments to the existing loans.

As the crisis persists it will continue to have an impact export sectors such as furniture, art, and finally food crops. This will cause a significant drag on the Honduran economy. To reduce the effects of this crisis on our clients we have been adjusting the loans that are at risk, eliminated consumption based loans, and are more closely analyzing the requests of prospective borrowers.

#2

The increase in the price of food and fuel has affected clients with small businesses the most, as their decline in income prevents them from buying the same amount of food they once did. Beyond the increase in food prices, they also have to pay more on electricity, transportation and other services. This is causing an increase in our portfolio at risk, which jeopardizes the liquidity of ODEF.

To address this situation the clients and the institution are reducing our costs and looking for other efficiencies. In the case of ODEF, we have reduced our energy use, reduced our purchase of fixed assets in order to maintain liquidity, and refined our use of field representatives to better use their time and equipment.

#1

We haven’t yet been affected by the financial crisis. Nevertheless, the affects are going to be seen soon and they are going to be serious. We believe that the crisis will affect Pro Mujer because we will have to augment reserves in case of a possible increase in the default rates on our loans.

Our clients are going to be very affected because their sales will decline, and the cost of inventory will go up. Their profit margins will diminish, and they will have to reduce the size of their businesses and take smaller loans. Clients whose successful businesses would have needed $1,000 or $2,000 are going to only need $500, but they may be inclined to continue taking larger loans to maintain their levels of personal consumption, and this will have a very negative effect on their business and on the growth of Pro Mujer.

Because of this situation, the number of people that live on $1 or $2 a day will increase and make survival even more difficult for them. We believe that this gives Pro Mujer an opportunity to expand the number of clients it serves, aligning our strategies to satisfy the needs of this "new" clients.

We will have to be more cautious with our growth and the delivery of our integrated services. Although our default rates may increase necessitating strict qualification for prospective borrowers, we have to find efficient strategies in order to be as effective as possible, to avoid raising the interest rates, and preventing farther harm to the economic situation of our clients.

#2

The food and oil crisis have absolutely affected our clients and has had a more immediate impact in our clients' than the financial crisis.

The economic slowdown can result in a vicious circle. As clients generate less income, they are forced to buy less food. The effects will soon be seen in very dangerous nutritional levels, above all for children.

INVESTORS
Robert Annibale Global Director, Citigroup Global Microfinance Center
Jack Lowe President, Blue Orchard Finance Inc.
Asad Mahmood Director, Community Development Group, Deutsche Bank

#1

When the “Microfinance Banana Skins 2008” report was published based on a survey conducted in November 2007, liquidity did not even appear as a top “biggest risks,” other than “too much funding,” which was identified as a rising risk.

However, the assumption that the microfinance sector is not correlated with the formal economy is being increasingly challenged. The flurry of new microfinance collateralized debt structures has all but disappeared. Foreign exchange risks associated with unhedged borrowings are now significant as many local currencies have depreciated dramatically. Country risk premiums and local credit spreads, including MFIs, have increased as investors have become more risk adverse. A number of countries have seen domestic bank liquidity tighten and the credit performance of consumer’s served by banks deteriorate, presenting new challenges for those MFIs working in urban and peri-urban areas. MFI’s portfolios are increasingly showing early signs of credit deterioration in some markets. MFIs that are not well capitalized nor have diversified funding sources will be challenged by increased liquidity risk. Some of the fastest growing institutions have slowed their growth, perhaps prudently, as funding becomes more restricted and expensive. Some regulators are tightening prudential requirements for MFIs, such as capital adequacy. The earlier debate whether official and donor funding is ‘crowding out’ commercial investors is no longer topical.

Citi Microfinance’s global commitment to expand access to financial services through building relationships with MFIs, as partners and clients, leverages Citi’s global franchise and its local presence—we share the same local currency, legal and regulatory context, political and economic realities. We focus on accessing local funding for MFIs, whether through direct lending, partnering with international agencies and pioneering with MFIs in their domestic capital markets, which is likely to be more challenging for many MFIs in the year ahead. We are working creatively in over 30 countries with microfinance networks, investors and MFIs to support their growth and objectives. We jointly develop savings, insurance and remittance products. As market conditions become more challenging, we will continue to serve our clients and partners in the sector. In parallel, the Citi Foundation continues it’s over 30 year commitment to supporting microfinance, including programs to strengthen national and regional networks, expand financial education and to develop micro entrepreneurship.

#1

Above all, the financial crisis will affect liquidity going to the MFI's—a phenomenon we are already beginning to see. This will be amplified and will slow MFI growth. What liquidity remains will cost more to borrow.

#2

To address these challenges, we are redoubling our efforts to raise money in these difficult markets with new and innovative products targeting microfinance. We are also expanding our outreach beyond the already existing network of microfinance investors.

#1

In the coming year, the microfinance industry will face a liquidity crisis as most MFIs receive the majority of their financing from international investors. Major Funds that were to come to market have been delayed as the pricing has reached levels that cannot be supported by MFIs. Before the credit crisis, triple A tranches were trading at 150 basis points above the London Interbank Offered Rate (LIBOR) and now they are in the range of 500 basis points above LIBOR.

Certainly, the growth of MFIs would be affected and they would have to re-trench. The majority of MFIs use step lending in which clients who perform well are incentivized by larger loans. Given that this model would have to be changed, it would impact the credit quality of MFIs. In this market condition, MFIs will not be able to rely on socially motivated investors either (excluding grantmakers) because these investors do not live in a vacuum and are making their investments in the current context.

The liquidity crisis will certainly weed out some of the weaker MFIs as money gets tighter and investors raise their crediting standards to avoid risk. The positive aspect of the liquidity crisis is that it may force MFIs to improve their efficiency. Development agencies have a role to play at this time of crisis and the Inter-American Development Bank (IADB), for example, has announced a liquidity finance for development purposes that provides some relief.

#2

Inflationary pressures will have a direct impact on the credit quality of MFIs as poor people are stretched to meet their basic needs of food and shelter. Repayment of microfinance loans may take a secondary position. There has been some rise in delinquencies at some of the leading MFIs which are directly related to food price increases. For example in Pakistan, there has been a 40% inflation rate in the last six months. The only ways for MFIs to deal with the inflationary pressures are to work to become more efficient and reduce the rate or extend the maturity of the loans to make them more affordable.

Microfinance institutions can also reduce their growth expectations. But once growth is not there, what will happen to traditional MFI lending models?

One of the most central elements on the regulatory front is allowing MFIs to gather savings. These savings would provide low cost funding sources that could serve to create greater efficiency and ultimately lower cost to the borrower.