Microfinance Leaders See Trouble Ahead for Institutions and Clients
October 24, 2008
Microfinance Leaders See Trouble Ahead for Institutions and Clients
Usually stable tool to fight poverty not immune to global crises
October 24, 2008 — For years, microfinance has made quiet but significant headway in helping people pull themselves out of poverty with dignity. The practice of making small loans to the world’s poorest and most marginalized people — often women in developing countries — to start their own small businesses and provide for their families has succeeded in spite of conventional banking wisdom, and benefited millions of families worldwide.
Because microfinance institutions (MFIs) are often closely tied to the local community, they are usually immune from the fluctuations of traditional markets. However, the current global financial crisis, the rise in the price of food, and the fluctuating cost of fuel are causing concern among MFI leaders about their own stability. In a survey conducted by the Microcredit Summit Campaign, a project of RESULTS Educational Fund, 13 microfinance leaders on five continents expressed concern that trouble in the larger financial system could mean greater difficulty for microfinance.
Despite most of the functions of microfinance being carried out at the local level, increasingly financing for MFIs has come from domestic and international investors. As the liquidity of large banks diminishes, MFIs are worried about their ability to provide loans to their customers. “Previously, it was not so difficult to manage loan funds from banks, but currently it has become very difficult to manage these funds,” said Shafiqual Haque Choudhury of the Association for Social Advancement (ASA) in Bangladesh. Udaia Kumar of SHARE Microfin Limited in India said that the greater difficulty in obtaining funds for loans to existing customers “affects our credibility, and strains the trust built over a period of two decades with our clients.”
The crisis, including the increase of food prices, also impairs the ability of borrowers to pay back their loans. Small businesses started with the help of microloans are in jeopardy of failing, and microfinance borrowers may default at a higher rate. Additionally, some MFIs, such as the Organizacion de Desarrollo Empresarial Femenino (ODEF) in Honduras, have many borrowers whose families derive income from local export-based industries, such as assembly plants. When the plants close or lay-offs grow, the borrowers, whose micro-businesses are supported by these factory workers, are less likely to have the income to pay back their loans.
The inability to obtain a much-needed microloan comes at a difficult time for borrowers. The current financial crisis has coincided with food and fuel price fluctuations, raising the cost of both inventories for the business and of basic necessities for the family. Just when those in the world’s poorest countries need extra money to afford food for their families, the funds on which they depended just aren’t there.
“Clients have been eating less,” said Roshaneh Zafer of the Kashf Foundation in Pakistan. “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.” Nutrition and health are important concerns for those who can ill afford to address a medical emergency, but when the price of food rises, some MFIs report that their clients resort to eating less, including less healthy food. While John de Wit of the Small Enterprise Foundation in South Africa states that the wider financial crisis has yet to have a significant impact on its borrowers, he reports that “it appears that our clients…are shouldering the increases which have occurred by eating a little less meat with their meals.”
MFIs reported in the survey that they are trying to head off any more dire repercussions by slowing their growth. SHARE, in India, is trying to help those borrowers who depend on agriculture for income to identify alternate sources of fuel for their equipment to cope with changing oil prices, and helping them explore alternative food supplements as well. In the meantime, some MFIs have had to curtail new initiatives for the time being. “We wanted to introduce a pension product to our stakeholders with the help of mutual funds,” said L.H. Manjunath of India’s Shri Kshethra Dharmasthala Rural Development Project (SKDRDP). “We have had to shelve this initiative.”
While investors of MFIs share the institutions’ concerns, some express hope that the downturn could promote better practices to prevent future calamities. “The positive aspect of the liquidity crisis is that it may force MFIs to improve their efficiency,” said Asad Mahmood, Director of Deutsche Bank’s Community Development Group. In addition to slowing growth, Mahmood also suggested that regulatory bodies should allow MFIs to build up savings. “These savings would provide low cost funding sources that could serve to create greater efficiency and ultimately lower cost to the borrower.”
In addition to those quoted, the survey included responses from MFIs including Sinapi Aba Trust in Ghana; Amhara Credit and Savings Institution in Ethiopia; COPEME in Peru; and Pro Mujer in Bolivia; as well as MFI investors and investment managers such as the Citigroup Microfinance Global Center based in London; and Blue Orchard Finance based in Geneva. To view the full survey, please contact Robyn Shepherd at (JavaScript must be enabled to view this email address).
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The Microcredit Summit Campaign brings together microcredit practitioners, advocates, educational institutions, donor agencies, international financial institutions, non-governmental organizations and other stakeholders to promote best practices in the field, to stimulate the interchanging of knowledge, and to work towards reaching our goals. The Microcredit Summit Campaign is a project of the RESULTS Educational Fund, a U.S.-based grassroots advocacy organization committed to ending hunger and poverty.
