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The global financial crisis and its impact on microfinance
Microfinance institutions (MFIs) are being impacted in very different ways
Authors:
E. Littlefield; C. Kneiding
Publisher:
Microfinance Gateway, CGAP, 2009
Although the crisis still has deep shock-resistant roots, microfinance now has many more links to domestic and international financial markets, and as a result today’s financial crisis is more likely to infect its institutions. Many may suffer, and some may fail, but the sector has built sound foundations. The effects of today’s global crisis are likely to be more complex, deeper, and more difficult to predict than in the past.
How institutions are affected will depend on factors such as the structure of an institution’s liabilities, its financial state, and the economic health of its clients. MFIs with a broad base of deposits are less exposed to refinancing risks. Most deposit-taking MFIs, including the many savings-led institutions in Africa, are relatively well-cushioned compared to MFIs that rely on international funders who have been hit by the credit contraction. The most immediate concern in most countries is how the global liquidity contraction will affect the cost and availability of funding to non deposit taking MFIs. The most important action as a way forward is for non deposit taking MFIs to take steps in the ongoing challenge to become licensed to mobilise deposits and thus limit dependence on cross-border financing. These measures will take time, money, and expertise that many MFIs lack and will need to build.
Some microfinance markets had become overheated in recent years, with sensational growth rates, deteriorating underwriting standards, and crumbling risk-return tradeoffs. Slower growth, scarcer credit, more conservative policies, better products, and even consolidation of weaker institutions into stronger ones may be beneficial in the long run. The crisis may accelerate long overdue consumer protection measures that are part of responsible lending. The crisis has clearly illustrated the value of adopting a deposit-led approach to building sound and permanent domestic financial systems that can serve the poor with both credit and savings services.
