Microfinance not in the red, despite crisis
Microfinance not in the red, despite crisis
While major international banks have collapsed in these times of economic crisis, small microfinance institutions are still performing well. Poor women – until recently regarded as totally non-creditworthy – are paying back their loans while large companies fail to meet their repayments. How has micro-finance survived the economic storm?
Muhammad Yunus, the godfather of microcredit and 2006 Nobel Peace Prize laureate, explained in early 2009 that his Grameen bank had hardly been affected by the financial crisis:
“The simple reason is that we are anchored in the ‘real’ economy – not investments which exist only on paper. If we lend someone 100 dollars, that represents chickens or a cow. It’s not an imaginary asset.”
This is a reference to the cause of the global crisis: loans based on fictional values (sub-prime) and convoluted financial constructions.
There are, however, places where micro-finance institutions (MFIs) have not proved immune to the global crisis. From 2009, MFIs in Eastern Europe, Russia and the Caucasus, as well as Central America and the Caribbean were affected by the crisis. They became less profitable, there was reduced growth in the number of loans and overdue loans began to pile up. It’s no coincidence that the economies of these regions are more integrated into the global monetary economy, making them more sensitive to adverse economic conditions in the West.
India, on the other hand, seems completely unaffected. In fact MFIs are growing fast, by 100 or 200 percent in recent years and even last year. With more than a billion inhabitants India has an enormous domestic market and its economy is still not all that dependent on international trade. The informal economy, in which most recipients of microcredit operate, is even further removed from global financial developments.
“In India it will take two years before the lower regions of the business community are hit by the global recession, but within two years we will already be seeing signs of recovery,” says Amitabh Kundu, Professor of Economics and micro-credit specialist at Jawaharlal Nehru University in New Delhi. He emphasizes that the Indian government is actively stimulating what they refer to as “inclusive finance”: making financial services available to everyone. As a result, domestic money – both private and public – flows into MFIs, followed by more risk-avoiding foreign money. India has proved successful in attracting commercial funding from abroad. Around 178 million dollars of foreign money was invested in Indian micro-credit schemes in the financial year 2009, more than three times as much as in the previous year.
Despite the fact that their budgets have shrunk as a result of the crisis, foreign investment companies (private equity) and investors clearly regard it as advantageous to add microfinance to their portfolios. Returns have been healthy, relatively unaffected by financial developments in the West and they look good in the annual reports. Moreover, Indian microfinance has enormous potential. More than 22 million Indians current have loans from an MFI and rough estimates indicate that another 120 million households are eligible for micro-credit. That translates as a potential market for financial services totalling 50 billion dollars.
But let’s not celebrate too soon. The financial crisis could still penetrate into the microcredit sector: both MFIs and their customers could be affected. The development budgets of western countries are shrinking, if only because they are normally dependent on the donor country’s GNP. This could result in fewer cheap loans to MFIs in the South, and it’s unclear to what extent this can be cushioned by funds like the Bill and Melissa Gates Foundation or the online ender KIVA. This was one reason that, as early as late 2008, Dutch Development Cooperation Minister Bert Koenders announced he was earmarking 15 million euros for a fund to help compensate for dwindling funding for micro-credit.
From a commercial point of view refinancing MFI loans is a risk. Loans often run for one or two year. New loans are now being granted at higher rates of interest. This is the result of increased currency risks: the chances of exchange rates adversely affecting the lender because of devaluation are greater in times of crisis. Early last year the International Finance Corporation, an affiliate of the World Bank, and the German development bank KfW set aside 500 million dollars to cushion the risks of refinancing. In order to balance their books MFIs will have to concentrate on recovering outstanding credit. This process is already underway in Africa.
While major banks were toppling in the West, the damage to credit lenders in less wealthy parts of the world was limited to falling profits and a brake on their growth. However, in some cases, the collection of loans will become more problematic there too. The World Bank has calculated that an additional 65 million people will end up living on less than two dollars a day due to the financial crisis. A number of MFIs show an increase in the number of loans being paid back later or too late.
Migrant money transfers
The trend is reinforced by a dramatic reduction in migrant money transfers. Their weak position in the Western labour market means migrants are often the first to be laid off during times of economic hardship. As a result they are sending less money back to relatives in their countries of origin.
At first glance the microfinance sector seems to have been immune to the financial crisis. In 2008 the ten largest microfinance funds grew by 30 percent (while ‘normal’ funds shrank by a fifth). The results for 2009 look a lot less rosy in many regions. Despite a solid basis, the big question in 2010 in whether the sector can continue to stay out of the red in the wake of the global crisis.