The Global Financial Crisis: What does it mean for microfinance?

Picked up on Weitzenegger’s Website for International  Development Cooperation, and its Newsletter

Linked with Karsten Weitzenegger – Germany, with Consultative Group to Assist the Poor CGAP, with South East European Educational Cooperation Network SEE-ECN; , and with Karsten Weitzenegger Consulting.

Published on CGAP, December 15, 2009.

In most past financial crises – like those of the 1990s in Asia, Mexico, and Russia – financial services for poor people have been remarkably resilient. In fact, the quality of the loan portfolios of microfinance institutions (MFIs) during the Asian crisis and in Latin America during various banking crises barely quivered, while corporate portfolios collapsed. Those banking or currency crises had little relevance to subsistence-based economies in closed ecosystem markets.

“Our present crisis is like no other,” says CGAP CEO Elizabeth Littlefield. “Microfinance is far more connected now. While it still has deeply shock-resistant roots, and many places seem unaffected today, there is little doubt that there will be impact.” Integrating microfinance into the mainstream has many benefits but it also has some costs. MFIs that depend on foreign capital investments are suffering, and the medium and longer term effects of a global recession are likely to be hard on microfinance clients in some countries.

On the bright side: Microfinance has solid fundamentals – Lessons from microfinance: …

… Looking ahead: Crisis as opportunity?

In the end, the financial crisis could actually produce some long-term benefits for access to finance, even if they are painful to come by. Some markets had become overheated, with sensational growth rates, softening underwriting standards, and deteriorating risk-return trade-offs. Slower growth, stronger credit policies and procedures, better products, and even consolidation of weaker institutions into stronger ones may be beneficial in the long run. The crisis may be a booster to implement appropriate client protection policies and practices. And at the very least, the crisis has clearly illustrated the value of adopting a deposit-led approach that aims to build access to domestic, local currency financing.

As one microfinance group, ProCredit, puts it: “Let us hope that if nothing else, the global banking crisis has served as something of a wake-up call for the banking community regarding what a good banker’s core values should be and microfinance has long held as core values: understand your risks, be transparent with your customers, and focus on long-term value rather than short-term profits.” (full text).

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