Microfinance Institutions Face Growing Pressures

May 14, 2009    

Despite the severity of the current global financial crisis, microfinance institutions (MFIs) have shown greater resilience than many traditional banks, according to a new survey conducted by CGAP, in collaboration with the MIX, the Microcredit Summit, ACCION, Grameen, FINCA, Freedom From Hunger, MicroFinance Network, Opportunity International, Women’s World Banking, and Sanabel.

There have been few failures among MFIs since the onset of the current financial crisis. However, the more than 400 respondents to the March survey reported significantly tougher market conditions.

The full impact of the financial crisis is likely to be felt in the second half of 2009. Accordingly, many MFIs are taking steps to cope, such as taking a more conservative lending approach and, in some cases, even cutting staff.

“Many poor households are struggling with the many consequences of the global food, financial, and employment crises,” said Elizabeth Littlefield, CGAP’s chief executive officer. “Their income sources, like revenue from small businesses or from money sent from families working abroad, have become more erratic. At the same time, many expenses, like food, are still far higher than before. Savings are thus being withdrawn and loan repayment rates to MFIs are worsening.”

“But the leading MFIs are well-positioned to adjust their operations to weather the storm . Many are investing more in client communications and tightening credit and collection policies. It is critical that these organizations stay financially viable, as their clients will need their services now more than ever.”

Sixty-five percent of respondents to the CGAP survey reported declining—or at best stable—loan portfolios in the most recent six months, reflecting the impact of the credit crunch. In addition, more than two-thirds of MFIs reported an increase in their portfolio-at-risk levels.

There are, however, strong regional differences, with MFIs in more integrated economies—particularly Europe and Central Asia and Latin America—reporting the largest impacts from the crisis.

Institutions in the Europe and Central Asia region have been hard hit by volatile currency markets, by the worldwide credit squeeze, and by a loss of confidence in their banking systems—shocks magnified by an accompanying economic downturn.

While half of the MFIs participating in the survey expected loan delinquencies to improve over the next six months, this optimism was tempered by the finding that more than 60% of MFIs expect to face liquidity pressures over the same period.

A majority of MFIs report that the liquidity drought is hurting, with smaller institutions suffering more acutely than their larger counterparts. However, according to another new publication from CGAP, “Microfinance Continues to Grow Despite the Crisis,” MFIs can still rely on capital provided by the 104 microfinance investment funds in the market. These funds have a total of $6.5 billion in total assets, a figure that grew a remarkable 35% in 2008.

Overall, CGAP does not expect the current crisis to spur a decline in assets under management at microfinance funds. However, growth is seen moderating to between 10% and 35% in 2009. Redemptions should remain low and will be compensated by new contributions from public and retail investors.

“The strong growth in assets at microfinance funds in 2008 is in stark contrast to the steep sell-off in emerging market funds last year,” said Xavier Reille, who led the survey effort at CGAP. “The focus by many public and private investors on both sound financial returns and positive social outcomes should continue to drive growth in assets at microfinance funds, albeit at a slower pace than the outstanding growth seen last year.”

Public investors, such as IFC (part of the World Bank Group) and the Inter-American Development Bank are ramping up their microfinance portfolios to support MFIs affected by the credit crunch. With the World Bank predicting that between 50 million and 90 million more people could be driven into poverty by the current global crisis, microfinance will continue to play an important part in ensuring that entrepreneurs can weather the storm and take on new opportunities when developing economies revive.