Focus on Deposits and Consumer Protection: A Silver Lining to the Crisis?

May 28, 2009    

Article based on a podcast with CGAP CEO, Elizabeth Littlefield.

The world’s headlines are filled with tales of the financial crisis—about bank bailouts, mortgage market meltdowns, liquidity shortages, and job losses. Recently, the Wall Street Journal reported on the launch of the latest liquidity fund (Asian Nations Unveil $120 Billion Liquidity Fund). On the other hand, more conservative institutions that have long stuck to the basics are trying to get the word out that their cautious approach has paid off. In May, The New York Times ran the headline We’re Dull, Small Banks Say, but Have Profits.

It has become clear that microfinance institutions (MFIs) are not immune to the financial crisis either. Local headlines in India declare: “Banks take a hard look at lending to microfinance firms” because they fear that funding is drying up. In this context, we asked CGAP CEO Elizabeth Littlefield how MFIs are handling this crisis.

What are the latest data you’re seeing out of Washington on the financial crisis?
The data are changing daily. Sadly, the numbers keep getting revised downward. What’s happened, it seems to us, is that the financial crisis became an economic crisis, and is now quickly becoming an employment crisis. The latest we’re hearing is that GDP is actually going to contract in 2009, down 1.7 percent. Trade is falling for the first time in an awfully long time; it’s dropping 6.1 percent in 2009.

We hear from the World Bank that the financial crisis is going to trap some 50 million to 90 million people in poverty who wouldn’t have been there otherwise. This is on top of the 130 million to 150 million people who won’t be able to move out of poverty because of the food crisis that started early last year. All in all, the numbers just keep getting worse and worse.

Could you talk about the effects you’re seeing on clients of MFIs?
Absolutely, that’s core to what we care about at CGAP. We did a survey of MFIs last summer asking how the food crisis affected their clients. And then this April, we sent another survey to MFIs that asked how their customers have been affected by the various current crises. That survey prompted more than 400 responses.

Reports from these two surveys say that food consumption on the whole is down among poor customers. Sixty-seven percent of MFI managers report that their customers are spending significantly less money on food—particularly in South Asia and Sub-Saharan Africa. We’re also hearing that household conflicts are up in places like Mauritania. We’re hearing that women are working longer and longer hours in Honduras and elsewhere. And we’re hearing of increased anxiety and aggressiveness on behalf of customers, particularly vis-à-vis loan officers coming to collect repayments.

Indeed, we’re hearing that repayments are down across the board. Sixty percent of MFI mangers are saying that repayment rates are down. That’s particularly acute in Eastern and Central Europe.

How are MFIs likely to be affected?
Clearly when you’re seeing customers suffer and repayment rates down, the financials of MFIs are being directly affected. Overall, roughly 65 percent of MFI managers reported that their portfolios had shrunk, and almost 70 percent reported that portfolio at risk was up. This is particularly acute in Eastern and Central Europe, where almost 90 percent of MFI managers said that their portfolio at risk had gone up in the last couple of months as a direct result of the financial crisis.

MFIs are worried about liquidity. As we know, many institutions have become very dependent on cross-border funds—to fund the quite dramatic growth of the last couple of years. Those institutions that were expecting their financing to be rolled over by financial institutions that are, themselves, suffering from the liquidity crisis are really getting worried. Roughly half of the respondents reported liquidity concerns today, and a bit more than 65–70 percent reported that they’re worried about liquidity in the future. This is not surprising. We’ve long hoped and advocated for MFIs to become licensed to mobilize deposits so that they can become more fully integrated into their domestic markets. So the overdependence on what have turned out to be pretty fickle international capital flows is really coming home to roost.

It’s pretty obvious that savings-based institutions, because they have a reliable source of funding, are not facing the same kinds of liquidity concerns or constraints as the nonsavings-based institutions are finding. Only about 42 percent of them say they are worried about liquidity going forward compared to 56 percent of the nonsavings-based institutions.

However—and this is a statistic that we don’t fully understand—it does seem that savings-based institutions on the whole are showing higher increases in portfolio at risk in the last couple of months. Around 76 percent of savings-based institutions say that portfolio at risk is going up, whereas only about two-thirds of nonsavings-based institutions are saying that. We don’t know exactly why that is. We need to look into that further.

How do you see all of this playing out in the next two to five years?
I certainly think that 2009 will test the broadly held assumption that microfinance is resilient to shocks and that it can maintain very high levels of asset quality during periods of strife. I think microfinance will emerge pretty strong—chastened perhaps, but strong. Many have talked about consolidation in the sector and mergers and acquisitions of weaker institutions into stronger ones, but I don’t think we’ll see as much of that as some expect. I think it’s culturally just a difficult thing to do in the broader financial world as well as in the microfinance world.

But I think one positive outcome from this “chastening” will be an additional and enhanced focus on customers: on consumer protection, on responsible finance, back-to-basics, communicating clearly with customers, transparent pricing and procedures, and so on.

A second welcome result is a renewed focus on the importance of savings, both as a critical service for poor customers, and also as a critical element in any institution’s liability structure.

What do you hope to see in terms of MFI responses to this crisis?
My hope, again, is that this would give added impetus to savings mobilization, and cause more institutions to recognize that having a diverse funding base means trying harder to shift toward deposit mobilization as a funding strategy. So we’re hoping that MFIs will make the extra effort to push to become licensed to mobilize deposits.

For institutions that already mobilize deposits, I hope that there will be added impetus to broadening the range and the diversity of savings products offered and to focusing on new marketing strategies, perhaps social marketing and other innovative strategies to bring in more savings customers. Also, I’m hoping that MFIs themselves will focus on responsible lending, transparent pricing, and consumer protection more broadly.