State of Microfinance in Eastern Europe and Central Asia

March 24, 2010    

In 2008, the microfinance sector in many countries of the Eastern Europe and Central Asia (ECA) region continued on a path of positive but slower growth, according to a new report jointly produced by CGAP and MIX. The effects of the financial and economic crisis were not felt in these regions until the last months of the year.

Despite ECA countries experiencing bank failures, the tightening of credit, a slowdown of economic activity, increases in unemployment and food prices, and decreases in remittances, microfinance providers continued to deepen their outreach in 2008 and increased their penetration rate by 2%. Preliminary 2009 figures for the microfinance sector in ECA countries show continued slow growth with high credit risk levels, negative returns, increased cost of funds, and stagnate outreach. However, a positive sign is that in many countries, microfinance institutions (MFIs) performed better than commercial banks in terms of delinquency levels, and in some countries the microfinance sector has even remained relatively unscathed.

From a global perspective, the ECA microfinance sector is relatively young, but in less than two decades of operations, it has become integrated with domestic and international financial markets, and as a result is facing challenges similar to those of mainstream providers during this financial crisis.

Benchmarking Report
Eastern Europe and Central Asia 2009: Microfinance Analysis and Benchmarking Report analyzes how MFIs performed and coped with heightened risks in 2008, exploring the following themes:

• Market structure
• Credit risk
• Currency risk
• Funding risk
• Policy trends

The report presents the state of microfinance services in ECA in 2008; it looks at the overall market structure as well as trends in outreach for the past three years. Key issues and recent developments in the policy environment are discussed, and funding trends and financial performance of ECA MFIs are analyzed. The report also looks at developments resulting from the financial crisis in some countries in 2009.

Looking ahead
The report acknowledges that further analysis and research is needed to address some pressing questions:

• How deep of a mark will the financial crisis leave on the performance of ECA MFIs?
• Will the microfinance industry see more active deposit mobilization by nonbank financial institutions and more microfinance-specific legislation on consumer protection?
• Will more nonbank financial institutions transform into banks to alleviate foreign currency exposure?
• Will there be a greater consolidation of the market as a result of smaller providers merging or going out of business?