CGAP's Virtual Conference Highlights: How will microfinance weather the financial crisis storm?

December 1, 2008    

On November 18-20, CGAP’s virtual conference welcomed over 600 microfinance institution (MFI) managers, central bankers, investors, and advisers from 34 countries. The 150 comments submitted painted a vivid and powerful picture of how the financial crisis is impacting MFIs and their poor clients. The dominos of the crisis—credit crunch, inflation, currency dislocations, and global recession—are hitting microfinance in very different ways, depending on location, funding structure, financial state, and the economic health of clients. While many places seem unaffected today, there is little doubt that there will be impact: integrating microfinance into the mainstream does have costs.

MFI managers from Mongolia, India, Rwanda, Mali, and Pakistan reported on clients hurt by inflation and the early signals of the economic downturn: job losses in the United States and Europe have already led to fewer remittances from relatives abroad. Client purchasing power has gone down and cash needs have gone up, causing savings to be withdrawn and sometimes straining repayments. Lessons from previous financial crises show how some nimble clients might even benefit from this situation if, for example, they can adapt their inventory to meet newly frugal customer demands. MFIs whose customers sell commodities tend to fare better than MFIs that provide consumer finance to salaried workers or cash-flow-based small business lending. On the whole, pressure on customers is expected to translate broadly into higher portfolio at risk.

The most immediate concern is the effect of the global liquidity contraction on the cost and availability of funding to nondeposit-taking MFIs. Money from both domestic and international banks is tighter, slower, more conservative, and more expensive. Anecdotal evidence cites rate increases from 1 percent to 4 percent in Latin America and South and Central Asia, with some banks pulling out altogether. MFIs are anxious about meeting refinancing needs when loans from foreign banks and microfinance investment vehicles come due in 2009. Those borrowing in foreign currency fear the double hit of both increased interest rates and the costs of having to pay in hard currency with recently weakened local currencies. Declines in MFIs’ net income from foreign exchange losses were cited in the 7–43 percent range in the past few years, with one Latin American MFI reported to have lost 75 percent in a single year. This inflation means operating costs are rising, and these costs can’t always be passed on to clients.

Institutional investors in microfinance are not seeing significant retail redemptions, but they do expect fundraising in the coming months to be a tougher sell. Retail investors are cautious and loath to realize losses in existing investments to make money available for new microfinance investments. Development finance institutions have seen demand for funds from MFIs rise dramatically, and many are up to their lending limits to MFIs. Several are planning a joint emergency liquidity facility, which would be welcome if appropriately structured.

The strongest message from the conference was that deposit-taking MFIs are well-insulated from refinancing risks. The many savings-led African institutions have little need for external funds. That said, most deposit-taking MFIs mobilize larger deposits from nonpoor customers, and these may be more sensitive to the economic downturn. In a world where communications are global and news travels fast and far, there is also fears that bank failures in the United States and Europe will lead to a loss of confidence in local banks and a run on deposits. Large-scale savings withdrawals have occurred only in isolated cases where other factors were already at play beyond the financial crisis.

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