Research & Analysis

The Global Financial Crisis and Its Impact on Microfinance

Compared with other financial institutions, microfinance institutions (MFIs) have emerged relatively unscathed from the financial crises of the past few decades. During the currency crises in East Asia and the banking crises in Latin America in the 1990s, institutions serving poor customers generally performed better financially than mainstream banks. At that time the clients and microenterprises financed by MFIs were not integrated into local banking and currency markets.

Although it still has deep shock-resistant roots, microfinance now has many more links to domestic and international financial markets, and as a result today’s financial crisis is more likely to infect its institutions. Many may suffer, and some may fail, but the sector has built sound foundations.

Many strong institutions and the vast untapped market of creditworthy clients will ensure that the microfinance sector will survive the setbacks brought on by the current financial crisis. The effects of today’s global crisis are likely to be more complex, deeper, and more difficult to predict than in the past. What is clear is that the medium and longer term effects of a worldwide recession are likely to be punishing for many poor people and the institutions that serve them.

Anecdotal evidence from different markets suggests that as the consequences of the crisis ricochet around the globe—credit crunch, currency dislocations, job losses, and falling demand—MFIs are being impacted in very different ways. How institutions are affected will depend on factors such as the structure of an institution’s liabilities, its financial state, and the economic health of its clients.

So far, policy makers have mostly focused on macro-level measures. And in some regions like Latin America, they are taking a cautious wait-and-see attitude for the first semester of 2009, with more clarity on their steps to be expected later this year.