As I argued previously, microfinance will not escape the impact of the financial crisis. CGAP is staging a virtual conference over the next three days on precisely this topic. Here are some of the highlights so far:
Results from the poll of participants:
- Most respondents thought that the financial crisis would have moderate to significant impact on MFIs (69% of MFI respondents, 74% of consultant/other respondents, 88% of donor/investor respondents).
- A similar percentage of respondents thought that the crisis would have a moderate to significant impact on their work.
- The most significant issue facing MFIs in the short and medium term will be securing funding (50% of MFI respondents, 62% of consultant/other respondents, 82.4% of donor/investor respondents). Respondents agreed that debt from international commercial sources (the private sector) would be the most difficult for MFIs to secure in the short and medium term.
...Many MFIs are dependant on financing from local and international banks. They face more pressure today than MFIs who have built a deposit base. Some are already seeing their banks withdrawing loan offers, cutting credit lines, or raising rates. Some banks are even asking for loan prepayment and offering to waive prepayment fees. Steep rate increases are being announced - from 250 basis points in Eastern Europe, to 450 basis points for top tier institutions in South Asia. While the immediate reactions have come from international banks, domestic ones may well pull back too...
George Staicu on Kosovo:
...the commercial banks are speculating the liquidity squeeze that MFIs are facing through imposing them tougher borrowing conditions (higher interest rates). Some banks are even “blackmailing” the MFIs by threatening them that the existing (but maturing) credit-lines will not be renewed / rolled-over...
Martin Holtmann from IFC:
Traditionally, microfinance has been a very robust asset class during economic stress, but we need to recognize that the industry is now much more integrated in the capital markets than it was before. Areas to watch are:
(1) Refinancing risks for MFIs that are mostly funded from external sources such as DFIs, MIVs and local or international financial institutions. While liquidity seems fine through the end of 2008, some organizations are likely to experience problems in refinancing their debt obligations through 2009, especially if they have accepted "hot money" from fickle investors.
(2) Liquidity risk for deposit taking institutions. Historically, deposit taking institutions have been more insulated from funding problems. However, in the current situation, there are likely to be (hopefully isolated) crises of confidence that could affect some MFIs.
N. Srinivasan from India:
One of the undercurrents is the question whether Microfinance loans (being = collateral free)are "sub prime"? Going by Banks' reactions,the SHG bank linkage programme does not seem to be affected as much as MFIs by the problems. However the SHG client outreach expanded by 18% only last year (compared 25%+ of previous three years). Since these loans rank as the least risky of the State directed credit portfolio, one would expect that banks in India would continue to expand these loans.
Poor clients who have nothing to do with internationally active financial sector are being asked to pay. New clients have been asked to put on hold their business plans by MFIs in many places. Interest rates are being reset. Till a clearer picture emerges, many clients would face uncertainy and might opt for high interest options from informal sources.
Veronika Thiel from the UK:
Support for MFIs from banks, always more on the philanthropic rather than the commercial side, will dry up. Government support is woefully inadequate in a country where microfinance is unlikely to become financially sustainable. At the same time, banks reduce lending to microentrepreneurs as credit scoring becomes tougher, and personal credit lines dry up. What we have seen, anecdotally, is an increase in applications with MFIs for support, not all of which can be granted due to liquidity constraints.
Ranjan Kumar from India:
MFIs are facing a hit on their spread (net operating margin) due to effect on all the three major cost heads:
1. Creeping cost of funds: Due to the present crisis, liquidity is drying up, cost of borrowings are escalating.This is leading to increase in financial cost ratio of nearly all the MFIs.
2. High inflation: Low liquidity is also leading to unprecedented level of inflation, which is wiping out purchasing power of people. To counter this salary have to be correspondingly increased. Since microfinance is a labour intensive enterprise, it will jack up the operating expenses ratio.
3. Higher delinquency and default: The present crisis is leading to slump in overall demand which may lead to reduction or even nil returns on micro enterprises which could increase delinquency and default. This would require the MFIs to increase their loan loss provisioning.
Lauren Burnhill from ACCION:
Much as the impact of the crisis on mainstream economies and financial sectors continues to spread unevenly, so the impact of the global meltdown on microfinance varies by region. Eastern European MFIs seem to be experiencing deposit runoffs or reductions, whilst Latin American MFIs are reporting more cancelled / non-renewed lines and/or delayed disbursements. Asia and Africa each face different challenges as well. One thing seems certain though, despite falling oil prices, commodity prices remain high, credit has been sharply curtailed on many levels and life at the bottom of the pyramid is more squeezed than ever.