Crunch time for microfinance - final thoughts


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CGAP ran a virtual conference last week on microfinance and the financial crisis. (See their website for details and an earlier post on the first round of emails from the conference.) There was a ton of interest in this topic, reflected in the extraordinary volume of communication from all over the globe. To make things easy for you, I pored over the emails to bring you more highlights from the first half of the conference, which focused on MFIs and their clients:

Daniel Mensah from Ghana:

I am a member of the credit union movement in Ghana, West Africa. At a recent meeting of some of the credit union executives, it was reported that the number of members taking loans or withdrawing their savings is going up. Among the many reasons given was that the financial crisis has reduced the inflow of remittances from citizens/relations abroad and so many members now have to fall on their savings or take loans.

Martin Holtmann from IFC:

Generally speaking, I believe that the DFIs ought to focus on helping to mobilize local funding for MFIs through instruments such as partial credit guarantees, and that they need to encourage MFIs to mobilize local deposits. In the long run, that will be the soundest and most sustainable way for microfinance to grow.

N. Jeyaseelan from India:

MFIs and the clients are definitely affected due to the current global melt down. Because of the liquidity strain experienced in the Indian banking system, credit to MFIs have been blocked and the MFIs are not in a position to deliver the credit in time to the clients as planned.

Mark Flaming:

It seems reasonable to expect that the impact of the current crisis will fall hardest on non-deposit taking MFIs that fund themselves primarily with foreign debt.  Funding will be dearer and scarcer.  And these MFIs may well struggle to produce the high retained earnings they have relied on in the past years to leverage additional debt to fund growth.

Julie Abrams from Microfinance Analytics:

I have seen a number of examples where an MFI's income was seriously and materially affected specifically resulting from currency fluctuation losses. Here are some specific cases in which an MFI's net income dropped directly as a result of foreign exchange losses in a single year, and there may well be many others:

  • Two Eastern European MFIs: a 14% drop and a 43% drop
  • Four Latin American MFIs: net income declines of 7%, 10%, 10%, 14%
  • A Latin American MFI: a 75% decline in net income due to FX losses in a single year.

Franz Gomez-Soto from MIDAS (USAID - Colombia):

Following the creative destruction thinking, I believe that there are some benefits from the ongoing financial, and soon economic crisis.

1. The liquidity problem may become the right incentive for regulated MFIs to develop and launch more attactive savings products. The non-regulated MFIs may decide to become regulated institutions in order to get a more stable source of funding.

2. The funding issue will reduce the MFIs loan portfolio rate of growth, which reduces the growth risk. This type of risk arises from an MFI experiencing a rapid growth without having a strong internal control system which ultimately leads to a greater delinquency rate.

3. Under a period of crisis, lending should be done in a a more conservative fashion. So MFIs will need to improve their screening system.  Moreover, they will need to improve their MIS in order to have a more detailed information to keep track of the situation. In summary, this is a good time for improving their risk management system.

Kate McKee from CGAP:

In some markets (not just India but also Morocco, Nicaragua, Bosnia, etc.), the market-leader MFIs have been growing at very high rates in recent years.  At the microfinance conference for institutional investors in London late last month, CEOs or Board Chairs of four leading MFIs (from Nicaragua, Bosnia, Georgia and Uganda) were questioned about the impact of the financial market turmoil and their growth plans. 

All but one stated that they had dramatically scaled back growth plans, for reasons of tighter liquidity, yes, but also out of concern that local markets were getting overheated, delinquency (and perhaps over-indebtedness) was going up, systems needed consolidating, reserves needed building, etc.  I the case of BANEX (the newly licensed microfinance bank in Nicaragua, formerly FINDESA), whereas growth last year reached 75%, the Board had met this year to scale back growth plans to around 20-25%.  At a minimum, we might be able to agree that MFIs planning continued rapid growth should stress-test their models and assumptions to see if it is feasible, and even if the answer to that question is "yes," to see if it is wise.

Mohammed Khaled, CGAP Representative in West Asia North Africa:

We have a similar situation in our region. I talked to several CEOs of MFIs in the region who said that they did not feel the impact of the crisis on their MFIs YET and the financing for 2008 is going according to plans. This could be because very few MFIs in our region (Morocco, Jordan, Tunisia) are commercially financed (mainly through local currency loans). Our MFIs are mainly not for profit credit only organisations so there is issue of Savings is not on the screen there.

Larry Reed, formerly with Opportunity International:

...We found that group meetings took in more value during these times of crisis.  They became times when clients could discuss what was happening in the market and how they were responding.   In this way market knowledge passed from the most savvy entrepreneurs to the rest of the group much more quickly than any training program we could have come up with.  In some cases when the fluctuating prices and devaluation got so bad that the MFI had to suspend lending, the groups kept meeting and became the place that clients shared their secrets for surviving the crisis.

Gerelmaa Yu from Xacbank, Mongolia:

Many of the clients of cooperatives are herders, who have income from selling of cashmere, meat or skin, market price of which has declined during the last months. With yearly inflation of around 30% the living expenses of herders like all people increased significantly. In addition the liquidity shortage experienced since April of this year in Mongolia has led other banks to stop or restrict loan disbursements in remote areas. This all influenced defaults in loan repayments of FC borrowers and automatically will affect the bank's whole sale loans to FC. I think under this conditions every organization and every body needs to tighten the loan growth and the operating expenses to overcome this situation.

Chimaobi Agwu from Nigeria:

In Nigeria with about 800 microfinance banks, we (the MFIs) are all more or less unperturbed by the global happenings due to the viable policy environment instituted and monitored by the Central Bank of Nigeria and the fact that we are all savings and deposit led with less dependence on government, bank and external funding.

Els Boerhof from Goodwell Investments:

Group loans have proven to be an excellent mechanism to manage portfolio quality. If a borrower cannot repay, the other group members will settle the bill. Also, the group members seem to know pretty well who they want to invite in the group and who not. When the crisis hits groups as the ones I mention above, what will happen? Will problems submerge later because a loyal group is hiding internal problems too much? Or will they be able to settle the problem because they are a group? Are MFI's who provide individual loans in a better position to monitor portfolio quality because repayment problems become visible immediately?


Ryan Hahn

Operations Officer

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