Has the Global Financial Crisis Impacted Microfinance?
At the start of the global financial crisis in 2007, the World Bank questioned the impact of the crisis on microfinance institutions and their clients. Their survey found that loan portfolio qualities were deteriorating and urban low-income clients were having difficulty repaying their loans. Some experts found this surprising as microfinance was considered to be counter-cyclical; as microfinance clients seemed to be more flexible in changing their local conditions and MFIs were less susceptible to international financial markets. However, a new study by the International Monetary Fund (IMF) methodically examined the data and tracked the impact of the financial crisis on the microfinance sector and found that lending was indeed constrained by fewer borrowing opportunities. It also noted that the economic slowdown negatively impacted the quality of assets and profitability of MFIs, while increasing the relatively high interest rates that MFIs already charged their low-income customers. Moreover, MFI performance was found to be correlated to both domestic economic conditions and to international capital markets.
Yet, the nature of the relationship between MFIs and the global recession was certainly less than monolithic. MFI institutions are far from homogeneous, and the various NGOs, traditional banks, rural banks, cooperatives, non-banking financial institutions, and credit unions who participate in the microfinance industry responded to the changing economic conditions in different ways. Banks and non-bank financial institutions, for example, were shown to be most affected by the extraneous economic environment, and generally speaking suffered more than their brother and sister institutions. Rural banks, on the other hand, displayed no such empirical links, and appeared relatively isolated from such external developments.
Along with these eccentricities, other factors displayed statistically significant correlations. There is some evidence, for example, that MFIs operating in Central America, the Caribbean, and Eastern Europe have a higher level of systemic risk than those located in other parts of the world. Likewise, there is some evidence that for-profit institutions and younger MFIs may have elevated levels of risk as well.
While microfinance has its detractors, the report noted that microcredit in some low-income countries has contributed a significant portion to gross domestic product (GDP) and to total credit to the private sector, so that any changes to microcredit could have macroeconomic implications. The report further stated that to sustain a dynamic microfinance sector, certain measures have to be implemented to help mitigate external and internal risks. The researchers thus call for strengthening legal frameworks, using credit bureaus, improving corporate governance principles, and presenting timely, standardized reporting.