Posted on July 10, 2009

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Microfinance Industry May Be Stressed by Recession, Report Finds

The global microfinance industry may not be as insulated from the economic mainstream as traditionally thought, leaving it vulnerable to declines in growth and funding due to the global recession and declining investor confidence, a new report from the London-based Centre for the Study of Financial Innovation (CSFI) finds.

Funded by the Citi Foundation, the Consultative Group to Assist the Poor, and the Council of Microfinance Equity Funds and based on a survey of more than four hundred practitioners, investors, regulators, and analysts, the report, Microfinance Banana Skins 2009 (52 pages, PDF), found that the recession is presenting the microfinance industry with its first major stress test since it emerged in recent decades as a fast-growing provider of small-scale financial services to the world's poor.

According to the study, many of the main risks — or banana skins — stem from the recession: credit risk (no. 1 on the list of concerns), lack of liquidity (no. 2) and funding (no. 6), and declining profitability (no. 12). In contrast, a 2008 survey had credit risk at 10 on the list, liquidity at 20, funding at 29, and profitability at 22.

Respondents from every country surveyed reported that financial and economic conditions had worsened in the past year and were affecting local microfinance institutions (MFIs), with regional variations. In particular, those surveyed were concerned that the recession would lead to increased political interference as governments attempt to control the availability and cost of microlending, or even encourage borrowers to default. However, the report noted that MFIs have traditionally shown resilience to stress and could emerge from the recession with a better reputation for looking after their customers than mainstream banks.

"These findings turn the earlier survey on its head," said CSFI senior fellow David Lascelles, who edited the report. "Last year's result reflected the traditional view that microfinance operates in a world of its own with abundant funding and loyal customers. But the crisis has shown that it is also exposed to the shocks of the 'real economy.'"

“Economic Crisis Presents Microfinance With Stress Test.” Centre for the Study of Financial Innovation Press Release 7/08/09.

Primary Subject: International Affairs/Development
Secondary Subject(s): Economic Crisis
Location(s): International

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