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, the report, Microfinance Banana Skins 2009 (52 pages, PDF), is based on a survey of more than 400 practitioners, investors, regulators, and analysts in eighty-two countries. It 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 — stemmed from the recession: credit risk (number 1 on the list), shortages of liquidity (number 2) and funding (number 6), and declining profitability (number 12). In contrast, in a 2008 survey credit risk was number 10 on the list of concerns, liquidity number 20, funding number 29, and profitability number 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.'"
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