With the current global economic crisis going on, people are asking many questions about how microfinance will handle the situation, and to what degree MFIs will be affected. As I was thinking about this, I asked myself “am I making the right decisions when I lend?”  I am always interested in learning about new lending platforms and usually just give each one of them a fair trial and then determine which ones I like based on user experience.  I realized that most of my decisions on who to lend to are based on how easy it is to lend and how intrigued I am by the entrepreneurs story.  However, although this makes things fun for me, it is not always the most effective solution.  To piggyback on Drew’s post discussing interest rates,  I have found some interesting posts that lenders can consider when making decisions:

-Ryan Calkins, over at SeaMo, recently made a post entitled “Nine Questions to Ask Every Microfinance Institution” which discusses some questions that the Grameen Bank has come up with to determine which MFIs are good investments.

-David Roodman discusses interests rates and lending in his blog post “When is lending just?”

It seems just about every week, a journalist somewhere in the world will write a piece on microfinance and the effects the worldwide credit crisis will have on the sector. Most journalists and experts alike are optimistic that microfinance will weather the storm and could even be “the answer” to the international investment predicament we are slipping further and further into (find the article here: Raksin, Huffington Post). An article by Allianz’s James Tulloch, “Can Microfinance Beat the Credit Crunch?” presents one of the more realistic outlooks for microfinance in 2009. Though it strays from the common “nowhere but up!” optimism, it offers a silver lining to the crisis’ impact on microfinance worldwide;

The downturn could [force] MFIs to grow less aggressively and focus on consumer protection, transparency, and governance. “Are we building a ‘bubble’ of over-indebtedness? If so, then a slowdown in growth will provide the opportunity to reconsider the basics of underwriting,” said Cecelia Beirne of MicroVest at the CGAP event.

There is no doubt that microfinance is a pretty resilient investment alternative, and the growth of MFIs (microfinance institutions) through the Asian and Latin American economic crises of the 1990′s and early 2000′s is an encouraging sign that microfinance may reside just below the economic current that can affect the regions of operation.  Today, the sector has not been greatly affected by 2008′s volatility and economic decline. Though past performance is encouraging, it is a different sector today than it was three years ago, not to mention 10-15 years ago. In that period, microfinance investment, exposure, and commercialization has increased exponentially (with projections that at one time had predicted private investment in microfinance to increase from $2B USD to $20B USD by 2015; IAMFI).  Let it be known that I, like the many that are optimistic that microfinance may even benefit from the credit crunch, are cut from the same cloth… we all want to microfinance to succeed in its efforts to alleviate poverty worldwide. I also know there are many out there, like myself, that think microfinance is so close to the tipping point of becoming a mainstream issue and investment avenue. This feeling can lead to a concern that the progress microfinance has made (and deserved) in recent years may take a serious hit because of the current crisis. I personally do not find this concern to be a very valid one. The concerns over the impact of the financial crisis can essentially be split into two camps; the financial concerns and the ideological concerns.

Financially speaking, I do believe funding will become more expensive and harder to find in 2009 (even though investment funds have heralded microfinance and healthcare as the two sectors with the most opportunity… seeing an opportunity and access to the capital to pursue that opportunity are two very different things). Realistically speaking, I think individual microfinance institutions will have considerable woes in 2009.  However, ideologically speaking, I do not believe microfinance will be hurt by the crisis, and in that regard, the progress and attention gained over the past few years will hardly dissipate (just seeing investment funds spotlighting microfinance on par with a sector like healthcare is something quite incredible). Financially speaking, investment in microfinance will likely focus more on the larger, less speculative, and less aggressive MFIs. This will pose serious problems for the majority of MFIs that are still in their nascent stages of operation. Ideologically speaking, the crisis hasn’t hurt people’s interest and advocacy for microfinance. October 2008 was quite possibly the most volatile and economically disruptive month in the US over the past 50 years. However, it is interesting to note that October 2008 was also the month that Kiva raised the most in a single month in the history of its operation to that point (which was then surpassed by November and December of 2008).

The financial concerns, though significant, and the continued ideological progress could turn out to be a microfinance idealist’s dream. 2009 could be a year in which the commercialization and over-aggressive growth of microfinance wane, but attention and interest grow… which would certainly make 2009 an interesting year for microfinance– 2009 could be the year that 2008 catches up to microfinance, but the “gathering clouds” may certainly have a “silver-lining.”

For those of you who are interested in microfinance (I hope everyone reading this blog), there’s an article on the Huffington Post written by Alex Raksin worth reading. It came as a result of discussion at the World Economic Summit in Davos and talked about how microfinance may be one of the few areas of growth in this worldwide economic crisis we’re experiencing.

Where should leaders look to find a new “transformative vision for international finance”?

The answer [...] seems to me to be obvious, even though it’s admittedly in one of the last places mainstream economists would have looked before the crash: to microfinance.

Although microfinance was until recently derided as little more than an idealistic gamble, it embodies, more than any other financial system today, the very best ideals of early Western capitalism.

What began as a philanthropic movement to empower the working poor by Nobel Peace Prize recipient Muhammad Yunus, has evolved into a new class of social entrepreneurs who have shown that capitalism, especially when driven by creativity and social conscience, can generate significant returns in every sense of the word — financial, ecological, ideological and cultural.

Head over and read the whole article.

Do you think the global financial crisis will hurt microfinance? Or do you think microfinance will experience strong growth during the downturn?

Time magazine has an a great interview with Mary Ellen Iskenderian, the CEO of Women’s World Banking.  In the article, Ms Iskenderian discusses the current global financial crisis and the future of microfinance, including a few new innovative ideas that the Women’s World Banking is developing.

I was reading a good article on livemint.com called “Big Microfinance Firms Taking Over Clients of Smaller Players,” and in it Vikram Akula, the founder and CEO of SKS Microfinance, discusses how smaller MFIs are having a hard time getting funding, so SKS is helping out a lot of their recipients:

“Banks are lending only to large MFIs. We are in a strong position. We are holding discussions with MFIs who are facing strain and helping them by taking over their clients,”

Since there are so many small MFIs out there who are having trouble finding funding, why do MFIs run out of people to loan to?  It has happened multiple times that I have gone to microfinance lending platforms and have not been able to loan money.  If these small MFIs in India are having trouble getting money for their recipients, why don’t they reach out to these organizations?  The article also mentions that there is a demand for 55 billion dollars while India currently only provides about 5 billion in microfinance loans.  If the people are out there, wouldn’t it just be a matter of connecting them to the right organizations?  It seems like there are plenty of lenders ready to donate to individual recipients, but not so many who are willing to donate to MFIs. What if there was a microfinance lending platform that was similar to Kiva and Microplace, but instead of donating money to individual recipients, you could donate to different MFIs?  Lenders could give loans to MFIs, who would in turn give loans to entrepreneurs.  The loans would have to be for a longer term than normal since they would most likely be bigger loans.  The model could be either non-profit or provide a return, depending on the business model, and it could help smaller MFIs who are having a harder time coping with the current economic crisis.  Of course there would be pros and cons to lending platform, but I think that if they were weighed out, the pros would win.

Learn more microfinance lending platforms.

Last month Ryan Calkins started a discussions about whether or not the global financial crisis will hurt microfinance.  CGAP is currently hosting a Virtual Conference on the Financial Crisis and I’ve seen some pretty interesting articles to add to the debate from last month:

• Crunch time for microfinance ctd
• Microfinance and the financial crisis
• How the credit crisis effects microfinance