Will the Global Financial Crisis Hurt Microfinance?

Published by Ryan Calkins, | 10 Oct 2008 at 09:12 am

Author's Website: http://www.seattlemicrofinance.org/

14 Comments General

14 Responses to “Will the Global Financial Crisis Hurt Microfinance?”

1. Drew Meyers on 10 Oct 2008 at 4:09 pm #

   I personally don’t think there is going to be anything, microfinance included, not impacted by the global economic crisis. Access to capital is tight and consumers are weary of spending money — which leads me to believe microfinance funding from both capital markets and from sources such as Kiva/Microplace is going to become harder to come by.

2. The Impact of the Financial Crisis on Microfinance | My Thoughts on Microfinance, Life, Web 2.0, Blogging, and Business on 10 Oct 2008 at 4:48 pm #

   [...] experiencing a financial crisis worldwide right now. Ryan Calkins asks the question “Will the Global Financial Crisis Hurt Microfinance?” over at myKRO.org — if you have an opinion or thought you want to share, leave a [...]

3. Jerry Ostradicky on 11 Oct 2008 at 7:31 pm #

   Everyone will be affected by the current financial crisis, however, I don’t think that microfinance will be affected as much as everyone thinks.
   In terms of P2P lending platforms, I think Kiva will have a harder time raising additional money, but I don’t think that the situation will get any worse. I don’t think that people who have donated money to Kiva will withdraw it. Unless someone is in dire financial need, I think that most people will keep recycling the money that they have already put into Kiva.
   Microplace I think might actually see growth. Although people are wary about investing right now, people will find a less volatile investment rather than just sitting on their money. Instead of putting money into the Dow, people will look to diversify, and if Microplace (or any other P2P lending platform that offers a return) continues to have a steady ROI, I think they can capture a fair share of the investors.
   In terms of loan repayment, I think that some microfinance recipients will be affected, but I think that the majority will continue to succeed. Most of the business people start with their loans are day to day goods. People are selling food and clothing, not ipods and cruise packages.
   The one aspect of microfinance that I think might get dinged the most is the operational costs of MFIs. Most people are willing to donate money to people, but it is harder for MFIs to get money because it takes a lot more money to show something. I think that it will come down to the big donors. They might be more apprehenisve about donating in a bad economy, but at the same time, they are already successful so they may continue to donate the way they did before the financial crisis.

4. Kayla Villnow on 11 Oct 2008 at 8:17 pm #

   Just thought I would throw in a few observations that I have made from MF on the ground level.

   BEFORE we hit the current financial crisis as a country, the same which has now translated into a global crisis, the US economy was still not in great shape. It was at that point several months ago now that (at least here in the DR/Haiti) our associates begin to feel the pressure

   The economy of nearly every Caribbean county is very closely tied to that of the US. As gas prices spiked earlier this year, so too did they in the Caribbean. In the DR alone, gas can cost upwards of $6 USD/gallon, and this is in a country where the minimum wage is roughly a $300 USD allowance per month. Increased gasoline and diesel costs led to increased cost of transportation for meats, fruits, vegetables, transportation, construction materials, etc.

   So how does this affect the associates on the ground level? Micro entrepreneurs participate in micro economies, which are in part fueled by micro loans. IHere is one example: in the DR, costs for cement doubled, costs for iron increased significantly, costs for sand increased— the result was an indefinite hold put on innumerable construction projects. For a country where tourism brings in more money than any other industy, and where growth of facilities to support tourism is necessary, halts on construction projects is bad news for all. This one part of the economy resulted in losses for many of our associates– where there is construction, there are construction workers who need to eat and drink, and whom are being paid something with which to buy food and drink. When the construction stopped, the workers were fired, and every associate who used the construction sites of new home developments, new resorts along beachfront property, etc. lost the opportunity to sell their goods to a buying customer. These sites were good fuel for used/new clothing sales, small food stands, fruit stands, and beverage carts—all very successful micro-businesses here in the DR/Haiti.

   Furthermore all microentreprenures who sell goods, as opposed to home-grown agriculture, have faced enormous increases in transportation and selling-costs. Busfare to market or port locations where clothes/shoes/products are bought at discount increases, the cost to transport good back to their home location increase, and consequently the profit margin of each micro entrepreneur decreases.

   These are all things that happen on a large scale and with wider scope of course, but they illustrate how the downfal of the US economy began to affect microfinancing on the ground level some time ago.

   To date I have not observed any significant operational changes due to the recent crisis, however I will stay tuned and will be happy to share any developments on this blog.

   To both Jerry and Ryan, thanks for bringing up an interesting and pertinent topic!

5. Drew Meyers on 11 Oct 2008 at 9:07 pm #

   Ryan-
   You know, you haven’t yet offered your own opinion on the subject

6. Dave Schappell on 12 Oct 2008 at 9:40 am #

   1) I think that MFI’s will find it increasingly difficult to generate donations and other charitable capital, if the economy continues to worsen — I don’t think that can be doubted. I don’t have access to research on past recessions, but I’m positive that all charities will suffer.

   2) That said, I think that MFI’s that have built their organizations to be sustainable (i.e. grown large enough to generate positive financial returns, charged enough to cover their costs, and are located in areas with sufficient growth opportunities) will be much less affected by the economic situations. Because, their clients will largely be unaffected by the broader market issues; so, if they have the capital already (i.e. aren’t largely dependent on donations), I’d think that they’d be much more likely to not only survive, but possibly prosper during these times… as they have been to date (i.e. MFIs like SKS, Bandhan, and others)

7. Bhagirath Iyer on 13 Oct 2008 at 2:44 am #

   As an integral part of the financial system of a country, microfinance is bound to be affected by the present financial crisis, which is threatening to trigger an economic recession even in India. The effects, I believe, will be visible in the following ways:

   1. MFIs will find it difficult to borrow from banks and would have to revise their Business Plan targets downward. This is not because microfinance is considered a risky business (MFIs do lend to sub-prime customers, after all!) but because of the overall sentiments in the market, which makes any lender prefer liquidity to investing his/her funds. Large corporates are equally likely to be affected by this market sentiment-induced credit crunch.

   2. MFIs seeking equity investment or donor funds from abroad will definitely be affected as not many investors would like to invest now, in an uncertain economic environment.

   3. If the crisis triggers a recession leading to loss of jobs, MFIs may also face a situation of default on some loans. This is not unlikely, as low-income households in India have at least one person dependent on casual wage labour, mostly in the construction industry or other similar “brick-and-mortar” companies, which are likely to be affected by recessionary conditions in the economy. A loss of job affects the household income and the effect of this is likely to be seen even in rural areas, where most households have at least one bread-earner engaged as a migrant labour in cities. MFIs may see a rise in demand for consumption credit, which is not “bad” inherently, but is more risky and should be given out cautiously.

   MFIs are, however, likely to recover easily from the financial crisis soon, provided that it does not evolve into a full-blown recession.

   My advice to MFIs: Be cautious. Be firm. Be transparent in you operations. Be sure to maintain your relationship with your customers.

8. Michelle Grocke on 15 Oct 2008 at 9:29 pm #

   I think that we have to keep in mind what got us into this financial mess – greed, consolidation of wealth, unsustainable and unbalanced development…in a nutshell too many people were focused on short-term growth and investment.
   We are now in a rebuilding phase, and this time around we have to ensure that we are building from the bottom up and are placing the emphasis on long-term development, growth and stability. The 1.4B billion people living in extreme poverty are merely sitting on the sidelines of this global economic crisis – the more we invest in Microlending, the more individuals will be working toward bettering our economy as a whole.
   With that said, I think it should be noted that poverty leads to instability, it leads to insecurity and it threatens U.S. interests. In this time of financial instability, I think our efforts should be even more invested in those people who need it most in order to ensure that this does not happen again.

9. Leslie Forman on 20 Oct 2008 at 12:01 am #

   I agree with other commenters that it will be increasingly difficult to generate donations for microfinance organizations. However, I found this excellent BusinessWeek interview with Muhammad Yunus, in which he says that actual microfinance portfolios are much more stable than those of larger financial institutions, because their assets are real. http://feedroom.businessweek.com/?fr_story=8ab72ceaec934d886b2205233d23e47534081cdd” rel=”nofollow”>Here’s the video.

10. Global Financial Crisis And Its Effect On Microfinance | myKRO on 20 Nov 2008 at 5:58 pm #

    [...] 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 [...]

11. Is Microfinance Going to Be an Area that Sees Growth During the Financial Crisis? | myKRO on 29 Jan 2009 at 11:10 pm #

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12. vivek kumar on 15 Feb 2009 at 11:51 pm #

    i am a ‘masters in social work ‘ student. previously i was planning to join a microfinancing institution. given the econommic meltdown , should i still go for it or i should head for any government funded institution?

13. Jerry Ostradicky on 24 Feb 2009 at 1:45 pm #

    Hi Vivek,
    Microfinance Institutions (MFI) are definitely getting affected, but I don’t think that it should deter you from looking for a job at one. The smaller MFIs are hurting more than the big ones, so if you are hesitant and are looking for more stability, you can look for an MFI that has been around for a while and has deeper roots.
    Here is a link to an article the Forbes did about that top 50 MFIs:
    http://www.mykro.org/forbes-top-50-mfis/2008/06/

    Or you can look at the Mix Market which does a pretty thorough job analyzing MFI performance: http://www.mixmarket.org/

    Jerry Ostradicky

14. Diana on 20 Oct 2009 at 8:42 am #

    MFIs are have been affected by the crisis… the article below outlines some strategies to mitigate vulnerability in future.

    http://www.microsave.org/briefing_notes/india-focus-note-23-the-global-financial-crisis-and-indian-microfinance

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