Economic Crisis Presents Microfinance with Stress Test

Jul 2009
United States, July, 09 2009 - The resilience of the global microfinance industry will be put to the test by the economic crisis, according to a new survey of the risks to the business, Microfinance Banana Skins 2009. Far from being insulated from the economic mainstream as traditionally thought, microfinance could face a fall in growth and funding because of the global recession and declining investor confidence.

This will present the 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.

The survey, published by the CSFI and sponsored by Citi Foundation and the Consultative Group to Assist the Poor (CGAP) and supported by the Council of Microfinance Equity Funds (CMEF), was designed to identify and rank the main risks, or “Banana Skins” facing the industry at a time of economic crisis and change. It reflects the views of more than 400 practitioners, investors, regulators and analysts in 82 countries.

The survey shows that the greatest risks all stem from the crisis: a surge in bad loans, shortages of liquidity and funding, and declining profitability. Other top concerns surround the ability of microfinance institutions (MFIs) to manage their way through the crisis because of weaknesses in management and corporate governance.

The survey updates a previous poll carried out in early 2008 at the beginning of the crisis, and shows how sharply risk perceptions have changed since then. Most of the risks which are now seen as threats to the sector’s prospects, such as the world recession and the credit crunch, were considered negligible only 18 months ago.

Bob Annibale, Global Director of Citi Microfinance, said: "This year's report clearly illustrates a dramatic shift in perceived risks within microfinance with credit and liquidity issues rising to the top. MFI clients are being challenged by rising food and energy prices and declining remittance flows. However, strong stakeholder support has ensured that where funding and performance problems exist, these are largely being addressed. Financial inclusion continues albeit with realistic growth expectations, continued sustainable scaling and investment in the sector."

Elizabeth Littlefield, CGAP's chief executive officer, said: "This year’s Banana Skins survey highlights cracks and fissures in microfinance that have surfaced with the global economic crisis. But, the sector is basically healthy with strong fundamentals and a solid, reliable and growing client base. Tackling immediate concerns about credit risk, liquidity is important, but remaining focused on longer term issues of management bench strength, governance, and asset and liability management capacity remains crucial for the future."

The Banana Skins report says that the crisis is global in its impact. Every one of the 82 countries participating in the survey reported that financial and economic conditions had worsened, and were affecting local MFIs, though with regional variations.

The responses also showed a strong link between all the major risks, with economic recession potentially hitting growth and profitability, in turn affecting the confidence of investors in microfinance, creating funding difficulties which affect the viability of MFIs. There is a risk that some MFIs will fail.

There is also strong concern that the recession will increase political interference in the industry as governments try to control the availability and cost of microlending, or even encourage borrowers to default. The main sources of comfort are that MFIs have traditionally shown resilience to stress, and could emerge from the crisis with a better reputation for looking after their customers than mainstream banks. The risk of losing depositor confidence was not seen as high.

The 45-page report provides a commentary on each of the 25 risks that were identified, and breaks down responses by type and region, providing a detailed view of the concerns by geography and different classes of respondent.

Source : Yahoo Finance

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