09 December, 2008
Microfinance Resilient to Credit Crisis
By Tamsin Harriman
Despite the global financial crisis, microfinance is still performing well. Here in Thailand, despite a struggling economy, microfinance institutions (MFIs) are not feeling ill effects. In fact, Common Interest Foundation in Chiang Mai is still seeing a 100% repayment rate on its loans to member Village Banks. Globally, MFIs are still reporting the same 96-98% repayment rates as always, and microfinance is still growing at a good pace.
Microfinance is resilient to financial crises like the current credit crunch in part because of the more intimate relationships MFIs have with borrowers. MFIs have personal interactions with borrowers on a regular basis, so they are less likely to over-lend because - unlike more traditional lenders - they understand borrowers' abilities to repay. According to Mary Ellen Iskenderian, CEO of Women's World Banking, in an interview with Time, "Repayment rates [for microfinance] remain very high, 97% or 98% in many places. That results from good, old-fashioned credit methodology — you know a household's capacity to repay. That's the kind of old-fashioned banking that some people feel was absent in this latest round of banking disasters."
Of course, the poor do feel the effect of rising prices. In Thailand, inflation recently reached a ten-year high of 7.6% (year-on-year). Thus as food and fuel prices rise, borrowers may be less likely to pay back their loans, because they will have to choose between doing so and meeting their basic consumption needs. However, another reason for microfinance's resilience is MFIs' growing ability to combat this problem with an emphasis on savings and risk-management products such as microinsurance. If a client has a hard time repaying her loan due to illness or financial instability, for example, she can tap into her savings or access emergency insurance funds. These products ensure that even in times of crisis, borrowers can still repay their loans without having to sacrifice consumption to do so.
As the credit crunch continues, it is possible that MFIs may raise interest rates so they can meet their costs as funding becomes less readily available. However, it looks as though this will not happen on any large scale. In fact, availability of funds for MFIs looks likely to increase, rather than decrease. As investors are seeking to diversify away from traditional financial markets, many have focused their attention on microfinance. Banks such as CitiBank and venture capital firms such as Sequoia Capital, as well as many other institutions, are eager to invest in microfinance. This is especially true now, with microfinance's high projected growth and profitability in stark contrast to those of the struggling traditional financial institutions. According to a recent article by Sify, "the success of so many microfinance initiatives leads experts to believe that the industry is poised for further accelerated growth. Deutsche Bank estimates that investment will increase from $5 billion to $25 billion by 2015, and that those investment dollars will be seeking adjacencies."
The current financial crisis may slow microfinance down a little, and may perhaps lower some MFIs' repayment rates. However, it looks like despite global financial instability, microfinance has a healthy future ahead.
Despite the global financial crisis, microfinance is still performing well. Here in Thailand, despite a struggling economy, microfinance institutions (MFIs) are not feeling ill effects. In fact, Common Interest Foundation in Chiang Mai is still seeing a 100% repayment rate on its loans to member Village Banks. Globally, MFIs are still reporting the same 96-98% repayment rates as always, and microfinance is still growing at a good pace.
Microfinance is resilient to financial crises like the current credit crunch in part because of the more intimate relationships MFIs have with borrowers. MFIs have personal interactions with borrowers on a regular basis, so they are less likely to over-lend because - unlike more traditional lenders - they understand borrowers' abilities to repay. According to Mary Ellen Iskenderian, CEO of Women's World Banking, in an interview with Time, "Repayment rates [for microfinance] remain very high, 97% or 98% in many places. That results from good, old-fashioned credit methodology — you know a household's capacity to repay. That's the kind of old-fashioned banking that some people feel was absent in this latest round of banking disasters."
Of course, the poor do feel the effect of rising prices. In Thailand, inflation recently reached a ten-year high of 7.6% (year-on-year). Thus as food and fuel prices rise, borrowers may be less likely to pay back their loans, because they will have to choose between doing so and meeting their basic consumption needs. However, another reason for microfinance's resilience is MFIs' growing ability to combat this problem with an emphasis on savings and risk-management products such as microinsurance. If a client has a hard time repaying her loan due to illness or financial instability, for example, she can tap into her savings or access emergency insurance funds. These products ensure that even in times of crisis, borrowers can still repay their loans without having to sacrifice consumption to do so.
As the credit crunch continues, it is possible that MFIs may raise interest rates so they can meet their costs as funding becomes less readily available. However, it looks as though this will not happen on any large scale. In fact, availability of funds for MFIs looks likely to increase, rather than decrease. As investors are seeking to diversify away from traditional financial markets, many have focused their attention on microfinance. Banks such as CitiBank and venture capital firms such as Sequoia Capital, as well as many other institutions, are eager to invest in microfinance. This is especially true now, with microfinance's high projected growth and profitability in stark contrast to those of the struggling traditional financial institutions. According to a recent article by Sify, "the success of so many microfinance initiatives leads experts to believe that the industry is poised for further accelerated growth. Deutsche Bank estimates that investment will increase from $5 billion to $25 billion by 2015, and that those investment dollars will be seeking adjacencies."
The current financial crisis may slow microfinance down a little, and may perhaps lower some MFIs' repayment rates. However, it looks like despite global financial instability, microfinance has a healthy future ahead.
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