Signs point to toughening times for the microfinance industry. A recent article from the Economist has echoed my concerns that selling microcredit (as a concept or a product) will grow increasingly difficult as the global economy stumbles (or crashes and burns) on the heels of a debt-led recession in the United States. Not only in the concept politically less appetizing than it was back when Muhammad Yunus won the Nobel Peace Prize in 2006, the capital fueling the industry is drying up. The similarities and differences between subprime lending that fueled the US recession and the "sub, sub, subprime" lending happening in developing countries through microfinance institutions have been debated and analyzed for over a year now. But only recently has the engine of seemingly-endless capital to MFIs around the world starting slowing, sputtering to slow chug in some instances.
The Economist article argues that the microfinance industry is more insulated from the crisis than many of my colleagues working in the sector would currently state. Just because the Grameen Bank has not faltered in this financial crisis doesn't equate to an entirely healthy sector. Moreover, the decrease in capital, and the resulting liquidity constraints and challenges institutions will face, does not represent the variety of challenges that MFIs, or the microfinance sector, could and will likely face as a result of this crisis. While I commend the Economist for putting on spotlight on this particular problem, the article fails to provide readers with the bigger picture.
Fortunately, CGAP just released last week a more thorough analysis of the potential impacts of the crisis on microfinance. The Focus Note reviews not only the challenges of the institutions, but also those of the clients that frequent these institutions to gain capital for their micro-business or, in many cases, borrow to smooth consumption over time. Essentially, the Note paints a relatively more nuanced picture of the crisis on the microfinance industry and tempers its optimism that the industry is "insulated from the problems of the global economy" (as is speculated in the Economist). On the other hand, CGAP does share my view that this crisis will bring opportunities that could result in a better functioning industry, with potentially better outcomes for the poor.
In my opening remarks at the March 16 USAID panel on Microfinance and the Financial Crisis, I also outlined a number of challenges I either currently see or envision for the industry as the global crisis unfolds, many of which are reflected to some extent in the articles mentioned above, including decreased capital, weakening consumer confidence, increased pressure for tougher regulation, etc.. However, I foresee as serious opportunities for the industry. (Call me hopelessly optimistic, but I prefer to concentrate on opportunities whenever possible, particularly in troubling times.)
First, a debt-led global recession is indeed spurring some to cast a critical eye on debt-led poverty reduction like micro-credit. While this may be understandably worrisome for particular institutions, it's a huge opportunity for the microfinance field in general. The backlash against credit and subprime lending could very well lend itself to a microfinance industry whose health is dependent on a more diverse and balanced portfolio, particularly with an emphasis on savings. In fact, deposit-taking MFIs (who are less dependent on capital investments) are indeed the very institutions most insulated from the crisis so far. Next, the spotlight on savings is not limited to acknowledging the need for deposit-taking for an institutions fiscal health. The microfinance field as a whole is now paying long overdue attention to the other critical financial needs of the poor, namely access to effective and safe savings services. Finally, there is a growing recognition that all people, chief among them the poor and the vulnerable, need to save and create a safety net against economic shocks, rather than relying on credit alone. This is a lesson the US learned too late, but for the microfinance field, it's a very real opportunity to look at economic opportunity and resiliency in a whole new way.
(Transcripts and materials from the March 16 event, including perspectives from other panelists on this issue, can be found on the Microlinks site.)