With remittances dropping, commodity prices remaining high, unemployment rising everywhere and credit drying up, how does microfinance fare? The MFIs? The borrowers?
The general consensus seems to be that microfinance has withstood the financial crisis better than most financial institutions. Muhammad Yunus, characteristically thinks that microfinance is doing fine and that the crisis is a real opportunity to restructure financial access. Love that guy’s optimism.
Still, MFIs have been hit. Foreign exchange risk poses a real problem in that managers have to worry about repaying higher interest rates to international lenders (from whom they get most of their money) with their local currency, which has decreased in value. CGAP reports that one Latin MFI reported a loss of 75 percent of net income in a single year from foreign exchange losses. MFIs always have to bear the risk of currency fluctuations, but these fluctuations combined with decreased liquidity from international sources has led to unpredictability on a new scale. I’m left wondering what the long term effects on their clients will be.
In a recent survey by CGAP, 65% of MFIs responded that their loan portfolios are either flat or have decreased in the last 6 months, this must result in fewer hires and perhaps decreased services or increased interest rates in an attempt to pass cost along to their clients.
Clients who are already suffering the effects of the global crisis. For the poor, small changes in their portfolio can result in painful shortages, particularly as food costs remain high. These problems are likely to be exacerbated by a dramatic drop in remittances, which the World Bank estimates will drop by 7-10 percent in 2009. This will surely affect ability to cover day-to-day expenses as well as their ability to repay existing or future loans. However, despite this belt-tightening, many micro businesses are highly resilient and run operations that can quickly change shape and function. As a Kiva Fellow in Bolivia I met one woman who owned a sewing machine and normally made traditional skirts for sale out of her home. When I visited her, I was surprised to see her out front making candles. When asked about her sewing business she told me flatly that there is a crisis (am I an idiot who didn’t realize?) and people aren’t buying clothes. But, everyone still goes to church where they’ll buy candles, and with increased electrical costs, she thinks more people will use candles for light. After a quick analysis of her sales, she completely closed shop and reopened an unrelated business in less than 2 days. We are unlikely to see this degree of flexibility from larger businesses.
Seems that some lessons can be drawn from the microfinance sector. Both for businesses that should learn to be somewhat more flexible, and to financial institutions who may wish to do what most MFI’s have sought from the beginning- to provide personal services to the benefit of their customers rather than the bottom line.
For those interested in more information about the credit crisis and microfinance, CGAP issued a helpful report in May: http://www.cgap.org/p/site/c/template.rc/1.9.34453/
*By Sierra Visher
On October 6, 2009 the NYU Microfinance Initiative (NYUMI) and IPSA invited Mr. Arif Islam, the Country Head of BRAC Uganda, to discuss the scaling up of microfinance in Africa. Mr. Islam played a critical role in establishing BRAC as one of the largest microfinance institutions in Uganda. Mr. Islam presented a powerpoint with the story of how BRAC Uganda grew to become one of the largest microfinance institutions in Uganda in less than three years. After a fantastic presentation, the packed crowd ensued to ask wonderful questions of Mr. Islam. He was delighted by all the questions and wanted to continue late into the evening. The event concluded with a delightful cocktail hour with mingling and networking.
Working as a Kiva Fellow in Honduras and Bolivia led to many adventures for me over the past year. Before I left, I knew I´d be exposed to the surprising ins and outs of microfinance (Kiva uses the internet to connect lenders and borrowers across the world, I would be facilitating that interaction). I did not, however expect the experience to lead down so many unique roads.
I´m travelling now in Northern Peru, post Kiva Fellowship, and on my long bus rides and often quiet nights I´ve been remembering some of the moments. Most of the time, I was face to face with the dynamic, colorful and crushing poverty of two nations as alike in their optimism as they were different in their culture. I´ll forever be moved by images of children with severe iron deficiencies holding the hem of mom´s skirt who used her micro loan to sell jello to school children for less than 3 pennies a cup in a desperate effort to squeak out a living in her home clinging to Tegucigalpan hillsides. Still other moments make me laugh. One in particular caught me off guard on a taxi ride this morning, winding up a dirt road above lost hot springs in a tiny ¨town¨ called Llanguat.
I was riding with my roommate from Coroico to La Paz in the back of a minibus, jaw dropped at the Lord of the Rings- like scenery, when suddenly a cool sensation spreads under my knee. Looking down I realized that in our rapid altitude climb, the wine bottle of honey held by my neighbor had spontaneously exploded! Honey sticking, spreading and oozing across the seats covered my lap, stuck to my fingers and quickly to my hair, the wall, my shoes everything. Everyone starts passing back pathetic little scraps of tissue we tried to use to scoop up several liters of honey. Though my drinking water is always of very high value, I handed over my aligner, here use this. To my surprise, it turns out she was completely unconcerned with the mess is trying to salvage as much honey as possible!! Quickly she dumps the water out the window and starts pouring the remaining honey into my bottle. Thanks so much for this gift she tells me. I didn´t quite get it that she thought I had given her the bottle and thought I´d leave the matter until we arrived back in La Paz.
We get there and I´m trying to tell her, please I need my bottle back, what can we do? I´m thinking, buy another little bottle but she thinks, oh I´ll just buy this one. I cringe when I tell her it is 89 Bolivianos or 12 dollars. A sum she simply cannot fathom for a simple water bottle. I suddenly realize that I´ve come from very far away. Hopefully the honey can stick us together.
This was written by Sierra Visher
More articles about her fellowship can be found at www.svisher.wordpress.com