At a time when the financial crisis is in most people’s mind, and despite the recent fall in commodities’ prices, we shouldn’t lose sight of the effects of the food crisis on poor people.

The last CGAP blogpost on foodflation spurred discussion on how MFIs and their clients are affected by the crisis. To better understand the implications of the food crisis and the role microfinance could play in coping, we conducted an opinion survey in August (PDF) with the managers of 45 leading MFIs in 16 of the most affected countries.

A majority of the participating MFIs in our survey saw an increase in their Portfolio at Risk (PAR), and a third of them faced higher default rates. Given that food constitutes a very large part of poor people’s budgets, it’s not surprising that MFIs see the consequences of higher food prices in their portfolio. Not only do poor people have to make tough choices about their expenditures in times of crisis, they also have difficulty saving and paying back their loans. These results are supported by a recent USAID study on the effects of the food crisis in Bangladesh, Haiti, Tanzania, and Nicaragua. The combination of higher expenses (with more time spent with clients to recover loan repayment), lower repayment rates, and lower deposit collections contributes to liquidity problems. This in turn forces many MFIs to reconsider their expansion strategies and refrain from increasing outreach to harder to serve markets. It is likely that this liquidity problem is only going to get worse with the double effects of the food crisis and the financial crisis.

Most of the MFI managers said they found it harder to find a balance between financial sustainability and assisting the poor as a result of the crisis. They’re faced with a serious moral dilemma on how to deal with defaulters, for example. MFIs frequently applied a more flexible loan policy, increased loan sizes to compensate for inflation, and one third of them rescheduled loans.

MFIs are nonetheless hesitant to do relief activities. The General Manager of a Tanzanian MFI said they sponsor food, but didn’t want to distribute the food themselves to avoid confusion about their role. In fact, there was a broad consensus that MFIs should not take measures which compromise their long term objectives. But this doesn’t mean that microfinance can’t do anything about the food crisis. Most managers saw microfinance as an instrument to increase agricultural production. Thus, microfinance could significantly contribute to preventing another food crisis in the future.

While the effects of the food crisis are still significantly felt in many countries, we need to think about how we can help MFIs better prepare themselves for such crises. This will be one of the issues discussed at the European Microfinance Week in Luxembourg next week. In the short run, donors and practitioners could join their efforts to help MFIs solve their on-going portfolio management issues. They can also help MFIs to better prepare themselves against future similar crises by improving their risk management, including managing liquidity issues and acquiring long term financing, and when possible developing deposit services that both help clients mitigate risks, and ensure more stable source of funding for the MFI. Finally, as many leading MFI managers mentioned to us, microfinance can play a role in preventing future crises by supporting agriculture and agri-businesses, even though it cannot by itself solve the issue of agriculture production. We believe that it is the right time for all of us to share lessons learned on successful experiences of MFIs in designing appropriate and profitable financial products for farmers.

We would love to hear from our bloggers on this last point. Have you seen successful examples of microfinance for agriculture?