No, the crisis is not over and Yes, it is probably too early to draw any conclusions, but overall it seems that the combination of the food crisis, financial meltdown and economic recession has revealed lessons in many areas including in the role that governments can play to support more inclusive financial systems.

During the recent European Microfinance week, CGAP facilitated a panel on “the Role of Government” and I presented a survey that we conducted last summer to track government responses to the crisis as part of our overall work on the global crisis. In rich countries, governments have intervened heavily in the banking sector to try to stem the tide, so we wanted to know whether governments have done the same in developing countries. We found information on policy interventions in 21 countries over a one-year span (Aug 2008-Aug 2009).

Our most surprising finding was that much less than we expected had taken place, and few governments had made “populist interventions” in microfinance. While it is not unusual for governments to intervene in the private sector in times of crisis, developing country governments have put a strong emphasis on acting to protect the industry and its consumers through regulations and financial literacy programs. Several countries have introduced consumer protection measures (e.g. the Philippines, Sri Lanka and Nepal). As the specter of over-indebtedness has appeared, governments are encouraging the creation of credit bureaus. This trend can be seen in West Africa, according to Renée Chao-Béroff. The protection of clients’ deposits also remains a priority role for governments in times of crisis, as Wolfgang Bücker emphasized during his presentation at the European Microfinance Week.

Where microfinance institutions have suffered from liquidity shortage, several governments have injected local currency liquidity into microfinance through apexes. Such interventions, as well as local currency guarantees to commercial banks, have been one of the most popular crisis-related policies. We have seen liquidity injections in India, Pakistan, Cambodia and Russia. There have been very few cases of restrictive regulations being introduced, such as interest rate caps, but instead a push on conducive regulations such as the recent authorization for two licensed MFIs in Cambodia to raise public deposits hence lowering their liquidity risks, and the introduction of new legislation to allow contract agents in Mexico.

Government interventions were difficult to attribute directly to the global crisis. In several cases, governments have accelerated a reform that was in the pipeline. In other cases governments have increased the use of existing funding tools – such as apexes in South Asia. While donors and investors have continued to increase their funding for microfinance, most of it is in foreign currency which can be an issue for MFIs when local currencies depreciate and they have to pay back their loans in hard currencies.

What comes next? Are we seeing a new paradigm of the role of government with less government interventions in the provision of credit and more client protection?  Or was this just the tip of the iceberg? What will happen if another food crisis hits poor countries? Several participants in our panel discussion believed that there are signs that governments may try to launch new agriculture banks, which proved previously to be un-sustainable in many cases. What are you witnessing within your specific context?