Archive for: Financial Crisis

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).

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Kolar is a tranquil little town in the Indian state of Karnataka, not far away from the state capital of Bangalore. In microfinance circles, its name is only mentioned with apprehension since earlier this year, from one day to the next, around 15,000 MFI clients defaulted on their loans. Local Muslim organizations through their clerics had summoned all Muslim borrowers to stop repaying until further notice, claiming that paying interest contradicted the Koran. Just a few months later, similar instances were reported in three neighboring towns, following more or less the same pattern.

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In some districts of Karnataka State (India) there has been resistance to repay loans taken from MFIs (also refer to the WSJ article on repayment problems in that state). In Kolar the Muslim clergy have given the call, pronouncing the MFI loans as un-Islamic; in Mysore a ten day curfew that followed a communal clash created repayment problems, in Tumkur another local group asked the MFIs to pay some kind of protection money to carry on their business resulting in repayment disturbances The size of the affected portfolio is estimated to be between $12 and 15 million. For the large MFIs, the problem is very small, while some small MFIs have a large problem. The MFIs are confident that the problems will be resolved and that they would recover most of the loans. The affected portfolio is tiny: less than 0.5% of overall outstanding loans. So we shouldn’t think of this in terms of the sub-prime crisis. Nonetheless we should draw lessons from those events.

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The financial crisis has made investors and asset managers increasingly sensitive to risk in all areas of finance, including microfinance. Lenders and investors worry about whether MFIs can survive. They weigh the risks by applying sophisticated analysis to the MFIs’ financial performance and asset quality. A spreadsheet with numerous ratios and graphs serves as the standard tool. Unfortunately, such efforts can lead to erroneous conclusions because their focus isn’t wide enough.

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Not long ago I joked that I would spend the rest of my career in microfinance putting together debt financings to support microcredit lending operations, and that I would spend my retirement restructuring those debt financings.  Unfortunately that “retirement career” may be nearer than I hoped.  Just  last week journalists began writing about the problems and alleged temporary closure of GreenHouse Investment Solutions, a Nigerian microfinance institution.  According to one journalist, the problems of GreenHouse could “sound the death knell for the microfinance sector [in Nigeria] that is gradually gaining public trust and patronage by depositors.”

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Absolutely. Access to finance is much more than poor people simply getting credit. Access to finance is - or should be - about delivering a wide range of “appropriate” financial services that include savings, payments, credit, and insurance to the  people in  need of them. In a sense, finance is similar to sanitation, electricity, or water. The key is to supply those financial services taking into consideration the market it is intended for.

A  natural question arises concerning whether financial institutions are willing to provide these services in the midst of a financial crisis. That may well depend on  the  product,  but many are. While it may be difficult to finance a mortgage today,  opening a bank account may have become easier. Consider for example, the case of Latin America. Due to the crisis, many banks have experienced a shortage of liquidity and resources from international markets. To overcome this deficit, banks  have aimed to expanding their depositor base by offering new products and targeting  new  market segments. In Colombia during the last year, the  number  of  adults  with a bank account increased considerably, so that now more  than  half  of  the adult population hold an account. In Mexico, banks are pushing  regulators to pass the law that would allow them to contract agents and expand  their  depositor  base. These situations present an opportunity for many people  to  get  access to a bank account and a chance to fortify the system. So, even with a credit squeeze and financial crisis, these trends show that it still makes sense to promote an access to finance agenda.

A couple of weeks ago, I attended the 12th Annual Microfinance Center (MFC) Conference in Serbia. It was my first time at a MFC Conference, well-known to be the premier microfinance event for the ECA region, especially for networking and making deals (and some social entertainment as well). 

I was struck by the numerous “mea culpas” of practitioners and investors alike in discussions about the problems facing the microfinance sector, such as overindebtedness, now starkly exposed by the financial crisis.  One microfinance manager from Bosnia shared with the audience–in a plenary session no less-that her institution had gotten caught up  in the wave of high growth and apparent infinite demand at the expense of carefully analyzing clients’ needs and capacity to repay. An investor confessed that they had sent inappropriate signals to practitioners, focusing on outreach numbers with insufficient attention to whether strong fundamentals where in place. 

With this kind of frank talk and a recommitment to the basics and keeping clients at the center, I am certain things will be looking up at next year’s MFC Conference. Click here to listen to participants from the conference.

It was a lot easier to ignore the dirigistas (ie those who favor more government influence in financial services) before the crisis, wasn’t it? During boom times, free-marketeers could smile and nod at such inefficient thinking, taking comfort in huge double digit growth rates and an endless supply of funding. In fact, too much funding was a major problem for microfinance a year ago. With so many willing investors, what could possibly go wrong?

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I’ve been working on a presentation on the global crisis and microfinance and came across the phrase “preparedness” in one of my resources. It made me chuckle thinking of when I was a young bank examiner assigned the “Emergency Preparedness” checklist during an exam, one of those tedious tasks given to junior personnel to keep them out of trouble (I’m pretty sure they don’t use this anymore).

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Back in October at the IDB’s Microenterprise foro in Paraguay, the lines were three deep at the business center, as participants checked the internet for news of the global meltdown. Attendees watched the global stock markets decline on news of Lehman’s demise, and began to wonder what this could mean to their economies. But while it did provide a buzz outside the conference facilities, inside, during the panels and discussions, it was business as usual. One session on the impact of the financial crisis was highly attended, but the overall feeling was one of mild concern coupled with astonishment at the degree of market disruption in the large economies. Read the rest of this page »