Is the financial crisis affecting MFIs around the world?
Has your institution been affected by the global financial crisis? Share your experience and strategies with the global microfinance community by writing to the Microfinance Gateway at webmaster@microfinancegateway.org.
Recent headlines suggest the varying effects of the global financial crisis on the microfinance industry:
The Microcredit Summit Campaign surveyed members to find out what MFIs are actually experiencing. Leaders of nine MFIs in countries spanning Asia, Africa and Latin America responded during the week of October 13, 2008. Excerpts taken from the MCS newsletter provide a snapshot of what the field is confronting.
Some MFIs have not yet felt the impact of the crisis, yet others are witnessing sharp increases in costs of funds and direct effects on clients’ well-being. Shafiqual Haque Choudhury, President of ASA in Bangladesh and John de Wit, Managing Director of the Small Enterprise Foundation in South Africa, both report that their organizations have not yet faced difficulties in managing their loan funds. Other microfinance leaders are already seeing the effects of the financial crisis.
SHARE is facing reduced access to funds due to the liquidity crunch. Though in principle, SHARE has sanctions to the tune of US$155.6 million with lower interest rates, we face a peculiar situation from bankers and financial institutions trying to bring in new covenants like raising interest rates exorbitantly and asking for personal guarantees from our directors. The situation is alarming since it affects our credibility and strains the trust built over a period of two decades with our clients, a development which could result in clients not making timely repayments.
Roshaneh Zafar, President of the Kashf Foundation in Pakistan writes:
The first impact has been the lack of liquidity in the capital markets - curtailing our ability to raise additional funds this year. In March of 2008, we revised our growth plans from 500,000 to 350,000. Over the past 9 months the Foundation has actually grown at 6%.
The second impact has been a substantial rise in the cost of doing business. Due to constrained liquidity, the cost of funds has increased by over 450 basis points. At the same time, the energy crisis has spiked the cost of transport and electricity, creating the expectation that salaries will increase in line with inflation. A recent staff survey showed that over 50% of our current staff are not happy with the salary structure and expect cost of living adjustments. This will impact loan officer productivity and overall efficiency and sustainability.
The third impact is on portfolio quality. This is linked to increased client exits as businesses fail and our clients’ ability to service loans is constrained.
Kashf’s strategy to deal with these impacts is:
• Be prudent and grow slowly during this period
• Remain in close touch with clients
• Enhance efficiency to counteract rising prices
• Improve overall compliance and monitoring
• Remain liquid
The global financial crisis is affecting ODEF’s clients and the institution itself because many of our clients live in areas dominated by assembly plants. This sector has been one of the first to feel the effects of the crisis because the products these plants make are for export to the U.S. The crisis has caused a decline in incomes as well as layoffs, diminishing sales in the micro and small businesses that these workers support. This reduces our borrowers’ capacity to pay off loans and has caused ODEF to make adjustments to existing loans.
The crisis will continue to impact export sectors such as furniture, art, and agriculture, causing a significant drag on the Honduran economy. To reduce the effects of this crisis on our clients we have adjusted loans at risk, eliminated consumption-based loans, and are more closely analyzing new loan requests.
Still waiting for the storm to hit
Tony Fosu, Executive Director of Sinapi Aba Trust (SAT) in Ghana writes:
Although the effect of the crisis seems very minimal, we expect it will have a significantly negative effect on the availability of funding for Sinapi Aba Trust going forward. We expect an impact on both commercial loans and grants from donors.
Though there are no clear indications yet as to the effect of the crisis on ACSI’s operations, given the current state of affairs, some risks are likely and require us to prepare for potential turmoil. Maturity mismatches between our lending and savings withdrawals is one risk. This requires ACSI to diversify our loan structure to avoid a bank run.
Carmen Velasco, Executive Director of ProMujer Bolivia writes:
Pro Mujer hasn’t been affected yet by the financial crisis, but we will soon be seriously affected. We are augmenting reserves in anticipation of a possible increase in loan defaults.
Our clients will be affected as their sales decline and inventory costs rise. Profit margins will diminish, causing clients to reduce the size of their businesses. As a result, they may take out smaller loans. Clients whose businesses would have previously needed a $1,000 or $2,000 loan, may now only need $500. However, clients may be inclined to continue taking out larger loans to maintain current personal consumption levels. This may negatively impact their businesses and Pro Mujer’s growth.
