Slowdown puts microfinance industry to stress test, says survey

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Chennai: The resilience of the global microfinance industry will be put to the test by the economic crisis, according to a new survey of the risks to the business, Microfinance Banana Skins 2009. Far from being insulated from the economic mainstream as traditionally thought, microfinance could face a fall in growth and funding because of the global recession and declining investor confidence.

This will present the industry with its first major stress test since it emerged in recent decades as a fast-growing provider of small-scale financial services to the world’s poor.

The survey, published by the CSFI and sponsored by Citi Foundation and the Consultative Group to Assist the Poor (CGAP) and supported by the Council of Microfinance Equity Funds (CMEF), was designed to identify and rank the main risks, or “Banana Skins” facing the industry at a time of economic crisis and change. It reflects the views of more than 400 practitioners, investors, regulators and analysts in 82 countries.

The survey shows that the greatest risks all stem from the crisis: a surge in bad loans, shortages of liquidity and funding, and declining profitability. Other top concerns surround the ability of microfinance institutions (MFIs) to manage their way through the crisis because of weaknesses in management and corporate governance.

The survey updates a previous poll carried out in early 2008 at the beginning of the crisis, and shows how sharply risk perceptions have changed since then. Most of the risks which are now seen as threats to the sector’s prospects, such as the world recession and the credit crunch, were considered negligible only 18 months ago.

David Lascelles, survey editor, said: “These findings turn the earlier survey on its head. Last year’s result reflected the traditional view that microfinance operates in a world of its own with abundant funding and loyal customers. But the crisis has shown that it is also exposed to the shocks of the ‘real economy’”.

Bob Annibale, global director of Citi Microfinance, said: “This year’s report clearly illustrates a dramatic shift in perceived risks within microfinance with credit and liquidity issues rising to the top. MFI clients are being challenged by rising food and energy prices and declining remittance flows. However, strong stakeholder support has ensured that where funding and performance problems exist, these are largely being addressed. Financial inclusion continues albeit with realistic growth expectations, continued sustainable scaling and investment in the sector.”