Microfinance Seems Fairly Insulated from Credit Turbulence

By Daniel Altman

International Herald Tribune,
Tuesday, February 12, 2008

The turbulence in global markets has tightened credit in most of the world's major financial centers, but how has it affected the world of microfinance?

Because of its focus on developing countries and small entrepreneurs, microfinance doesn't often attract much attention from Wall Street, London or Tokyo. Yet for an international investor, this budding industry could offer an insurance policy when the major markets go south.

The idea of microfinance is to give poor people a small amount of credit, usually without collateral, that could mean the difference between living hand to mouth and investing in a more productive business with a longer horizon. Over time, microfinance institutions have become known for their clients' reliable repayment of loans, and so they have started to attract capital from sophisticated investors.

Given this integration with the global credit market, you might think that episodes like the credit tightening of the past several months might have a more damaging effect on microfinance. But it still seems fairly insulated from the recent turbulence, and from that fact may spring an opportunity.

"Our network of organizations has almost $3 billion in the streets of Latin America, Africa and India, and about 3 million clients," said Maria Otero, president and chief executive of Accion, a global group of microfinance institutions. "The largest have portfolios or assets of about $300 to $400 million. I have not heard from any of them that there is an issue of tight credit for them that could be related to what we're seeing in the world markets."

The same is true of the Grameen Foundation, part of the Nobel-winning Grameen movement that began in Bangladesh. "We have not seen any credit-tightening in the financial markets where we work in these various countries," said Liselle Yorke, a spokeswoman for the Grameen Foundation in Washington, which has operations in countries including India, Philippines and Nigeria.

Several factors have insulated microfinance operations, Otero said. First of all, the amounts they seek from credit markets to fund their operations are relatively small, in the tens of millions of dollars. Second, they are also funded in large part by the savings of the poor, which is not so sensitive to the benchmark interest rates used by global investors. And third, when they do raise money, it's often locally, in emerging economies that haven't become completely synchronized with the major markets.

That's the willingness-to-lend side of the microfinance equation. On the ability-to-repay side, there are also insulating factors, said Premal Shah, president of Kiva, a program that connects individual lenders in wealthy countries with borrowers in the developing world.

"Shocks to an economy, like a global recession, affect the informal sector less than the formal sector," he said. "For the microfinance institutions, because their clients are in the informal sector, typically the portfolio quality does not decline."

In other words, the small, cash-only enterprises run by microfinance's borrowers don't feel the effects of a global downturn right away. Also, Shah said, there's still an altruistic aspect to microfinance networks like his.

Kiva benefits, he said, from the fact that lenders feel like they're doing a good deed - but they can also expect to get their money back. In an economic downturn, people from wealthy countries might see Kiva as a budget-conscious alternative to a donation to charity. It doesn't hurt, either, that the minimum loan is just $25.

"My intuition, just listening to customers, is that the price point is just small enough that there are a lot of other compelling things that are getting people to do it," Shah said. He compared the lending side of microfinance to making small personal loans to someone you know; your willingness to make that kind of loan might not decline in a downturn.

Kiva is a relatively new and growing service, though, whereas Accion has been around for decades. Yet Otero said returns on loans in Accion's network, including the world's first microfinance commercial bank, were still high.

"That bank and all of the banks that have the same model are showing a positive return on assets and return on equity, on an ongoing basis, even as the local economies go up and down," she said.