Microlending was one of the biggest parties in finance in recent years—an era of many parties. A new report out from the Centre for the Study of Financial Innovation (CSFI) details how things have changed over the past year-and-a-half. The report is based on a survey of 430 institututions in 82 countries and reveals that what’s happened in high finance has trickled down to the level of $50 cow loans in a major way. This was not entirely expected—part of the mythology around microfinance was that it would be sheltered from shocks to the mainstream world economy.
When the CSFI last did this survey, in early 2008, microfinance institutions (MFIs) tended to worry most about things like staffing, regulation and corporate governance. Now the top-three hand-wringers at MFIs are credit risk, macro-economic trends and liquidity. Sounds familiar. The report notes:
There is also concern that recession will expose “naked swimmers”: weak MFIs with poor funding and inefficient management who were being buoyed by good economic conditions and overabundant funding. The risk of institutional failure is seen to be high.
Although is that really a reason for concern? Microfinance has long been overdue for a grounding. Bob Annibale, who runs Citigroup’s microfinance practice, recently commented on how microfinance in some countries had been growing at 50%, 100%, even 200% a year. A slowdown in growth, he said, would be “prudent.”
Also from the CSFI report:
A further recession-led concern is for the reputation of the industry if MFIs are unable to sustain their flow of lending or are forced to become tougher about loan re-payment. Any hardening of the MFIs’ position would add to concerns about mission drift and the perception that MFIs are abandoning their social objectives. Linked to this is the risk that investors in MF and users of the service have unrealisable expectations about what MF can deliver.
That might be painful in the short-term, but if we all gain a more realistic view of what exactly microfinance is and isn’t able to do, then I think the shake-out will be a good thing for the long-term growth and development of the industry.