THE WORLD FINANCIAL CRISIS AND THE NEGATIVE EFECTS ON MICROFINANCE INSTITUTIONS

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THE WORLD FINANCIAL CRISIS AND THE NEGATIVE EFECTS ON MICROFINANCE INSTITUTIONS

This Group aims at identifying solutions to the problems generated by the current world financial crisis that are negatively affecting the microfinance institutions worldwide. Therefore any opinion, ideas and suggestions will be most appreciated.

Members: 7
Latest Activity: Sep 30, 2009

The current world financial crises has already and seriously affected the liquidity needs of the respective MFI. Access to donor and / or investor funding to finance the further growth of the loan portfolio is drastically reduced. Even the microfinance investment funds have difficulties to fund raise.The main negative effect of the current world financial crisis is that good MFIs with good quality loan portfolio are facing a serious slow-down of their growth as well as liquidity and reputation risks due to the fact that they can no longer meet the needs of both existing clients, that are graduating the loan cycles, as well as of the new, potential micro-enterprises.
On the other hand the commercial banks are speculating the liquidity squeeze that MFIs are facing through imposing them tougher borrowing conditions (higher interest rates). Some banks are even “blackmailing” the MFIs by threatening them that the existing (but maturing) credit-lines will not be renewed / rolled-over, unless the MFIs will move to the respective banks their current accounts (where MFI’s loans disbursements and clients’ loan repayments are taking place) that were already opened at other commercial banks. Such “demands” are addressed irrespective of the fact that the respective blackmailing banks are not providing all the services needed for a professional management process of a MFI (for instance, the internet banking service that is needed to easily undertake inter-branch fund transfers any time/day in order to meet the loan disbursements and cash management needs) .
As a conclusion the current world financial crisis has already started to have a negative impact on the microfinance area, generating a dangerous chain reaction through a vicious circle: lack of funding for MFIs means lack of finance (micro-loans) to MSME – many of the MSME will close – unemployment will rise, poverty levels will deepen, all of these compromising the MFIs’ social mission as well as the economic development processes…
There is a definite need also to reform the whole international financial system, including the IMF, World Bank, EBRD, European Commission (its aid development programs arm), etc. and, along with this reform, to develop a new and comprehensive world economic development strategy with clear objectives, short-medium-long term operational plans and budgets, deadlines and responsibilities. A such strategy MUST address and solve all the flaws of the existing international financial system, especially including the survival / development needs of the poorest countries / regions affected by the current financial crisis and with a major strategic objective and emphasis on a strong financial support (rapid funding access, technical assistance for institutional development, etc. ) to the microfinance sector.
The support for the MFI sector, and especially the access to donor/investor/commercial bank funding (at a commercial but realistic cost), must be the TOP PRIORITY of the respective new strategic objectives and of the new world financial system. After all the MFI’s clients – the Micro-Small & Medium Enterprises represent the most important pillar for every economy and the backbone of sustainable economic development strategies and programs.
George Staicu
Microfinance & banking consultant
Bucharest, Romania

Discussion Forum

Finanacial Crisis

Started by Saqib Masood Chishti. Last reply by Jerry Peloquin Sep 30, 2009. 1 Reply

Comment Wall

Comment by Jerry Peloquin on November 15, 2008 at 6:36pm
The present upheaval in the world’s financial system presents both threat and opportunity. The threat is all too apparent as shrinking stock portfolios diminish donors’ capacity to give. We believe there are great new opportunities as well.

The global development effort from both private and public sources has been experiencing a gradual shift from pure charity and crisis intervention to sustenance and capacity development through market driven solutions to poverty. In the last decade, the emergence of the Microfinance sector has further advanced the notion that addressing poverty can be good business.

This concept paper puts forward the premise that the developing world presents an enormous opportunity for expansion and market development. The term “economic development,” should be reconsidered and replaced with the concept of market development, since growing markets are the foundations of a healthy economy.

It is our premise that the greatest economic potential lies in building the productive capacity of the underdeveloped world. Such an investment should be made, not in large infrastructure projects like dams and bridges, but in the grass roots development of small- to medium-sized enterprises (SMEs) and in the human capital improvement that will yield tremendous returns. Just as all politics are local, the basis for all economic development is (or should be) local.

As Microfinance has proven, investment at the bottom of the economic pyramid can be both successful and profitable. The collapse of traditional investment vehicles in the developed world presents an unprecedented opportunity. We would now suggest a shift in focus from parochial investment in our consumption-driven, low-elasticity economies to the high opportunity, high growth emerging markets available globally.

Socially Responsible Investment (SRI) is both good business and good foreign policy and certainly represents enlightened self-interest. As the Marshall Plan revitalized Europe, it created a vast market for American goods and services. So it will be with Asia, Africa and other underdeveloped markets. An investment in Uganda, Liberia, Peru, The Philippines, or any such country today assures markets for America tomorrow.
Comment by RAFAEL PABLO MOLINA FERNANDO on September 5, 2009 at 3:25am
A close friend once said that the main cause of our current world financial crisis is GREED. I definitely agree 100%. Greed destroys man's true nature which is love, kindness, compassion & peace.

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