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Microfinance: not immune to the credit crunch by sylvng

I have an Economist subscription, and as most Economist readers know, the magazine is packed. Packed enough that I have a problem keeping up with the material even on not so busy weeks. And for the 2 months now I’ve hardly had time to keep up at all. So today, I started going through the March material, and found an interesting article on the impact of the credit crisis on microfinance.

By conventional wisdom microfinance should be cushioned against the drivers of the financial crisis – behind every loan is something concrete (eg. a cow or a chicken), not just a piece of paper. And the fact that the loans are funding local businesses means that the repayment rate should hold up. However, the Economist points out, there are two things that putting the squeeze on microfinance institutions (MFIS):

  1. MFIS depend on international aid budgets for funding, and those sources are drying up, even as global banks are pulling out of their involvement with microfinance  due to the current climate.
  2. MFIS are having trouble re-financing existing loans; the refinancing gap could be as high as $1.8B over the next 18 months.

Some also question the microfinance model; there is evidence that borrowers are using loans from one institution to pay off loans from another. Based on this, there is an argument for MFIS to start taking deposits like your local bank, instead of purely relying on institutions and donors for funding.

My take on it all? Lend away. The borrower delinquency rate has only risen from 1.2% to 2%-3% in recent times, which means that microfinance is still a very dependable way to lend your money. And really, I view some of these MFIS (Kiva, Garmeen Bank, etc.) as charitable, and like any charity in need of some financial help in tough times, donor dollars can go a long way. MFIS have already proven to be stronger than some other financial institutions in this credit crunch; their failure now or in the future would only prove that this economy affects everything, and not that microfinance doesn’t work.

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