Microfinance on the Backdrop ofGlobal Financial Crisis |
 Introduction It is good to know that the world economy is showing the sign of recovery from the financial crisis that has affected every country of the world and caused great damage to their economies. Due to the rapid, forceful and comprehensive measures taken by different governments in the form of bank bailouts, stimulus packages, fiscal stimuli and monetary policies, the economies have started turning around and Asia is leading as the world pulls itself out of recession. But the recovery still remains fragile and the risk of having asset bubbles is still there. There is no clear exit strategy as yet. What to do under this situation? Is it okay to remain complacent with the policy measures adopted so far or is it necessary to objectively review and revisit the whole system to see whether the system needs a complete overhauling for developing a mechanism for sustainable finance? This is the opportune moment for that. This is the time to ask whether the present regulatory and supervisory measures are really working. Are they enough? Is there anything wrong with the implementation strategy? This is the time for redesigning financial system for creating a system, which should not only guard against over speculation, bankruptcy and breakdown but also have an in-built coping capacity to take care of unwarranted situation. It is also the time to ask whether it is enough to try to save and fix up a system, which excludes many or to work for developing a system, which should be inclusive and serves all. But how? There is the need for new ideas, realistic bold steps and innovative approaches for this. The lessons may be learnt from the experiences of the countries, which have been resilient to the crisis. Lessons can also be learnt from the financial institutions, which have remained almost unaffected and continued growing. Consider the experiences of Bangladesh, China, India and Indonesia, where the economies not only have survived but also stayed vibrant. Take the case of Grameen Bank, which has developed a poverty focused financial system, broken the rules of conventional banking to serve the poor with financial services, used finance as a poverty fighting tool, pioneered microcredit movement and continued growing as a sustainable institution even in the face global financial breakdown. Microfinance and the Financial Crisis Microfinance has grown over time with more and different types of actors getting involved in its development with new ideas and technologies and with different types of products and services. There has been diversification in its funding sources and instruments and also gradual shift towards commercialization. The number of microfinance programs has increased globally and there is hardly any country in the world that has no microfinance program at all. Microfinance as a part of financial sector may not remain totally unaffected by the positive or negative changes that take place in the global or the regional financial markets. But the effects may vary from country to country depending on the nature of the economy, its financial system and regulatory framework. It also depends on the funding sources of MFIs. Although there is not much information on the impact of global financial crisis on microfinance sector in particular, according to a CGAP survey report, MFIs in Eastern Europe, Central Asia, Latin America and the Caribbean were found to be the most affected, while they are less affected in Middle East and North Africa (MENA), Sub Saharan Africa (SSA) and South Asia. It is because the MFIs in Eastern Europe, Central Asia, Latin America and the Caribbean have some of the most developed and highly leveraged microfinance markets, and is therefore feeling the pain of less liquidity and higher risk stronger than most other developing regions. Clients are also found to be more affected in these regions. The report also says that MF clients in urban areas are more affected specially in Latin America and Caribbean (LAC) region. On the other hand, Middle East and North Africa (MENA), Sub Saharan Africa (SSA) and South Asian MFIs have been less affected by the financial crisis due to their limited exposure to the toxic assets. The question is, are different MFIs with different practices and products in different countries facing same challenges? How MFIs and their clients are coping with this? The experiences of MFIs in different countries suggest that deposit taking MFIs are in a better position than those, who cannot accept deposits. In Bangladesh, for instance, where 66 percent of the MFI's loan portfolio comes through savings mobilization and where funding is available from wholesale funds like PKSF and other local sources, MFIs could remain more or less immune to financial crisis. In fact, the annual loan disbursement of the MFIs in Bangladesh has increased in the last three years even in the face of global financial crisis. The deposit taking MFIs like Grameen Bank, who are relatively well-cushioned compared to those who rely on other sources of funding, have not at all been affected by the financial crisis. But for the non-deposit taking MFIs, who are dependent on external funding, money is scarcer, as commercial investors have become more risk averse. What has been the situation with default and drop out rates and also with savings during the financial crisis? Evidence shows that the recovery rate of the MFIs in Bangladesh has been high and their net savings balance has increased in the last three years. The experiences of MFIs in India are also found to be the same. In fact, when the big financial institutions are facing high default rates in many countries, the default rates of MFIs have virtually remained negligible. Nobel Laureate Professor Muhammad Yunus observes that microfinance institutions have shown greater resistance than many conventional banks in facing the challenges of financial crisis despite the negative effects of the global financial crisis. Although in this crisis, many MFIs are facing problem due to private capital dry up, fall in aid and the poor are suffering due to inflation, fluctuation in commodity prices and job loss, their sufferings is mitigated because of the robust presence of microfinance. Due to its deep shock resistant roots and trust based operation, microfinance has the built-in capacity to protect itself from the devastating affects of financial crisis. Its work is location specific and pro-poor. It serves the poor at their doorstep and supports their income earning activities, who use local inputs and produce goods for local market. Most of the MFIs offer services like health, education, sanitation, housing etc. which increases the capacity of their clients. The culture of savings that the MFIs have developed amongst the clients is of great significance as it provides security, convenience, liquidity and returns to the poor savers as well as solves the problem of funding for the MFIs. MFIs know their clients in person and always stand by the side of their clients, unlike conventional banks, even when the clients face any disaster or crisis. They do not abandon their clients. They try their best to help their clients overcome the crisis. Microfinance programs are still growing in every country even in the absence of any significant bail out or stimulus packages for them. The experiences of MFIs in different countries including Bangladesh, China, Costa Rica, Guatemala, India, Indonesia, Kosovo, Nepal, Nigeria, Pakistan, Turkey, U.S.A. and Zambia provide evidence to this. Given its commitment and concern for the people at the bottom and given its root in their heart, microfinance has survived the setbacks brought by the current financial crisis. It has the vast untapped markets of clients to serve. It bears more significance in times of recession as it shows laid off employees and unemployed persons a way for self-employment. What Needs to be Done? |
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