Small and micro loans have significantly improved the quality of life for millions of poor people
Microfinance institutions are under increasing pressure as foreign capital dries up or becomes too expensive
New facility will provide up to $500 million to more than 100 institutions in 40 countries, benefiting up to 60 million borrowers
February 12, 2009 —Devayanai used to work in the fields in the southern Indian state of Tamil Nadu. That was before she got a loan of 15,000 rupees ($307) to buy a cow. Today she makes as much money selling milk as she did as a day laborer.
“Now I can work from home and be with the children.”
For millions of people around the world, being able to get a small or even tiny loan has made a big difference in their quality of life.
But some of the microfinance institutions that lend money to low-income people with no or little collateral have come under increasing pressure.
Once-plentiful foreign capital has dried up or become too expensive in the wake of the financial crisis sweeping the world.
In the next 18 months, microfinance institutions face a potential refinancing gap of at least $1.8 billion, putting as many as 150 million microfinance customers, most of them poor people, at risk, according to the World Bank Group’s private-sector arm, IFC.
World Bank Group and Germany Commit Funds
In response, IFC and German Development Bank KfW launched a new microfinance facility February 5 to help institutions facing financing shortfalls.
The Microfinance Enhancement Facility is expected to provide up to $500 million to more than 100 institutions in 40 countries.
The money will be used to help the institutions refinance loans and support lending to as many as 60 million borrowers.
IFC initially is contributing $150 million and KfW $130 million. They are working with a number of other partners as well as the German government to attract additional funding to the facility.
“Micro loans are among the most effective instruments in development,” German Development Minister Heidemarie Wieczorek-Zeul said at the microfinance facility’s launch in Berlin.
“Microfinance institutions are doing great work around the world. We cannot allow the global financial and economic crisis to threaten the work of those institutions.”
Microfinance Still Resilient
Microfinance institutions have proven resilient in times of crisis compared to other financial institutions. They offer the only access to finance for millions of low-income people. As a result, customers tend to take their loans seriously and are very reliable payers.
IFC says the microfinance industry continues to perform well, with microfinance institutions maintaining healthy portfolios. One of the world’s largest investors in microfinance, IFC has over US$1 billion in committed investments in microfinance and will reach US$1.2 billion in FY2009, a year ahead of its target.
But the scale, depth and reach of the current crisis pose a risk, particularly for institutions that depend on financing from local and international banks. Institutions in Eastern Europe and Central Asia and Latin America and the Caribbean, especially, are feeling the crunch.
The portfolio at risk (percentage of borrowers 30 days delinquent on their loans) for the top 150 institutions has edged up from 1.2 percent pre-crisis to 2-3 percent now.
CGAP Survey Reveals Impact of Crises
In addition, low-income people suffering from high food and fuel prices have also been withdrawing savings and even struggling with loan repayments, says Elizabeth Littlefield, Director and CEO of the CGAP, a multi-donor partnership for microfinance housed at the World Bank. She cited an August 2008 CGAP survey of microfinance institutions.
“Although microfinance still has deep shock-resistant roots, there will be impact—both on the institutions and the clients they serve. The medium and longer terms effects of a global recession are likely to be punishing to poor people.” Littlefield said in November on the CGAP blog.
Facility Part of Larger Effort
The microfinance facility is part of the World Bank Group’s multi-pronged effort to protect developing countries from the worst effects of the recession.
Those efforts include funds for bank recapitalization, trade facilitation, and infrastructure.
Bank President Robert B. Zoellick has also called for a Vulnerability Fund funded by 0.7 percent of developed countries’ economic stimulus packages.
The umbrella fund would speed resources to existing World Bank, United Nations and regional development bank safety-net programs and lay the basis for future development.
The new microfinance facility will provide “vital” funding” to ensure microfinance “continues to stimulate growth, create jobs, and overcome poverty in emerging markets.”
“It’s important that tightening of credit does not choke off small businesses and microfinance institutions,” says Zoellick. “Instead, we need to make a special effort to expand credit in these areas.”
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