Wednesday, April 29, 2009

Will Microfinance be able "feed itself," or will the global crisis catch up to it?

Banks think small to achieve big; focusing on microfinance

India's Microfinance sector is doing well, so well that the leading private and foreign banks in the country are planning to increase their MFI operations.

This article from the Hindu, MFI institutions are usually "fund-starved" in even the best of times due to the incredible demand that is unleashed as soon micro-credit becomes available to dis-enfranchised poor working within the context of a extra-legal economy.

"Despite the financial crisis, MFIs have been the least affected as they have managed to maintain the quality of the business. RBS will continue to expand its MFI portfolio and expects to grow the size to Rs 450 crore by the fiscal-end," RBS Vice-President Moumita Sen Sarma said.

Additionally the lender does not expect any deterioration in the asset quality of MFI units in 2009-10.

The question I ask to those interested in starting a discussion is how long can the Microfinance sectors in developing nations go unaffected by the greater global recession and continue to grow?

Microfinance generally targets the poor people in countries where poor do not have access to modern financial instruments like loans, savings accounts. Many times they lack access to even the most simple of modern technologies, like a cell phone.

Is it possible for Microfinance to "feed itself?"

Consider this cycle. A poor migrant has just emigrated from the Andes mountains to Lima, Peru. After years of struggling to make ends meet, living in a hut constructed out of garbage on a sand dune in the Atacama desert, this woman secures a loan to buy a blender. She can now make tasty juices from all of Peru's delicious fruits that she can sell to people waiting for the bus in her shanty town (Pueblo Jovenes as they are called in Lima).

Technically speaking wealth and economic activity have been produced in this corner of Peru's extralegal sector. This woman is able to pay back her loan with interest so that the lender makes money, she is able to earn a new stream of revenue which she can then spend in the greater economy on goods and services and maybe, just maybe she will eventually be able to afford something like schooling for her children.

How long can this last? Even if money is made available for Microfinance, how long will those workers waiting for the bus in the Shantytown remain employed? If they do lose their jobs does this mean the demand for juice will disapear? Or is there such a high demand for simple services like cold juice in the extra-legal economy that this woman who took out a micro-loan will continue to be able to do business?

Is demand from the underbelly of the world's developing nations so great that it can support itself and continue to grow even in the face of declining growth in the official economy in these countries (ie: the export, financial and real estate sectors)

In the article from the Hindu it seems Indian banks remain confident growth in the microfinance sector will remain robust.

"We could nearly double our MFI portfolio over the last year. We have been working closely with 30 top MFIs to finance their projects and look forward for more such tie-ups in the future," ICICI Bank General Manager (Agri, Rural and Micro Banking) Kumar Ashish said.

Foreign banks too...

"We are shortly launching a project in rural Maharashtra with a leading MFI... HSBC assists the MFIs to build up a strong business model in a number ways," HSBC Group General Manager and CEO Naina Lal Kidwai said.

What do you think?

About the Hindu

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Joshua said...

I wish I knew more about this subject to give an informed/educated opinion. With that said, here is just my opinion.

I think MFI can and will continue to grow. Something tells me that the majority of MFI borrowers sell products/services that are essential (that is to say that the juice example is probably not representative of a typical MFI borrower). The people who consume the products/services of MFI borrowers were probably very poor before the global economic crisis began and were probably no better off when the global economy reached its recent peak. I bet the people in these microfinance economies will likely keep buying, and the entrepreneurs will likely continue to pay back their principal and interest payments.