Demise of microfinance will prove devastating
The on-going global credit crisis has already started impacting the poor in South Asia. For close to four decades microfinance programmes in the region had supported small borrowers to set up small businesses and helped them come out of the vicious cycle of poverty.
Mumbai: A global credit crisis that has felled large investment banks and prompted multi-billion dollar bailout packages is also hurting unlikely victims half a world away: small South Asian businesses that depend on microfinance.
Microfinance has helped poor women and farmers in Bangladesh and India set up businesses and grow crops since the 1970s.
But as credit tightens and largesse from corporations and socially minded investors dries up, microfinance will be affected and will have an impact on poor people who have no other access to finance.
"A liquidity crisis is the very worst-case scenario for microfinance institutions," said Roy Jacobowitz, managing director of development and communications at ACCION International in Boston, which backs microfinance institutions.
"The demise of microfinance will be devastating. It will leave people that depend on it in a very, very bad situation. They could go from a level of success back to poverty."
South Asia's lifeline
South Asia accounts for the most microfinance borrowers, making up more than half of global demand, according to Sa-Dhan, an association of community development finance institutions.
While ACCION has not seen a "catastrophic impact" on microfinance institutions there yet, Kashf Foundation, one such institution in Pakistan, is now seeking international lines of credit, he said.
In India and Bangladesh, microfinance has given hope to hundreds of thousands, especially women. But these may now be under threat because of tighter credit.
"There's less money out there, so there's less money for MFIs," said Siddhartha Chowdri, a manager for ACCION in India, referring to microfinance institutions.
"For MFIs, the cost of their funds has gone up, and at the same time, they're under pressure not to raise lending rates to their borrowers. At some point that becomes unsustainable."
Microfinance shot into the spotlight in 2006 when the Nobel Peace Prize went to Bangladesh's Muhammad Yunus and his Grameen Bank, which pioneered giving small loans without collateral.
But today in Bangladesh, one of the poorest nations in the world, microfinance borrowers and workers are a worried lot.
That sinking feeling
Kulsum Bibi, a 45-year-old mother of three, set up a nursery with a loan of 3,000 taka, or $44, from Bangladesh Rural Advancement Committee, or BRAC, after her husband left her and their children.
"I felt as if I was sinking in a deep sea," said Kulsum, who also enrolled in a BRAC school for adults, and can now read and write and maintain the accounts of her small but profitable business selling plants and saplings. It employs 10 people.
BRAC is one of the largest providers of financial services to the poor in Bangladesh, having disbursed more than $5 billion to nearly seven million people since 1972, mostly women.
"If commercial banks are affected, then the expansion of the microfinance program will be affected," said Mahabub Hossain, an executive director at BRAC, adding that its donor-dependent efforts in education, health care and family planning are at risk.
"I am deeply worried," said the village health worker Hosne Ara, who works on programs for tuberculosis and family planning. "I have been working on this program for many years now, and if it stops, my family will be deprived of a regular income."
Indian woes
In neighbouring India, microfinance programmes were serving 10.5 million clients at the end of 2007, according to Sa-Dhan. The market is forecast to expand to 50 million clients by 2012, with the outstanding loan portfolio rising to $6 billion from about $769 million now.
Indian banks have focused on the programmes as part of the government's "priority lending" requirement of 40% of all lending to ensure smaller businesses and entrepreneurs can access funds.
About 500 commercial, regional and cooperative banks are indirectly involved in microfinance, including State Bank of India, ICICI Bank and Yes Bank.
Global heavyweights including Standard Chartered Bank and HSBC are also this area of finance.
But with banks turning cautious, the microfinance programmes may suffer, particularly smaller outfits that cannot afford higher interest rates or have access to private equity or venture capital.
Facing the heat
"Now that banks themselves are facing the heat, they might either resist lending to MFIs or increase interest rates on loans further," said Prathima Rajan, an analyst at the research firm Celent.
"On the flip side, MFIs might resist borrowing," she said, adding that this would hurt their chances for growth and success.
When they see the programmes cutting back, borrowers may also be unwilling to repay loans, which is critical to maintaining liquidity and giving fresh loans, Jacobowitz said.
"That will lead to belt-tightening, and for poor people it means tightening a belt that is already tight," he said.
However, if banks could overcome their doubts, then the case for lending to microfinance candidates for small, high-margin loans with low defaults is stronger than ever, said Somak Ghosh, group president of corporate finance and development banking at Yes Bank.
"This is actually a good time for banks to raise lending to MFIs, as their business model is a lower risk than large loans for a few big corporates, which are anyway seeing a slowdown."
The story had originally appeared in Reuters.
