Coping with the Price Spike? Effects of Food and Fuel Inflation on MFIs and Borrowers

This paper discusses the impact of food and fuel inflation on the microfinance industry. It reports findings of a study conducted in Bangladesh, Haiti and Nicaragua. The study draws on a survey of MFIs, MFI personnel and borrowers, published research, government statistics and analysis of loan portfolio data.The report confirms that inflation is negatively affecting MFIs and borrowers, but its extent and repercussions are yet to be fully understood. Findings include:

• Costs have increased at a far greater rate than incomes, resulting in increased loan delinquencies;
• Increase in delinquencies may lead to mass restructuring and write-offs if left unchecked;
• Continued portfolio growth has offered MFIs some relief, but has deflected focus from portfolio risk;
• MFIs inclined to focus on risk have few crude tools to do so;
• MFI borrowers find that prices for basic requirements have increased drastically, but incomes have remained the same.

The sustainability of MFIs will depend on the implementation of strategies that hedge against adverse domestic economic changes and macro global trends. In order to deal with economic shocks, MFIs need to adopt robust risk management techniques, tools and protocols.