Will the Bottom of the Pyramid Hit Bottom? The Effects of the Global Credit Crisis on the Microfinance Sector

This paper measures the impact of the financial crisis on the microfinance sector. It makes recommendations to ensure that the crisis does not cut off access to financial services to the poor when they need it most. The Credit crunch has reduced available commercial capital for MFIs, stunting the growth of MFI loan portfolio. Findings include:

• Sector wide microfinance loan portfolio growth will be less than anticipated over 2009 and 2010 due to scarcity of private credit;
• Higher borrowing costs will erode MFI margins;
• MFIs that take deposits will be better positioned to endure the crisis;
• Emergency liquidity funds from international development agencies will mostly be disbursed in hard currency loans, exacerbating MFI foreign exchange risk exposure;
• Providing support to MFIs in strengthening their balance sheets with a better debt-equity mix, and securing access to local currency funds will be essential;
• Many MFIs will see higher delinquencies.

Over the longer term, MFIs will need to adjust to a less benign environment, and face tough challenges of reducing costs, increasing efficiencies, improving customer service and diversifying funding in order to stay profitable and competitive.