Global Recession and Sustainable Development: The Case of Microfinance Industry in Eastern Europe

This paper explores traits of the microfinance industry in Eastern Europe and the impact of the ongoing economic downturn on its performance. It discusses its excessive vulnerability to contemporary economic trends and examines reasons for its cyclical performance.MFI growth in Eastern Europe has slowed down with flat or even decreasing trends in loan portfolios in 2009. On the clients' side, accelerated inflation, massive layoffs and drop in incomes have led to lower repayment rates.The study lists the main reasons for the cyclicality currently experienced by the microfinance sector in Eastern Europe. They include:

• Incomplete economic transition in former communist countries;
• High inflation and drop in real income;
• Higher cost of capital after a long period of unreasonably cheap funding made available to MFIs;
• Dominance of individual lending, which increases cost per borrower and risk of default;
• High average size of microloans, which increases concentration of credit risks;
• Lack of local deposit base due to incomplete regulation of microfinance business in many countries;
• Withdrawals of existing deposit base over the recent months due to negative past experiences.