From Boom to Bust: How Different has Microfinance Been From Traditional Banking?

This paper analyzes developments in global microfinance before and after the Lehman Brothers collapse in 2008. It compares them to developments in traditional banking sectors of emerging market economies and developing countries.

The paper presents data on capital flows and credit growth in microfinance and traditional banking before and after the Lehman Brothers collapse. It analyzes the impact of rapid credit growth on financial stability in the sectors. Conclusions include:

• Pre-crisis credit boom in microfinance and traditional banking sectors was fostered by substantial inflows of foreign capital;
• Microfinance markets with strong capital inflows, high credit growth and increasing competition experienced deterioration in portfolio quality and decrease in credit growth in the post-Lehman period;
• Microfinance and traditional banking recorded similar regional differences in the impact of the credit boom and financial crisis.

The paper states that microfinance, by becoming part of the global financial system, lost its high resilience towards domestic and global financial crises. The sector has been experiencing the effects of global financial integration.