By John D. Conroy, published by the Foundation for Development Cooperation (FDC), May 2010, 4 pages, available at: http://www.fdc.org.au/files/Resources/briefing-note/Briefing%20Note%20No%2010%20-%20Final%20%28e-version%29.pdf

In this FDC Briefing Note, the author draws parallels between the worldwide development of subprime lending and microcredit over the last decade. The theme of inadequate capacity for deposits and other forms of saving through microfinance institutions (MFIs) also runs through the author’s arguments.

The paper opens with an outline of the evolution of microfinance towards commercialization, particularly in the realm of foreign investment. Between 2004 and 2006, foreign debt and equity investment in microfinance more than tripled to USD 4 billion. While this wave of foreign investment may have been necessary to initiate MFIs, the paper argues that continued access to these funds will ultimately harm domestic financial development. This may occur through decreased savings and mission drift as a result of external benchmarks and stakeholders.

The paper links the commercialization to trade imbalances between net consumers, like the US, and net savers, like China. The author argues that net savers such as China chose to limit domestic investments, instead of pouring money back into US markets, where this “wall of money” was used to finance “new” areas of investment such as sub-prime mortgages and microfinance.

MFIs were not immune to the recent financial crisis, largely because of the significant amounts of foreign investment that contributed to their creation and growth. Consequently, the crisis has lead to the development of domestic financial systems and a pullback from the use of “easy” international capital by MFIs.

By Matthew Castner, Research Assistant

About The Foundation for Development Cooperation (FDC):

The Foundation for Development Cooperation (FDC) was founded in 1990 and is based in Brisbane, Australia, with offices in Singapore and Fiji. FDC conducts policy-oriented research and mobilizes Australian and international support for development efforts.

Additional resource:

MicroCapital: “Subprime Lending: Lessons for the Microfinance Industry,” by Cecelia Beirne, April 2008, http://www.microcapital.org/downloads/whitepapers/Subprime.pdf

 MicroCapital’s Microfinance Universe profile: The Foundation for Development Cooperation (FDC): http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=The+Foundation+for+Development+Cooperation+%28FDC%29

 Browse the MicroCapital Universe and add your entry to the wiki at http://www.microcapital.org/microfinanceuniverse/