MICROCAPITAL STORY: Microfinance Pioneer Muhammad Yunus Says Food Crisis Threatens Borrower Repayments

In an interview with the Financial Times, Muhammad Yunus, the founder of pioneering microfinance institution (MFI) Grameen Bank of Bangladesh, says that the bank is seeing a sharp increase in problems associated with the repayment of debts by poor borrowers as a result of rising food prices.

Yunus, who won the Nobel Peace Prize in 2006, views the ongoing food price crisis as “serious,” especially since food expenditures consume a disproportionately large chunk of income for poor families.

“Whatever money they have, now they’re using a lot more of their income for buying food, so the strain on making payments becomes very, very difficult,” Yunus tells the Financial Times. Though the crisis has affected many of the 38 countries in which Grameen operates, it has been most acutely felt in India, the Philippines, and Bangladesh.

One ironic factor in the escalation of food prices is the increases in demand as people move out of poverty and into the middle classes. Supply often cannot keep pace with this growing demand.

“It has created a new situation where consumption level has gone up, people are eating more than they did” when they were poor, says Yunus.

The seemingly sudden global uptick in the prices of food staples has caused numerous disruptions in recent weeks, leading to riots in some countries and even spooking consumers in the developed world. Questions have also been raised about the role of, and impact to, microfinance institutions: an article in the African Executive magazine examines the relationship between microfinance and agriculture in Kenya, and MicroCapital recently summarized an article by a microfinance risk manager on the potential effects of the food crisis on MFIs.

By Stephen Son

Additional Resources:

Financial Times: “Borrowers hungry for a helping hand to survive”

MicroCapital.org article, May 7, 2008: “NEWS WIRE: Kenya: Is Microfinance Failing Agriculture?”

MicroCapital.org article, May 5, 2008: “Microfinance Risk Manager Predicts Effects of Food Crisis and Sub-prime Meltdown on Microfinance Institutions (MFIs)”

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