MICROCAPITAL STORY: Microfinance Risk Manager Predicts Effects of Food Crisis and Sub-prime Meltdown on Microfinance Institutions (MFIs)

Writing in the Globalist, an online magazine that covers globalization issues, David Apgar, a risk manager with microfinance investment management firm BlueOrchard Finance, discusses the link between the U.S. sub-prime meltdown and the global food crisis and their potential impact on microfinance institutions (MFIs). In short, he relates the rising prices of food to the currently stumbling U.S. economy’s influence on world financial markets; as a result, he posits that the poor may turn against the very system that has made it possible for many of them to benefit from microfinance.

Mr. Apgar begins by examining the roots of the food crisis, with an emphasis on the role of the U.S. dollar. The U.S. has been pursuing an inflationary economic policy for years, and it continues to do so in order to stave off a recession brought about by the sub-prime mortgage debacle. This affinity for inflation has helped unleash an increase in world commodity prices, which are largely denominated in U.S. dollars.

In the best-case scenario, then, Mr. Apgar sees the U.S. ending subsidies that encourage corn over grain production and balancing its budget to relieve domestic inflation pressures. Developing countries would follow up by allowing their currencies to temporarily gain against the dollar, decreasing the impact of dollar-driven inflation and allowing them to remove agricultural trade barriers that starve their people. Increased exportation of U.S. grain would help lower food prices worldwide and reduce the U.S.’s foreign debt, which has hobbled its economy.

How does this come to bear on microfinance? Even in this best-case scenario, microfinance borrowers remain subject to the pinch of rising prices – a 40 percent increase in food prices that already consume 35 percent of their budgets. This could arguably fuel a blanket reaction against global financial markets by the poor. MFIs would have to deal with heightened foreign currency risk as their home currencies appreciate against the dollar – a new risk for many of them. Mr. Apgar thus makes a projection as to the conditions MFIs would face under a hypothetical scenario, though what his article unfortunately lacks is a real-time assessment of how microfinance borrowers are reacting to and MFIs are coping with the ongoing situation.

Mr. Apgar proposes that MFIs find a way to vary the rates they charge to different customers, balancing the interests of food producers against distressed food consumers. They also need to find ways to manage foreign currency risk, as ongoing volatility is certain. Finally, policymakers in both developing and developed countries would need to take appropriate action, smoothing a path to allow the best-case scenario to play out.

And what of a less-than-best case scenario? Mr. Apgar doesn’t go on to speculate about the ramifications of such a prospect, but it is likely a topic that MFIs, investors, policymakers, and academics would want to consider as these crises continue to roil the world economy.

By Stephen Son

Additional Resources:

The Globalist: “Microfinance and the Global Food Crisis”

Similar Posts: