MICROFINANCE PAPER WRAP-UP: The Impact of the Global Financial Crisis on Microfinance and Policy Implications, by Gabriel Di Bella, published by the International Monetary Fund

Published by the Western Hemisphere Department of the International Monetary Fund (IMF) as IMF Working Paper No. WP/11/175, 2011, 41 pages, available at: http://www.imf.org/external/pubs/ft/wp/2011/wp11175.pdf

The author of this paper considers the following manifestations of the growth of the microfinance industry: the scaling-up of microfinance institutions (MFIs), diversification of funding structure (away from subsidized lending towards commercial borrowing), adoption of better management practices and information systems, and transformation of nonprofit NGOs into regulated financial institutions partially funded by private capital. In many countries, microcredit now constitutes a significant portion of both GDP and private sector credit. Consequently, abrupt changes in microcredit delivery in these countries may have adverse macroeconomic consequences. However, before the global financial downturn of 2007-08 it was hard to establish a relationship between MFIs’ usual performance indicators and international capital market developments and even domestic macroeconomic conditions.

This paper sheds some light in this area by reevaluating the issue of general risk of MFIs and finds, contrary to what was commonly believed prior to 2007, that MFI performance is linked to both domestic economic conditions as well as changes in international capital markets. The paper uses data from 353 MFIs over the period of 1998 to 2009. Regressions were performed for alternative cross sections, time periods and MFI groupings to establish whether relative systemic risk varies depending on location, legal status (regulated or un-regulated), institution type (NGO, bank, rural bank or co-operative etc.), purpose (for-profit or nonprofit) and age.

The study finds that during the global financial crisis microcredit growth rates worldwide sharply decreased as MFIs’ balance sheets were negatively affected both on the liability side (by the decrease in liquidity) and on the asset side (by increases in loan delinquency and write-off ratios). Also, MFIs’ relatively high interest rates and their lack of transparency in some countries resulted in government-mandated interest rate caps.

The empirical findings suggest that links between MFI performance indicators and both domestic and international economic conditions are stronger than previously believed. In particular, MFIs in Mexico, Central America and the Caribbean (M-CAC); Eastern Europe; and the Middle East and Central Asia seem most sensitive to changes in the domestic and international economic environment, while from an institutional standpoint, banks and non-bank financial institutions show the closest links. These results suggest that MFIs’ increased attention to financial “sustainability”— ie, commercialization of portfolios and growth—have made them more similar to conventional financial institutions.

The paper also analyzes the factors behind MFI lending rates and interest rate spread. The Results indicate that average loan size, MFI productivity and age are correlated with differences in lending rate levels, ie, the rate at which loans are disbursed. Empirical evidence also suggests that more mature MFIs charge lower lending rates. Other variables tracking asset quality and MFI funding structure also appear to be correlated with lending rates. However, the study finds no significant link between lending rates (spreads) and domestic economic conditions.

Although these links are consistently observed across a number of regions, institution types, legal status, MFI purpose and age, the systemic risk of some MFI groupings appears to be higher. From a regional perspective, the results suggest that systemic risk is higher for MFIs operating in the M-CAC and EUR regions, while it is lower for those in the Asia-Pacific region and South America. From an institutional perspective, the systemic risk of banks and non-bank financial institutions appears to be higher, while for NGOs such systemic risk is lower. There is also some evidence that the systemic risk of for-profit institutions and younger MFIs is higher than that of nonprofit MFIs and more mature institutions.

Results in this study “also suggest that if the policy objective is to reduce interest rates, regulation should, in principle, aim at creating an enabling environment (a market structure) in which MFIs can operate, test their lending technology, introduce innovations allowing increases in productivity and efficiency, and exert a competitive pressure on each other.” Finally, the study suggests strengthening legal frameworks, generalization of the use of credit bureaus, improved corporate governance principles and timely and standardized reporting.

By Ashim Kar, Research Associate

Sources and Additional Resources:

Bella, G Di (2011). “The Impact of the Global Financial Crisis on Microfinance and Policy Implications”, International Monetary Fund (IMF) Working Paper No. WP/11/175, available at: www.imf.org/external/pubs/ft/wp/2011/wp11175.pdf

MicroCapital.org story, August 19, 2011, “MICROFINANCE PAPER WRAP-UP: Discovering Limits: Global Microfinance Valuation Survey 2011; By Frederic de Mariz, Xavier Reille, Daniel Rozas; Published by JP Morgan, CGAP (Consultative Group to Assist the Poor)”, https://www.microcapital.org/microfinance-paper-wrap-up-discovering-limits-global-microfinance-valuation-survey-2011-by-frederic-de-mariz-xavier-reille-daniel-rozas-published-by-jp-morgan-cgap-consultative-group-to-assist/

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