THE WORLD FINANCIAL CRISIS AND THE NEGATIVE IMPLICATIONS ON MICROFINANCE INSTITUTIONS

    DECEMBER 2008

    Last week I have just finalized a technical assistance consulting project (funded by the European Fund for South east Europe) for an MFI in Kosovo in the areas of financial and risk  management and I can definitely state that , on the short run, the current world financial crises has already and seriously affected the liquidity needs of the respective MFI. Access to donor and / or investor funding to finance the further growth of the loan portfolio is drastically reduced. Even the microfinance investment funds have difficulties to fund raise. On the medium and long run the negative effect of the current world financial crisis  is that good MFIs with good quality loan portfolio are facing a serious slow-down of their growth as well as liquidity and reputation risks due to the fact that they can no longer meet the needs of both existing clients, that are graduating the loan cycles, as well as of the new, potential micro-enterprises. On the other hand the commercial banks are speculating the liquidity squeeze that MFIs are facing through imposing them tougher borrowing conditions (higher interest rates). Some banks are even “blackmailing” the MFIs by threatening them that the existing (but maturing) credit-lines will not be renewed / rolled-over, unless the MFIs will move to the respective banks their current accounts (where MFI’s loans disbursements and clients’ loan repayments are taking place)  that were already opened at other commercial banks. Such “demands” are addressed  irrespective of the fact that the respective blackmailing banks are not providing all the services needed for a professional management process of a MFI (for instance, the internet banking service that is needed to easily undertake inter-branch fund transfers  any time/day  in order to meet the loan disbursements and cash management needs) .As a conclusion the current world financial crisis has already started to have a negative impact on the microfinance area, generating a dangerous chain reaction through a vicious circle: lack of funding for MFIs means lack of  finance (micro-loans) to MSME - many of the MSME will close - unemployment will rise, poverty levels will deepen, all of these compromising the MFIs’ social mission as well as the economic development processes…

    There is a definite need also to reform the whole international financial system, including the IMF, World Bank, EBRD, European Commission (its aid development programs arm), etc. and, along with this reform, to develop a new and comprehensive world economic development strategy with clear objectives, short-medium-long term operational plans and budgets,  deadlines and responsibilities. A such strategy MUST address and solve all the flaws of the existing international financial system and especially the survival / development needs of the poorest countries /  regions affected by the current financial crisis and with a major strategic objective and emphasis on a strong financial support (rapid funding access, technical assistance for institutional development, etc. ) to the  microfinance sector.The support for the MFI sector, and especially the access to donor/investor/commercial bank funding (at a commercial but realistic cost), must be the TOP PRIORITY of the respective new strategic objectives and of the new world financial system. After all the MFI’s clients - the Micro-Small & Medium Enterprises represent the most important pillar for every economy and the backbone of sustainable economic development strategies and programs.

    George Staicu