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The impact of the financial crisis on microfinance providers – Results from March 2009 CGAP Opinion Survey Xavier Reille and Christoph Kneiding, CGAP

The global crisis is spreading quickly in emerging markets but little is known on its impact on the microfinance sector: Which regions are most impacted and why? Are MFIs resilient to this unprecedented economic downturn? What is the effect of the crisis on MFI business models? CGAP conducted an online survey with MFIs in March 2009 to answer some of these questions and to monitor the impact of the crisis on microfinance institutions. The survey was widely disseminated to microfinance institutions globally with the support of the MIX and the Microcredit Summit campaign as well as through large MFI networks1. The survey generated over 400 completed responses2 from MFI managers with a good distribution among regions 3 and institutional sizes.4 Regional distribution of respondents

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ACCION, Grameen, FINCA, Freedom from Hunger, MFN, Opportunity, Women's World Banking, and Sanabel Respondents were asked to indicate the asset size of their institutions, for which the following brackets were provided: Tier 1 (assets above $50m), Tier 2 (assets between $3-50m), and Tier 3 (assets below $3m). Around 80 percent of MFIs in our sample are in Tier 2 or 3, which is in line with the proportion of Tier 2 and Tier 3 MFIs in the microfinance industry (as measured by MFIs that report to the MixMarket). One quarter of the respondent institutions mobilize savings – an understatement of the reality given that the participation of credit unions and cooperatives was fairly low. 3 EAP East Asia and Pacific, ECA Europe and Central Asia, LAC Latin America and Caribbean, MENA Middle East and North Africa, SA South Asia and SSA Sub-Saharan Africa. 4 This article presents the high level findings of the survey. CGAP will produce another report to be posted on www.cgap.org with the full results of the survey, which also includes impact of the crisis on MFI clients. 2

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Dramatic slowdown in portfolio growth Microfinance has enjoyed a decade of exceptional growth with the loan portfolio of MFIs reporting to the MIX Market growing by 47 percent in 2007 alone. However, the CGAP survey results show that this period of rapid growth has ended. 65 percent of MFI respondents reported that their gross loan portfolios remained stable or decreased over the last six months. This trend was consistent in all regions and amongst all types of MFIs. The credit crunch and the economic recession are clearly forcing most MFIs to slow down the growth of their microcredit portfolios.

Portfolio same or down last 6 months, by size of MFI

Portfolio quality down globally The lending business contraction is occurring alongside deterioration in the quality of MFIs’ loan portfolios. 69 percent of MFI respondents reported an increase in PAR. Non-performing loans increased for all sizes of MFIs with no significant variations among MFI tiers (see graph above). The broad increase in non-performing loans as a percentage of gross loan portfolio reflects clients’ economic hardship and is also magnified by decreasing loan portfolios. PAR trends in the last 6 months by geographical areas

The CGAP survey highlighted important regional differences. Eastern Europe and Central Asia seem to be most affected regions with 88 percent of MFIs reporting increases in PAR followed by Latin America (71 percent). MFIs in the Middle East and North Africa and East Asia Pacific appear less affected with 62 percent and 58 percent of MFI managers respectively reporting increases in PAR. 2


In search of liquidity The liquidity constraints highlighted during the CGAP virtual conference in December 2008 are still present but are less dramatic than the drop in portfolio growth and broad increase in nonperforming loans. Overall, 52 percent of the MFI respondents reported facing liquidity constraints over the past six months. As anticipated, smaller MFIs are more affected with 64 percent of small (tier 3) MFIs reporting funding problems versus only 35 percent for large (tier 1) MFIs. Small and medium MFIs appear to be struggling more with liquidity issues and their MFI managers expect the situation to worsen over the next six months. Seventy four percent of tier 3 MFIs managers expect the situation to worsen in the next 6 months. Regionally, the most pressing needs for capital are in Sub-Saharan Africa and in South Asia (with 68 percent and 57 percent respondents reporting liquidity problems respectively). Liquidity constraints by tier

% MFIs with liquidity constraints now and in the next 6 months 100 90 80 70 60 50 40 30 20 10 0 Tier 1

Tier 2 YES now

Tier 3

YES later

51 percent of savings-based MFIs expect their loan portfolio to grow, even if by a very low margin, and most of them (56 percent) are not facing liquidity constraints. However, savingsbased MFIs are far from being immune to the effects of the crisis and reported higher levels of PAR increases versus the non-deposit based MFIs (76 percent of the savings-based MFIs had an increase in PAR versus 66 percent for non-deposit based MFIs). No significant business adjustments yet What has been the MFIs’ response to the crisis? Are MFIs cutting costs to improve profitability? Are they increasing interest rates and passing the increases in cost of funds (estimated between 200 and 400 bps increase in most markets) onto their already stretched clients? Most MFI respondents reported no changes in their lending rate (61 percent) to clients. Such measures would indeed be difficult to implement and very unpopular in time of crisis. The survey also found that the majority of MFIs made no changes to their staff, with only 23 percent of the respondents downsizing staff to trim costs.

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Conclusion and Outlook Although opinion surveys are limited and potentially biased, the CGAP study provides an insightful picture of MFI managerial views on the impact of the global crisis on microfinance as of March 2009. Credit risk and liquidity issues are clearly the biggest managerial concerns and one can expect the situation to worsen as the full effects of the crisis unfold in emerging markets during 2009. Surprisingly, MFI managers appear optimistic: 42 percent believe that their performance will remain stable in the next six months. While this may be wishful thinking for some MFIs, it could also indicate that MFI managers are undertaking measures to confront the crisis and prevent further deterioration.

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