Tuesday, January 27, 2009

Microfinance and The Global Economic Slowdown

According to Premal Shah [President of Kiva], “Shocks to an economy, like a global recession, affect the informal sector less than the formal sector. For the MFIs [microfinance institutions], because their clients are in the informal sector, typically the portfolio quality does not decline.”

Micro-entrepreneurs mainly employ domestically produced goods and services, which make them less exposed to currency devaluations or exchange controls. This insulates MFIs from currency volatility and as a result micro-entrepreneurs are more likely to realize an increase in demand for their less expensive locally produced goods and services as the local market during a recession shifts from more expensive to cheaper imports from countries facing raising inflation levels due to the financial crisis.
From "Global Recession and Microfinance in Developing Countries: Threats and Opportunities," by Roberto Moro Visconti and Geoffrey Baluku Muzigiti (SSRN). The main threat to MFIs right now is whether their funding is constrained due to problems in US financial and credit markets. So far Kiva seems to still be getting plenty of loan volume, but I don't know whether large philanthropists are still donating as much to MFIs. It's no question that people stuck in the informal sector would be much worse off in the absence of these organizations.

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