Financial Crisis: Lessons from Microfinance

Paper
Date Published: 
Aug 2010
Author: 
Constantinou, D. & Ashta, A.

Analyzing impact of financial crisis on microfinance

This paper examines the impact of economic and financial crises on MFIs. It explains why MFIs require increased financing during a financial crisis.

The paper studies the impact of financial and banking crisis on Argentina, Bolivia, Ecuador and Russia, and presents a case study of the Bolivian microfinance crisis of 1999-2000. A CGAP report on the delinquency crisis of 2010 highlights concentrated market competition, multiple borrowing, overstretched MFIs and erosion of lending discipline as factors responsible for delinquency and the microfinance crisis.

The paper identifies strategies of Bolivian MFIs for surviving the crisis. It recommends that MFIs focus on strengthening credit risk management, consolidating back-office and front-office operations, increasing communication with staff and investors and enhancing balance sheet management. Conclusions and observations include:

  • Financial crisis does not significantly affect funding of larger MFIs;
  • Repeat needs of existing borrowers and new loans to previously excluded microentrepreneurs ensure growth of the sector even during crisis;
  • Complacency of MFIs leads to failure in credit discipline;
  • Non-performing loans tend to increase during a crisis;
  • Saturation of microfinance markets may lead to cross-lending and over-indebtedness.
Type: 
Paper