Impact of the Financial Turmoil on MFIs

This paper states that the current global financial turmoil will have a greater effect on the microfinance sector than previous financial crises because of MFI linkages with global financial markets. It will affect MFIs in the following ways:

• It will become more difficult and expensive to attract funding as capital streams dry up;
• Funders' credit terms will be shorter;
• There will be less demand for microfinance.

To deal with decreased demand and increased capital costs, MFIs will have to:

• Spread funding risk by diversifying funding sources, managing relationships with funders and tapping local markets;
• Manage liquidity by developing and monitoring a liquidity plan, and estimating the influence of currency movements on profitability and equity;
• Spread portfolio risk over areas and sectors by installing sector limits;
• Develop lean and mean operations by creating cost efficiencies, developing activity-based costing and considering cost-benefits of organizational structures and procedures.

The article stresses that these methods, under normal economic circumstances, would improve management information, diminish funding risk and make operations more efficient. However, the urgency of the current situation places them on top of the agenda.