Weighing in on Microfinance and the Financial Crisis

Jamie Zimmerman — Mon, 23 Mar 2009 20:24:00 -0400

Signs point to toughening times for the microfinance industry. A recent article from the Economist has echoed my concerns that selling microcredit (as a concept or a product) will grow increasingly difficult as the global economy stumbles (or crashes and burns) on the heels of a debt-led recession in the United States. Not only in the concept politically less appetizing than it was back when Muhammad Yunus won the Nobel Peace Prize in 2006, the capital fueling the industry is drying up. The similarities and differences between subprime lending that fueled the US recession and the "sub, sub, subprime" lending happening in developing countries through microfinance institutions have been debated and analyzed for over a year now. But only recently has the engine of seemingly-endless capital to MFIs around the world starting slowing, sputtering to slow chug in some instances.

The Economist article argues that the microfinance industry is more insulated from the crisis than many of my colleagues working in the sector would currently state. Just because the Grameen Bank has not faltered in this financial crisis doesn't equate to an entirely healthy sector. Moreover, the decrease in capital, and the resulting liquidity constraints and challenges institutions will face, does not represent the variety of challenges that MFIs, or the microfinance sector, could and will likely face as a result of this crisis. While I commend the Economist for putting on spotlight on this particular problem, the article fails to provide readers with the bigger picture.

Fortunately, CGAP just released last week a more thorough analysis of the potential impacts of the crisis on microfinance. The Focus Note reviews not only the challenges of the institutions, but also those of the clients that frequent these institutions to gain capital for their micro-business or, in many cases, borrow to smooth consumption over time. Essentially, the Note paints a relatively more nuanced picture of the crisis on the microfinance industry and tempers its optimism that the industry is "insulated from the problems of the global economy" (as is speculated in the Economist). On the other hand, CGAP does share my view that this crisis will bring opportunities that could result in a better functioning industry, with potentially better outcomes for the poor.

In my opening remarks at the March 16 USAID panel on Microfinance and the Financial Crisis, I also outlined a number of challenges I either currently see or envision for the industry as the global crisis unfolds, many of which are reflected to some extent in the articles mentioned above, including decreased capital, weakening consumer confidence, increased pressure for tougher regulation, etc.. However, I foresee as serious opportunities for the industry. (Call me hopelessly optimistic, but I prefer to concentrate on opportunities whenever possible, particularly in troubling times.)

First, a debt-led global recession is indeed spurring some to cast a critical eye on debt-led poverty reduction like micro-credit. While this may be understandably worrisome for particular institutions, it's a huge opportunity for the microfinance field in general. The backlash against credit and subprime lending could very well lend itself to a microfinance industry whose health is dependent on a more diverse and balanced portfolio, particularly with an emphasis on savings. In fact, deposit-taking MFIs (who are less dependent on capital investments) are indeed the very institutions most insulated from the crisis so far. Next, the spotlight on savings is not limited to acknowledging the need for deposit-taking for an institutions fiscal health. The microfinance field as a whole is now paying long overdue attention to the other critical financial needs of the poor, namely access to effective and safe savings services. Finally, there is a growing recognition that all people, chief among them the poor and the vulnerable, need to save and create a safety net against economic shocks, rather than relying on credit alone. This is a lesson the US learned too late, but for the microfinance field, it's a very real opportunity to look at economic opportunity and resiliency in a whole new way.

(Transcripts and materials from the March 16 event, including perspectives from other panelists on this issue, can be found on the Microlinks site.)

Blogger Exclusive with President Clinton: Wall Street vs. Main Street on the Eve of the Clinton Global Initiative

Jamie Zimmerman — Tue, 23 Sep 2008 13:40:00 -0400

Last night, I was one among 15 progressive bloggers invited to an informal and intimate meeting with President Bill Clinton to discuss the 2008 Clinton Global Initiative, the annual massive convening of world leaders, celebs, corporate executives and progressive NGO activists to make commitments to solve some of the world’s greatest challenges. Told the meeting would last 30 minutes and to limit our questions (“if there is time for any”) to this year’s CGI commitment areas, I wasn’t expecting much more than fluffy rhetoric and quick sound bites on each of this year’s issues -- education, energy and climate change, global health and poverty alleviation. But, President Clinton took his first question early -- “Will the financial turmoil in the United States be a distraction from efforts to advance CGI commitments?” Indeed. This question ended up dominating an hour-long discussion of the causes and effects of the current financial crisis, and what needs to be done about it.

The President gave us a crash course in 2008 Financial Crisis 101: In his view, the turmoil has been caused in large part by three factors. First, the financial system was transaction-based which resulted in over leveraging. Second, investment banks were not subject to the same level of oversight as commercial banks. And third, the money injected by Greenspan in 2001 to avert the tech bubble from bursting when into investments that were too narrow – real estate. By the early 2000’s real estate investments dominated the market and increasingly money was chasing opportunities in housing, leading to subprime mortgage lending and derivative futures.

But Fannie and Freddie aren’t off the hook here either. These institutions “socialized the risk” of real estate investing, “but privatized the profits.” And the lack of regulation and oversight of these institutions, coupled with “bi-partisan coddling of misconduct for too long” contributed to this mess we’re in now.

Here’s an interesting counterfactual he posited: If President Bush had ratified, instead of killed, the Kyoto Protocol when he came to office, it would have created investment opportunities and incentives to create new sustainable energy technologies and products. Housing wouldn’t have been investors’ only cash cow.

A moot point, perhaps in the immediate future (more on his comments on the environment and energy soon), as a quick response to the crisis is critical if we want any chance of averting a downward spiral of collapses and bailouts. And speaking of bailouts, what does the President think of the $700 billion package?

The package is necessary to deal with the crisis on Wall Street, but what about the crisis on Main Street, that faced by millions of everyday Americans who are losing their homes, who can’t pay their bills, who are worried about paying for healthcare, education and the value of the 401(k)s? In Clinton’s view, it’s not sufficient. For taxpayers to fork over 700 billion dollars, he said, they should expect in return:

A moratorium on foreclosures for two years,
The creation of a Loan Homeowners Corporation (model after the one created during the depression that saved million of homes and actually turned a profit for the government) and
A plan to pay back the taxpayers over time, through profit-sharing or other measures. Without an appropriate “Main Street” response, this package may fail.

But what does this have to do with the CGI convening’s this week? Obviously, the financial turmoil will impede next President’s (and perhaps other world leaders) ability to use of soft-power spending (on foreign assistance/poverty eradication efforts). But President Clinton is not convinced that this crisis will distract leaders from confronting important global issues. Instead, he wonders if - with the current crisis’ reminder that none of us are immune to economic and social troubles - will make the world more resolute in our search for solutions.

*Note: I will be blogging from the CGI all of this week. Stay tuned for more on the meeting with President Clinton, as well as coverage of commitments and sessions on poverty eradication, asset building and financial services for the poor *

global development

Weighing in on Microfinance and the Financial Crisis

Blogger Exclusive with President Clinton: Wall Street vs. Main Street on the Eve of the Clinton Global Initiative