Far from being insulated from the economic mainstream as traditionally thought,microfinance too faces a fall in growth and fund flows because of the global recession and declining investor confidence, according to a survey sponsored by Citi Foundation.
This will be the sector's first major stress test since it emerged in recent decades as a fast-growing provider of small-scale financial services to the world's poor.
The survey polled more than 400 practitioners, investors, regulators and analysts spread across 82 countries.
The global financial crisis has resulted such problems as surge in bad loans, shortage of liquidity, drying up of funding and falling profitability for the sector, the survey shows. Other top concerns surround the ability of microfinance institutions to manage their way through the crisis because of weaknesses in management and corporate governance.
The survey updates a previous poll carried out in early 2008 at the beginning of the crisis, and shows how sharply risk perceptions have changed since then. Most of the risks which are now seen as threats to the sector's prospects, such as the world recession and the credit crunch, were considered negligible only 18 months ago.
Bob Annibale, global director of Citi Microfinance, said, "This year's report clearly illustrates a dramatic shift in perceived risks within microfinance with credit and liquidity issues rising to the top. MFI clients are being challenged by rising food and energy prices. Declining remittance flow is another area of concern.
However, strong stakeholder support has ensured that funding and performance problems are largely being addressed."
David Lascelles, survey editor, said, "These findings turn the earlier survey on its head. Last year's result reflected the traditional view that microfinance operates in a world of its own with abundant funding and loyal customers. But the crisis has shown that it is also exposed to the shocks of the 'real economy'."
