There are several business models how Microfinance institution (MFI) operates. Generally speaking, MFI provides micro loans or insurance to the poor to spur their self-reliant entrepreneurs. On one hand, micro loans give the low-income people an opportunity to discover full potential for developing their own business and to bring home the bacon. On the other hand, micro insurance helps the poor manage variety risks, such as health risk and property risks, and sustain the business development. How the micro insurance works is revealed in the path to restoration after severe storm hitting Haiti in June 2011. Fonkoze, the largest MFI in Haiti, collaborated with the Microinsurance Catastrophe Risk Organization (MiCRO) to provide natural disaster insurance coverage to its clients after heavy rainfall which caused damage in Haiti. The insurance helped the borrowers to pay back the outstanding debt, have access to another loan to rebuild their lives, and receive small compensation for loss of property. This example demonstrates the positive influence on viability of micro finance products to support a sustainable economic growth in developing countries.

According to the 2009 MFI benchmarks provided by Microfinance Information Exchange (MIX)1, Latin American and the Caribbean (LAC) region has the largest FMIs number as well as yield on gross portfolio among four continents. (Figure 1) Even though microfinance has its long history, which can be traced back to the 1970s, and the mechanism was gradually improved, sustaining the operation and keep its long-term stability is one of the key issues for MFIs. To assess the degree how the global financial crisis impacts on MFIs’ sustainability in developing countries, MFIs’ cash inflow and outflow should be taken into consideration.

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1 http://www.mixmarket.org/ MIX collects and validates financial, operational, product, client, and social performance data from MFIs in all regions of the developing world, standardizing the data for comparability.

Figure 1. Number of MFIs and Yield on Gross Portfolio in Four Continents

Note:- 1. Values correspond to the median MFI in 2009. 2. Yield on Gross Portfolio (real) = (Adjusted Yield on Gross Portfolio (nominal) - Inflation Rate)/ (1 + Inflation Rate) 3. ECA: Europe and Central Asia 4. LAC: Latin American and the Caribbean 5. MENA: Middle East and North Africa Source: Microfinance Information Exchange (MIX)

Since the Great Depression in 1930, the global recession beginning in late 2007 was considered the worst crisis and beat most financial giants. There are some papers discussing the relationship between microfinance industry and macro economy. Mr. Nicolas A. Krauss and Mr. Ingo Walter2 probed into the effect of domestic and international shocks. According to Mr. Adrian Gonzalez’s study in 20083 and Mr. Christian Ahlin, Ms. Jocelyn Lin, and Mr. Michael Maio’s publication in April 20104 and, the authors addressed MFIs’ country-level determinants of success and studied the resilience of MFI to macroeconomic events.

Based on the empirical findings, there was a weak correlation between MFI’s usual performance indicators and international capital market developments, as well as domestic macroeconomic conditions. The statement, nevertheless, was based on the available data in a short period. If we focus only on the assets of the median MFI across four continents as illustrated in Figure 2, we can find there is a continuous and vigorous growth in asset size in a decade. However,

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2 Adrian Gonzalez, “Resilience of Microfinance Institutions to National Macroeconomic Events: An Econometric Analysis of MFI Asset Quality” published on 1 July 2007.
3 Walter, Ingo and Krauss, Nicolas A., “Can Microfinance Reduce Portfolio Volatility?” published on 30 January 2008.
4 Christian Ahlin, Jocelyn Lin and Michael Maio, “Where does microfinance flourish? Microfinance Institution performance in macroeconomic context,” published by the Journal of Development Economics on 27 April 2010. we can find there is a strong decrease in lending growth. (Figure 3) The charts imply that cash flow became inactive in microfinance industry, which means that funds are accessible with difficulty. In addition, the loan delinquency began to increase and domestic macroeconomic conditions became worse.

Generally speaking, some countries would take several steps to mitigate the impact of the financial crisis on their economies, including interest rate reductions, recapitalization of financial institutions, increasing liquidity to banks and firms, fiscal stimulus packages, trade policy changes, and regulatory reforms5. In the meanwhile, the interest rate charged by MFI would be relatively high. It also means that political decisions would affect and dominate the development of MFI in a manner. As a result, the relatively high rates (even when justified by industry fundamentals) were difficult to defend in the context of uninformed public discussion, or when the issue was exploited for political advantage6.

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5 United Nations Economic and Social Council, “The global financial crisis: impact, responses and way forward,” Committee meeting in June 2009
6 Gabriel Di Bella, “The Impact of the Global Financial Crisis on Microfinance and Policy Implications,” Working Paper of International Monetary Fund (IMF) in July 2011.

References

“2009 MFI Benchmarks”, Microfinance Information Exchange (MIX)

Adrian Gonzalez, July 2007, “Resilience of Microfinance Institutions to National Macroeconomic Events: An Econometric Analysis of MFI Asset Quality,” MIX Discussion Paper No. 1

Nicolas A. Krauss and Ingo Walter, January 2008, “Can Microfinance Reduce Portfolio Volatility?” Working Paper, New York University

Christian Ahlin, Jocelyn Lin, and Michael Maio, April 2010, “Where does microfinance flourish? Microfinance Institution performance in macroeconomic context,” Journal of Development Economics

Gabriel Di Bella, July 2011, “The Impact of the Global Financial Crisis on Microfinance and Policy Implications,” Working Paper, International Monetary Fund (IMF)

United Nations Economic and Social Council, June 2009, “The global financial crisis: impact, responses and way forward,” Cairo

Dilin Lim, December 2009, “Practical Challenges of Microfinance Institutions”

Sergio Navajas and Luis Tejerina, November 2006, “Microfinance in Latin America and the Caribbean: How Large Is the Market?” Publication of the Inter-American Development Bank

Angel Salgado Balmaceda, November 2010, “Benchmarking Microfinance in Central America 2010”