Impact of the financial turmoil on MFIs[1]
Introduction
This paper discusses the influence of the financial turmoil on MFIs and how MFIs can cope with the emerging challenges. MFIs and their clients have proven to be fairly stable during previous Asia, Rouble and Peso crises at the end of the last millennium. However, it is likely that the current financial turmoil will have greater influence on the micro finance sector; first because the global economy will be affected (which will diminish remittances, tourism and demand for commodities from developing countries) and second because many MFIs are more linked to the global financial markets than previously.
Higher costs of capital, lower demand
The financial crisis will affect the MFIs at least in the following ways:
· It will become more difficult and expensive to attract funding as capital streams dry-up due to lack of confidence in the repayment capacity of counterparts. This is also happening for MF-funders that get their funding from sources such as pension funds, banks and individuals, which are directly affected by the crisis.
· Shorter term credits will prevail. This direct impact on MFIs will be noted when attracting (new) funding; credit terms will possibly be shorter as the funders might be afraid that they are not able to refund their own funding and because they are less sure that they will get their outstanding credits back (the very nature of crises is the unknown nature of unknown factors, which funders considered manageable previously)
· The global economic slowdown will likely diminish demand for micro finance. A direct impact of the financial crisis is that the global economy is slowing down, which negatively influences sending of remittances, tourist spending and commodity exports and – consequently - those working in export related industries. Hence, it is likely that the economies of developing countries will slow down, which will slow down demand for micro finance.
Introduction
This paper discusses the influence of the financial turmoil on MFIs and how MFIs can cope with the emerging challenges. MFIs and their clients have proven to be fairly stable during previous Asia, Rouble and Peso crises at the end of the last millennium. However, it is likely that the current financial turmoil will have greater influence on the micro finance sector; first because the global economy will be affected (which will diminish remittances, tourism and demand for commodities from developing countries) and second because many MFIs are more linked to the global financial markets than previously.
Higher costs of capital, lower demand
The financial crisis will affect the MFIs at least in the following ways:
· It will become more difficult and expensive to attract funding as capital streams dry-up due to lack of confidence in the repayment capacity of counterparts. This is also happening for MF-funders that get their funding from sources such as pension funds, banks and individuals, which are directly affected by the crisis.
· Shorter term credits will prevail. This direct impact on MFIs will be noted when attracting (new) funding; credit terms will possibly be shorter as the funders might be afraid that they are not able to refund their own funding and because they are less sure that they will get their outstanding credits back (the very nature of crises is the unknown nature of unknown factors, which funders considered manageable previously)
· The global economic slowdown will likely diminish demand for micro finance. A direct impact of the financial crisis is that the global economy is slowing down, which negatively influences sending of remittances, tourist spending and commodity exports and – consequently - those working in export related industries. Hence, it is likely that the economies of developing countries will slow down, which will slow down demand for micro finance.
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