MFIs in Africa face collapse as financial crisis bites

Microfinance institutions in Africa have very little chance of surviving the current financial crisis as loan repayment default soars.

Most of their low-income debtors will be too busy concentrating on personal survival to think of repaying their loans.

This is despite a show of resilience by the global microfinance sector in a new survey conducted by CGAP, an independent policy and research centre dedicated to advancing financial access for the world’s poor.

“There have been few failures among microfinance institutions since the onset of the current financial crisis. However, the more than 400 respondents to the March survey reported significantly tougher market conditions,” reads the report, released recently.

In East Africa, microfinance institutions have been pivotal in spurring growth and development for the majority of rural dwellers.

They also support a thriving small and medium scale enterprise sector that today account for about 30 per cent of the gross domestic product of countries like Kenya.

However, the full impact of the financial crisis is likely to be felt in the second half of this year.

Accordingly, many MFIs are taking steps to cope, such as taking a more conservative lending approach and in some cases, even cutting staff.

“Many poor households are struggling with the many consequences of the global food, financial and employment crises,” said Elizabeth Littlefield, CGAP’s chief executive.

She added, “Their income sources like revenue from small businesses or from money sent from families working abroad, have become more erratic. At the same time, many expenses like food, are still far higher than before. Savings are thus being withdrawn and loan repayment rates to MFIs are worsening.”

According to the survey, as opposed to their counterparts in emerging economies, leading MFIs in the West are well positioned to adjust their operations to weather the financial storm.

Many are investing more in client communications and tightening credit and collection policies.

It is critical that these organisations stay financially viable, as their clients will need their services now more than ever.

It is this burden that local and regional microfinance institutions will have to deal with as the crisis finally takes its toll on Africa, coupled with other economic situations that may hamper their survival chances in the face of the crisis.

“On the client side, we foresee a further deterioration in food consumption and loan repayment in many markets resulting from sustained high food prices and a drop in incomes,” says the survey.