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Photo: Africa Renewal Vol22 No 2. July 2008

Implication of Global Credit Crisis on Microfinance Delivery

Mary Ellen Iskenderian, President & CEOFebruary 23, 2009

Women’s World Banking

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Women’s World Banking: Who We Are

WWB Global

40 Staff, Experts in Microfinance

Network Members

30 Microfinance Providers 21 countries

24 Other Financial Institutions Additional 9 countries

Services

Customer analysis and insightsProduct designMarketing and distribution strategiesLinkage to capital marketsPeer-to-peer learningKnowledge creation and dissemination

WWB Network Impact

Directly

11 MILLION POOR ENTREPRENEURS

Indirectly

ANOTHER 10 MILLION

FOR TOTAL IMPACT OF OVER

21 MILLION CLIENTS

GLOBAL NETWORK = Leveraging convening power, communication channels, and reputation to promote women as entrepreneurs, leaders and innovators

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WWB Core Network Members and Reach

Asia = 10, Africa = 8, LAC = 7, MENA and Eastern Europe = 5

30 Core Network Members in 21 Countries

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Our Mission

Our Impact

To expand the economic assets, participation, and power of poor women as entrepreneurs and economic agents by opening their access to finance, knowledge and markets

Largest network in microfinance, built over 30 years

Majority of WWB members are among the three highest-rated microfinance providers in their countries

75% of their clients are women

WWB members grow by an average of 30% each year

$2 billion in outstanding loan portfolio

Women’s World BankingMission and Impact

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Impact of Global Credit Crisis on Microfinance

Finance Finance• Increased Cost of Funding

•Structured Market slowdown/shutdown

•Existing relationships with investors largely unaffected but re-pricing happening per market conditions

•MFI demand for funds rising and many development finance institutions reaching their lending limit

•Decreased remittances

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Impact of Rising Fuel & Energy Prices on Microfinance

• Increased operating expenses (electricity, transportation, etc)

Offices closed on Saturdays

Transportation costs serious issue for MFIs with operations in areas outside cities

•Household expenses have increased, microentrepreneur margins down, especially for those who have operations outside their home

•Clients express difficulty reaching branches to receive services/repay loans

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Impact of Food Prices on Microfinance

Food • Food price increases add strain to the work of credit officers who need to prioritize interest collection over the clients’ household pressures

•Clients prioritize needs associated with food over repayment of interest on loans (or vice versa)

• Food consumption changes due to costs (Grameen Foundation: ‘MFI expressed concerns as their borrowers are eating less and less’)

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Financial Crisis: Impact on Developed Markets

US recession continues and deepens• Equity markets down over 30%• Real consumer spending down 3.1% q/q, largest decline since 1980

US credit markets• Cost of borrowing up despite reduction in Fed Funds rate• Spreads on single A corporates are 600-700 over 3-5 year Treasuries for a total cost of

borrowing in the 9-10% range. Spreads are up close to 400 bps since August 2008 Europe economy stagnant

• Real GDP fell 0.5% y/y, saar in 3Q08, compared with rising 7.9% y/y, saar in 1Q08 European credit markets

• 3-month LIBOR has fallen to 2.7%, down from a high of 4.8% in early October. Asia

• “Japan is in a shallow recession…the economy will likely not soon recover as long as external demand remains subdued.” (JP Morgan)

International capital is tighter, slower and more expensive.

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Financial Crisis: Impact on Emerging Markets

India• Government is actively trying to boost liquidity and overseas fund inflows. • Since October 2008, the Reserve Bank of India has cut interest rates by 150 bps,

while simultaneously relaxing external commercial borrowing restrictions to $500MM per borrower per year.

Pakistan• Pakistan continues to face economic and political challenges, resulting in a 600 bp

rise in borrowing costs and further fx deterioration. The BoP situation is worrisome. China

• Increased domestic demand will offset some G3 export decline, but aggressive monetary and fiscal polices are forecasted to foster GDP growth.

Africa • Some African governments are raising their capital adequacy requirements (eg,

Ghana) in response to the global financial crisis. PAR in Morocco has risen sharply but remains in line elsewhere in the region.

Economic slowdown of emerging markets is negatively impacting MFIs.

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Financial Crisis: Impact on Microfinance Providers

Loan renewals at higher interest rates with commercial and development institutions

More expensive / inflexible guarantee requirements

Increasing unavailability of local currency funding and lenders unwillingness to expose themselves to FX risk

As a Result, MFIs are:

• Curtailing business growth• Increasing monitoring from management

Increased cost of funds is a reality and need to be incorporated in MFIs’ growth projections.

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Clients Express Discontent-MFIs Look for Sensible Solutions

Clients request higher loan amounts to keep up with increased costs of goods and services

MFIs in turn are:

• Monitoring portfolios closely and questioning current business practices

• Reluctant to increase loan amounts-Can clients repay these higher loan amounts?

• Trying to respond with innovative solutions, while weighing the costs

Curtailed growth is leading to less outreach.

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Case Study-Kenya

Power consumption bills have tripled in single householdsCost of electricity expected to increase further if rains fail as most of the electricity is hydro generated

Inflation has more than doubled in one year due to high fuel & food prices

Consumption goods have doubled in price, while purchasing power is same

Kenya is among the 42 African nations where skyrocketing prices have resulted in public demonstrations and protests

“We need to raise 32 Billion shilling to meet the shortfall required in meeting the food requirements of more than 10 million Kenyans”. President Kibaki

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Case Study: Ghana

Inflation reached 18.1% as of December 2008, driven partly by a weaker cedi, which pushed up local prices for imported goods

Credit squeeze attributed largely to political jitters during an election year, and increased competition due to many new entrants in the banking industry

Credit situation expected to deteriorate with reduced remittances and declining demand for Ghana exports

Bank of Ghana has increased the minimum capital requirement for obtaining a Class 1 banking license (universal banking) to GH¢60 million, up from GH¢7 million. Existing banks are required to attain a minimum capitalization of GH¢ 60 million by December 31st 2009.  Non-Bank Financial Institutions (NBFIs) and finance houses will increase from GH¢1.0 million and GH¢1.5 million respectively to between GH¢7 million.

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Managing the Crisis: WWB’s Recommendations to its MFI Partners

Continually monitor current and projected business plans

Have ALCO/Liquidity Treasury committees meet regularly

Closely monitor expenses per credit officer for efficient liability management

Stay close to the client to ensure MFI is providing best competitive products and services

Conduct more robust credit analysis of loan renewals

Proactive Client Monitoring and Close Screening of Costs

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Longer-term Solutions: Savings

“What MFIs can do to mitigate liquidity risks, my proposition is thus: Be savings led and inspire your clients to save, match savings with loans, avoid funding mismatch, develop an array of savings and deposit products, be market and fund driven, never depend on bank loans, rely less on donor and oversee funds, do not compete with commercial banks, avoid high volume loans, lend

short and lend small, slow down on lending-race up to savings.”

C.J. Agwu, Agric Banking FMFB, Lagos Nigeria.

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WWB’s Experience With Savings

Savings Product Design

Implementation in the Dominican Republic, Benin

Savings Demand Research Pakistan, Indonesia

“How-To” Guide for Introducing Voluntary Savings

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How WWB is helping Network Members Navigate Challenging Times

More frequent communications

Updating funding information• Network Members capital needs (debt/equity)• Checking in with investors more frequently (local/international)• Monitoring the macroeconomic environment

Introducing network members to donor capital

Leveraging Loan Guarantee Program to protect or develop new local funds

Addressing portfolio quality concerns

Offering contingency planning assistance

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Presented by Women’s World Banking www.womensworldbanking.org

“As MFIs, we make the best of new crises by looking for new solutions…”

(Kenyan Network Member)

Prognosis for the Future