Bangladeshi women count money for repayment to a microcredit bank at Dowtia village, near Dhaka.
When the rich suffer, so do the poor. Or so goes the trickle-down theory. It turns out, though, that the spreading of global financial pain is far from simple. The microfinance industry, for instance, may be resistant to some of the volatility now plaguing financial markets. That's because those who borrow in small amounts from micro lenders often work on projects unaffected by large-scale global banking travails. Recent studies have confirmed the robust reliability of borrowers at the bottom end of the global income scale. The world's poorest are affected, though, by commodity price volatility and fluctuating food and fuel costs. Mary Ellen Iskenderian, CEO of Women's World Banking, a global network of 54 microfinance institutions and banks in 30 countries, spoke to Time's Jeremy Caplan recently about how the financial crisis has affected those on the lower rungs of the world's economic ladder.
TIME: To what extent and in what specific ways is the worldwide credit crunch impacting microfinance in developing countries?
Iskenderian: There is evidence that microfinance is resilient to global market movements, compared to traditional lending, as it falls outside of the mainstream economy. And there does still seem to be equity available for microfinance; recently, for example, a couple of large private equity deals were completed in India. Repayment rates remain very high, 97% or 98% in many places. That results from good, old-fashioned credit methodology — you know a household's capacity to repay. That's the kind of old-fashioned banking that some people feel was absent in this latest round of banking disasters. At the same time, we are seeing many microfinance institutions (MFIs) scaling back expansion plans and, in some cases, raising interest rates as a result of the credit-spread increase and the rising cost of borrowing. Certainly, no one is taking their existing funding relationships for granted. My concern is that we have only begun to see the effect of the triple threat of finance, fuel and food issues on microfinance.
TIME: To what extent have the global economic challenges trickled down to impact the poorest of the poor?
Iskenderian:The impact on the poor, including the clients of our network, has probably been most evident in rising food and energy prices, which have meant that families may face trade-offs like the choice between paying back their loans or putting dinner on the table for their families. Microfinance doesn't target the poorest of the poor, as they need other types of intervention. It targets the economically active poor at the bottom of the pyramid. There are signs that micro-entrepreneurs will see higher interest rates, since the global credit crunch will likely require MFIs to raise interest rates as funding becomes more scarce. I am particularly concerned about the ramifications for women since, for many poor women around the world who are otherwise excluded from formal financial systems, access to microfinance is their only economic lifeline.
TIME: What prompted the development of a financial instrument like micro-insurance, and what's the broader impact of new financial instruments aimed at the world's unbanked?
Iskenderian: Product diversification came out of a recognition that lending alone is not the solution if our end goal is long-term poverty alleviation, which is why we in the industry no longer talk about microcredit, but microfinance. Many entrepreneurs in the developing world are only one seemingly minor catastrophe — like a hospital stay — away from financial disaster, so housing loans and insurance and savings products help create and preserve assets, leading to broader benefits for the economy as a whole. I can't tell you how many times I've heard women clients in our network ask, "Why can't I save for my child's education, instead of taking out another loan to pay for it?" The poverty alleviation benefits are magnified when microloans are supplemented with savings and insurance products.
TIME: What other trends are you observing in the microfinance world?
Iskenderian: The trend that is most shaping the industry today is undoubtedly commercialization, as microfinance is increasingly seen as a distinct asset class and a profitable business opportunity. The numbers are truly staggering. In 2006, over $2 billion in commercial capital poured into the microfinance industry. In 2007, this investment was over $3 billion. At the same time, MFIs themselves are increasingly transforming from non-profit organizations to regulated, for-profit institutions. They are doing so even as many microfinance institutions still rely on a guy keeping a big book with a ledger rather than a computer system. But there is a delicate balancing act that we have to maintain, because while commercialization holds tremendous promise for expanding access to microfinance services to the more than one billion people — especially women — who have yet to benefit, there is also a clear risk of mission drift. One particularly disturbing trend — since you can't talk about poverty alleviation without talking about women's economic empowerment — is a decrease in the percentage of women being served as MFIs move toward a for-profit model . So making sure that profit doesn't trump mission is critically important.
TIME: What are the primary objectives of your microfinance network over the next couple of years?
Iskenderian: Continuing to raise global awareness of microfinance as a viable way to invest in poor women entrepreneurs and fight poverty around the world is our overarching goal. And the focus on women is really key not only for economic empowerment and empowerment reasons, but also because of the multiplier effect on economies and communities, since women reinvest their profits back into their communities at greater rates than men. One of the products we're developing that I'm most excited about is a pilot program for savings targeting young women and adolescent girls that we're working on with the Nike Foundation. Regional expansion is also a priority for us, and we're pursuing expansion strategies in Africa — where some astounding progress has already been made and the prospects for accelerated growth are promising — and the Middle East, and also in China, where microfinance is still a nascent industry.
TIME: How is microlending today different from where it was a few years ago when Grameen Bank was expanding rapidly?
Iskenderian: It is truly astonishing how the microfinance industry has changed since I began working in the field of international development. Microfinance has really come of age, and I think that many of the trends I mentioned before — from commercialization to product diversification — have all played a part in this transformation. But as I said before, to take full advantage of microfinance's potential, it is also important for the industry to continue to innovate and evolve. One of the most significant changes has been the move from group to individual lending — an area that Women's World Banking, an international network of microfinance institutions and banks, has helped pioneer. Individual lending is a way to allow micro businesses to start to grow, providing larger, cash-flow based loans than the group might be comfortable counter-guaranteeing. Group lending, where large groups of borrowers are jointly responsible for making sure loans are repaid, is an excellent introduction to finance for micro-entrepreneurs, but the businesses tend to remain quite small, purely income-generating activities that rarely grow to scale. Like group lending, the individual lending methodology does not require the borrower to have collateral since the MFI's lending decision is based on the household's capacity to pay. Marketing is another relatively new area that has not traditionally been a focus of the microfinance industry. Yet as MFIs increasingly move beyond credit to offer insurance and savings products so that women can save to pay their children's school fees and invest in healthcare for their families, and as the industry becomes increasingly competitive, understanding customer behavior is becoming more important. In this way, microfinance has come to adopt [more traditional] business practices.