For many years, microfinance has been the poster child of governments, policymakers and international organizations with the goal of lifting millions of people out of poverty. The notion that microfinance could pursue and achieve the intertwined goals of development and financial profitability without friction predominated. This dual opportunity, combined with a huge untapped market for financial services at the bottom of the pyramid attracted large amounts of funding from international capital markets, triggering unprecedented levels of growth. Until the global financial crisis, the sustainability of the resulting market growth had not been significantly questioned.
After several regional financial crises, from which domestic microfinance industries emerged with little more than scratches, the sector earned its reputation as ‘a reliable or trustworthy asset class.
“Until the global financial crisis that erupted in late 2007, available data suggested at most a weak relationship between usual performance indicators in the microfinance industry and international capital market developments, and even domestic macroeconomic conditions (Krauss and Walter, 2006, 2009; Gonzalez, 2007; Ahlin, Lin and Maio, 2010).” (Di Bella, 2011, p.4)
The global financial crisis, however, was unparalleled in its size and reach.2 As the crisis unfolded during the end of 2007, there seemed to be consensus among microfinance practitioners, analysts and other industry experts that this crisis would be different. The microfinance industry braced itself for anticipated liquidity crunches, increase in costs of funds and foreign exchange, as well as a sharp rise in portfolio arrears. This paper will:
- review recent publications that have drawn conclusions on the effects of the global financial crisis based on empirical data research.
- draw the conclusion that proper governance and risk management systems are essential and could have avoided many of the problems specific MFIs faced during the financial crisis.
- highlight Basel framework sections relevant to MFIs and demonstrate how these can be applied to strengthen MFIs. It will show that MFIs as financial intermediaries can increasingly use the Basel framework designed for financial institutions to best provide access to finance to help increase the availability and affordability of financial services