Its proponents say it can be done on the massive scale necessary to respond to the urgent needs of those living on less than a dollar a day.
Microfinance consists of making small loans, often less than $US200 to individuals, usually women, to establish or expand a small, self-sustaining business. Now, there are warnings of too much funding for microfinancing.
Presenter: Sen Lam
Speaker: Jamie Bedson, lead coordinator, at the Banking With The Poor Network Secretariat, and Asia Regional Representative at the Foundation for Development Cooperation
SEN LAM: Jamie, first of all, reports about too much funding for microfinancing. What were the major concerns?
JAMIE BEDSON: I think some of the main concerns early on, and this is prior to the global financial crisis, I think the microfinance industry was putting up the warning flags much earlier than the formal financial sector and a lot of this was in the form of social investment. There's approximately 91 microfinance investment funds, huge funds that are providing funds for social investment across Asia. Now there was a worry that the size of the funds is too big and the size of the industry was not quite sophisticated enough to absorb these funds. There was a little bit of a worry that there was overheating happening and too much money being directed at the sector, however that has turned around in the last 12 months.
SEN LAM: So what about the current financial climate worldwide - how is that impacting on microfinance schemes?
JAMIE BEDSON: Most of the impacts at the moment are anecdotal but talking to our members and reading about the microfinance industry more broadly there's obviously a slowdown in funds available, there's a shortage of liquidity from microfinance institutions. Fluctuations in the foreign currency for organisations that are borrowing cross border are causing huge problems. I mean, there's a precedent - the financial crisis in '97, a lot of microfinance institutions survived, they came out of that strongly because they were not integrating into the global financial system to the same degree. However in the last few years, the microfinance industry's commercialised, it started taking loans from foreign countries and those loans are now - have now dried up. Now overnight we've seen the G20 countries have announced possibly more than $750 billion provided to the IMF. Now that will be for non-developed countries and we're hoping that that will translate into further microfinance lending. It remains to be seen how much will be provided but we hope that India and Indonesia who are the big microfinance industries that are represented in London will be pushing that point.
SEN LAM: So from what you've just said is it right to then conclude that part of the danger is that microfinance schemes and certain sections of microfinancing have become more mainstream therefore making it more vulnerable to global forces?
JAMIE BEDSON: That's certainly the case. But that vulnerability is also an advantage. One of the main issues for microfinance institutions is that they're often not regulated, they're NGOs and they're unable to take deposits but the transformation into regulated institutions and that drawing into the global financial sector means that they can take deposits and that often insulates them. There's reports coming from Africa, for example, where deposit-taking institutions that are not so integrated into the financial sector are being unaffected and in countries like Cambodia and Laos, where we have small industries, that's certainly the case here as well where they're not feeling effects as greatly. Countries like India, the Philippines, where there is a bit more of a sophisticated sector, they are feeling the pinch, however a lot of them haven't speculated, they haven't been investing in complex investment schemes like a lot of developed country banks. What they're doing is concentrating on their core work - clients who are doing productive activities and paying back their loans.
SEN LAM: So, so long as they stick to the basics you think they'll be OK?
JAMIE BEDSON: Absolutely. I think as someone said about the US economy recently, the fundamentals are safe. These loans are going out to the poor. Now the effects on clients are going to be increasingly strong. Microfinance clients already walk a very thin line and they're especially sensitive to shock. So whether it's sickness or natural disasters or, in this case, you know, the dry-up of funds, I think one of the main places we're going to see effects is the effect on remittances. Now South-East Asia and Pacific remittances have just gone through the roof compared to other regions. However the World Bank's predicting a significant reduction, especially from those who are losing jobs in developed countries. Now this will have implications for funds available for poor households and also they will be drawing down on their savings. So those institutions that do rely on their deposit base on lending may struggle.
SEN LAM: And just briefly, Jamie, London's G20 meeting, which has just ended, was hounded by anti-poverty protesters. Did anything come out of the G20 at all which may actually benefit the world's poor?
JAMIE: Well, I hope so. We had Gordon Brown announcing overnight the end of the Washington consensus, the end of this extreme free trade and that could possibly have benefits as the industry changes the way that it looks at the world. I mean, we have a lot of talk about foreign aid and does it work. We think about the amount of money that's been given to a lot of foreign banks which are effectively aid in the form of bailouts. I think microfinance that takes those funds, lends them out, pays them back, is a strong argument for increased foreign aid in the form of lending to microfinance.