Global credit crisis limits microfinance loans for the needy in South Asia

Mumbai: A global credit crisis that has felled large investment banks is also hurting unlikely victims half a world away: small south Asian businesses dependent on microfinance.

But as credit tightens and largesse from corporations and socially-minded investors dries up, microfinance will be hit, impacting poor people who have no other access to finance. "A liquidity crisis is the very worst-case scenario for microfinance institutions [MFIs]," said Roy Jacobowitz, managing director of development and communications at ACCION International in Boston, which backs microfinance institutions.

Kashf Foundation, an MFI in Pakistan, whose economy is tanking, is now seeking international lines of credit, he said.

In India and Bangladesh, microfinance has given hope to hundreds of thousands, especially women, who have built successful businesses that have changed their lives.

But these may now be under threat because of tighter credit. "There's less money out there, so there's less money for MFIs," said Siddhartha Chowdri, a manager for ACCION in India. "For MFIs, the cost of their funds has gone up, and at the same time, they're under pressure not to raise lending rates to their borrowers. At some point that becomes unsustainable."

Today in Bangladesh, one of the poorest nations in the world, microfinance borrowers and workers are a worried lot.

Kulsum Bibi, a 45-year-old mother of three, set up a nursery with a loan of 3,000 taka ($44, Dh160) from Bangladesh Rural Advancement Committee (BRAC). "I feel as if I was sinking in a deep sea," said Kulsum, who runs a small but profitable business selling plants and saplings that employs 10 people.

In India, MFIs served 10.5 million clients at end-2007, according to Sa-Dhan, an association of community development finance institutions. The market is forecast to expand to 50 million clients by 2012, with the outstanding loan portfolio rising to $6 billion from about $769 million now.

About 500 commercial, regional and cooperative banks are indirectly involved in microfinance.

But with banks turning cautious, MFIs may suffer, particularly smaller outfits that cannot afford higher interest rates or have access to private equity or venture capital.

"Now that banks themselves are facing the heat, they might either resist lending to MFIs or increase interest rates on loans further," said Prathima Rajan, analyst at research firm Celent.

However, if banks overcome the jitters, the case for lending to MFIs for small, high-margin loans with low defaults is stronger than ever, said Somak Ghosh, group president of corporate finance and development banking at Yes Bank.