Partners. In Collaboration with:

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2 Partners In Collaboration with: Université Libre de Bruxelles / Belgium ESCEM / France ESC Dijon / France Sciences Po / France Freie Universität Berlin / Germany Leibniz Universität Hannover / Germany Eberhard Karls Universität Tübingen / Germany Rjiksuniversiteit Groningen / The Netherlands Frankfurt School of Finance and Management / Germany Università Cattolica del Sacro Cuore Milano / Italy Università degli Studi di Bergamo / Italy Università degli Studi di Roma La Sapienza / Italy Universidade Católica Portuguesa / Portugal Universidade Nova de Lisboa / Portugal European Microfinance Platform (e-mfp) We thank the following professors and practitioners for having participated in the Selection Committee: Michael Anthony (Allianz SE), Luciano Bonomo (Università degli Studi di Bergamo), Barbara Fritz and Ursula Stiegler (Freie Universität Berlin), Oliver Gloede (Leibniz Universität Hannover), Noara Kebir (Microenergy International), Hansjorg Kessler (FIDES), Stephan Klasen and Ahmad Nawaz (Georg-August Universität Göttingen), Fabrice Mauleon (ESCEM), Vanessa Mendez (PlaNIS), Fernando Rodríguez (Universidad de Salamanca), Hans Dieter Seibel and Stefan Karduck (Universität zu Köln), Roberto Visconti (Università Cattolica del Sacro Cuore Milano), and Claire Crochemore, Oumarou Diallo, Yann Hirlimann, Mohamed Maarouf, Stephan Pieron and Umberto Trivella (PlaNet Finance) With the Financial Support of: With Kind Support of: Allianz SE, BNP Paribas, Frankfurt School of Finance and Management and Dexia Kommunalbank Deutschland AG supported UMM activities (workshop, scholarship) Collaboration with European Microfinance Platform In 2010 the European Microfinance Platform (e-mfp) has set up an e- MFP Action Group University Meets Microfinance for practitioners to work with European universities and further enhance students research and microfinance professionalization.

3 UNIVERSITY MEETS MICROFINANCE edited by PlaNet Finance Deutschland e.v. ISSN The University Meets Microfinance Programme (UMM) presents its sixth UMM Award : Each year the UMM Awards honour outstanding theses on microfinance and give recognition to the work of young researchers. The UMM Award winners are selected by a committee of professors and microfinance practitioners, to recognize these presenting innovative research topics and approaches. Microfinance has gained scale and recognition over the last decade. Today, Microfinance Institutions reach approximately 190 million low-income people, who were previously excluded from formal banking systems, with financial services which include credit, savings, insurance and money transfer. This rapid expansion has also come with increasing challenges. Research on microfinance provides new insights into these challenges and can foster innovation in the sector. Between 2009 and 2010, 1565 students, professors and practitioners from 26 universities of the European Union participated in UMM. The Programme is co-financed by the European Union and was initiated by PlaNet Finance and Freie Universität Berlin with the aim of strengthening the cooperation between European universities and microfinance practitioners. In addition to promoting research publications, UMM offers microfinance seminars in partnership with European universities, mentorship and field research scholarship for Bachelor, Master and PhD students and organizes regular workshops with UMM participants. More information can be found at and Volumes 4 Oliver Rogall Microfinance and Vulnerability to Poverty The Evidence from Rural Households in Cambodia ISBN Maria Cristina De Lorenzo Microfinance Investment Funds: An analysis of profitability ISBN Sascha Huijsman The Impact of the Current Economic and Financial Crisis on Microfinance ISBN

4 Sascha Huijsman THE IMPACT OF THE CURRENT ECONOMIC AND FINANCIAL CRISIS ON MICROFINANCE ibidem-verlag Stuttgart

5 Bibliografische Information der Deutschen Nationalbibliothek Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet über abrufbar. Bibliographic information published by the Deutsche Nationalbibliothek Die Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available in the Internet at Gedruckt auf alterungsbeständigem, säurefreien Papier Printed on acid-free paper ISSN: ISBN-13: ibidem-verlag Stuttgart 2011 Alle Rechte vorbehalten Das Werk einschließlich aller seiner Teile ist urheberrechtlich geschützt. Jede Verwertung außerhalb der engen Grenzen des Urheberrechtsgesetzes ist ohne Zustimmung des Verlages unzulässig und strafbar. Dies gilt insbesondere für Vervielfältigungen, Übersetzungen, Mikroverfilmungen und elektronische Speicherformen sowie die Einspeicherung und Verarbeitung in elektronischen Systemen. All rights reserved. No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronical, mechanical, photocopying, recording or otherwise) without the prior written permission of the publisher. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. Printed in Germany

6 University Meets Microfinance vol. 6 5 Preface During the past 15 years, microfinance programmes have been introduced in many developing economies. Well-known examples of microfinance institutions include Grameen Bank, ASA and BRAC in Bangladesh, Banco Sol in Bolivia, and Bank Rakyat in Indonesia. Between December 1997 and December 2005, the number of people who received credit from microfinance institutions (MFIs) rose from 13.5 to million (84% of whom are women). Traditionally, MFIs have been funded mainly by subsidies from private and public donors and aid organisations. Several MFIs also attract savings from their members. But are these funds enough to serve the potential market and finance additional activities? Commercial microfinance, or the for-profit side of the microfinance sector, appears necessary to increase funding for MFIs. Therefore, the past decade has seen the commercialisation of microfinance. Commercial banks play increasingly larger roles in funding microfinance institutions and are helping expand the traditional services offered by MFIs. Whereas once they focussed only on microcredit, in the form of small loans to the poor, today they have shifted from microcredit to microfinance, including savings, insurance, and the distribution of clients output. Moreover, new banking technology, charge cards, ATMs, the use of mobile phones and the Internet have helped the microfinance business reduce costs and improve service delivery. The funding situation of MFIs also has started to change rapidly. Whereas once they relied mainly on private and public donors and aid organisations, more and more MFIs turn to the capital market for funding. Some MFIs have even gone public and become commercial banks. Some argue that the commercialisation of microfinance is a blessing, since it both improves MFI performance and the availability of

7 6 Preface funds for the poor. Others, however, argue that commercialisation will encourage MFIs to put shareholders above the poor they serve. Moreover, some argue that due the commercialisation, microfinance has become much more vulnerable to international economic developments, and international crises. Some even argue that the commercialisation has led to microcredit bubbles, that microfinance is the new subprime, characterised by loan-shark-style microfinanciers, which may result in mass suicides, as was the case recently in Andhra Pradesh, India. Unfortunately, however, there is almost no scientific evidence available on the impact of the financial crisis on microfinance institutions. The thesis of Sascha Huijsman is one of the only exceptions. In her thesis, she provides a rigorous analysis of the impact of the financial crisis on MFIs, using data from a survey with MFI managers worldwide, and using high-frequency financial data of almost 60 MFIs. Her research shows very convincingly that MFIs have been heavily affected by the financial crisis. Interestingly, however, she also shows that there are considerable differences between MFIs in different regions, noting especially that MFIs in Eastern Europe have been affected. Moreover, her thesis suggests that MFIs that focus on traditional lending methods, such as group lending, are more resilient to the crisis. The thesis of Sascha comes up with highly interesting results, and certainly is a must read for practitioners and researchers interested in microfinance. Prof Dr Robert Lensink Faculty of Economics and Business, University of Groningen

8 University Meets Microfinance vol. 6 7 Abstract This thesis provides a preliminary study of the impact of the current economic and financial crisis on microfinance institutions (MFIs). Results from our survey with 82 MFI managers worldwide show that as a consequence of the crisis, MFIs face higher financing costs, less availability of funding, changed demand for loans, and a deterioration of clients repayment behaviour. Using a panel of monthly financial data of 57 MFIs over the period of January 2007 to August 2009, the impact of the current financial crisis was investigated by studying structural breaks in the times series of MFI performance indicators related to profitability, growth, and portfolio quality. Results show that all performance indicators experience a significant negative shift, but that the timing of these shifts differs across the performance indicators. Profitability and growth are the first to experience a significant downward shift in the last quarter of Earliest signs of an adverse impact on clients repayment behaviour are also visible in late 2008, but a structural break in actual loan losses does not occur until August MFIs in Eastern Europe and Russia are most affected, whereas MFIs in South America show the highest resilience to the crisis. The extent of the impact depends on the funding structure of MFIs. MFIs attracting savings are significantly less affected.