Feature

April 23, 2009

The Global Financial Crisis: Counting the Social Costs

Elizabeth Vivirito, MPP'10, spent her spring break in India, traveling and helping coordinate a "development finance" forum as part of an internship with ShoreCap Exchange. This is the final article in a three-part online series.

The World Bank estimates that because of the current global financial crisis 53 million people, who would otherwise have escaped poverty, will remain trapped. At a time when the world is questioning the foundations of finance and economics, one model that is bridging the gap between social responsibility and capitalism-microfinance-finds its mission suddenly harder to achieve.

Fortunately for the field, it has not been as integrated into banking and currency markets as the rest of the global financial system, though it is becoming more closely linked as the field grows. Its foundation in local markets, close-knit ties with the communities it serves, and a history of surviving past economic shocks positions it well to ride out the current turmoil. But the crisis may also hold many of the world's poor in dire poverty, and microfinance can not reach them all.

One of the primary reasons for the field's success-with or without a crisis-lies in working closely with the people it serves. The "double bottom line" for microfinance institutions (MFIs) means that one mark of success is its positive social impacts.

In some instances, like SATHAPANA Limited in Cambodia, loan officers take trips throughout the countryside to visit their clients. This helps mitigate travel costs for rural clients and allows for loan officers to monitor how funds are being used. These customer-focused practices have allowed the bank to grow from 6,000 clients in 2002 to over 21,000 clients in 2007.

MFIs also thrive by working very closely with their borrowers and being innovative in the delivery of financial products. For example, Reliance Financial Services in the Gambia serves its clients, who are market vendors, by placing a mobile kiosk into the local market. This allows vendors to withdraw change each morning and deposit their funds each evening.

Despite their geographic differences, the banking institutions at the conference face many similar challenges. Lisa G. Thomas, a vice president for ShoreCap Exchange, works closely with most of the organizations in their home countries to help bolster their management and operations. She said, "One common challenge our institutions face is the lack of credit history for most of their borrowers. There are no credit bureaus in a lot of these places, so obtaining reliable information to mitigate risk is difficult."

Many banks in the field have seen tremendous growth and are in need of expertise to help them build capacity and grow to meet the market's demand for their services. And this pressure will only grow with added strains to the institutions due to the financial crisis. For the banks serving clients in Africa, Asia, and Latin America, development from the ground up may just have gotten a bit harder.

Editor's Note: The Harris School of Public Policy and the Booth School of Business are holding a one-day conference on microfinance on Friday, May 8, 2009, at the Harper Center. Check out to the Harris School events calendar for more details.

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