Amid growing signs that the global economy is worsening, the White House yesterday extended an invitation to developing countries to attend a summit next month in Washington with leaders of the world’s wealthy economies. Faced with rising food and fuel prices, some of Africa’s poorest nations are struggling to lower earlier projections of economic growth by focusing on how to satisfy the basic day-to-day needs of their citizens. One avenue for attracting investment needed to keep capital flowing in to local African businesses and public works is the practice of microfinance, or supplying credit to the poor at agreed-to, flexible rates which they can afford to pay back in an acceptable time frame. But the director of the Microcredit Summit Campaign Sam Daley-Harris says that tightening pressures are being felt even in low-end borrowing circles and that such small but essential programs that can make a difference for Africans facing dire poverty are also feeling the effects of the global financial pinch.
“We took a survey very recently, where we asked about the global economic crisis. But we also asked about rising food and fuel prices. And it was becoming clear that micro finance institutions that borrow from banks are facing higher interest rates and in some cases, drying up funds. This has this cascading effect as to when the banks are charging more for their interest, the microfinance groups have to decide, do we cut costs and not pass the higher interest rates on,” he said.
Surveying microfinance clients in Africa, Asia, and Latin America, Daley-Harris said there are varying degrees to which the crisis is being felt. In parts of Africa, he notes, the crunch is leaving its mark, especially when it comes to food shopping and diet.
“I’m thinking about a conversation with a microfinance leader in Ghana. And he said, clients have reduced the number of family meals from three to two times a day and changed the makeup of meals from more nutritious but expensive foods to less nutritious, cheaper foods. A microfinance leader in South Africa talked about their clients facing this new increase in food prices. He talked about the cost of cooking oil going up quite a bit, but maize had not. But still, they’re shouldering the changes that they’re facing by eating less as they are facing this really triple threat – financial crisis, food, and fuel,” he said.
To weather the latest pressures, Daley-Harris says African leaders need to act quickly to hold down rising bank costs and interest rates and to make sure that adequate investment flows in the credit market continue to be available to low-end borrowers, “in getting the regulatory environment such that microfinance groups could take an ‘on-lend’ savings.”
Daley-Harris said that higher prices cause people in developing countries to spend more of their savings for essential goods. He notes that drains personal bank accounts, but he puts faith in the ability of local populations to apply and pool their savings around securing more advantageous borrowing terms for microfinance projects that can help sustain a community during stressful times.
“If a microfinance group had easy access to savings that they could ‘on-lend,’ they could in essence bypass this global financial crisis. They wouldn’t have to go to the national banks or the international commercial banks for their loan fund. They could go right to the community for savings,” he notes.
In the world of international aid, during lean economic times, microfinance programs have had the ability to cover their costs and sustain themselves when financing from the big banks dry up. Microcredit advocate Daley-Harris says he remains hopeful for the sake of populations who subsist on incomes of less than one dollar a day that microfinancing terms will be able to withstand the current squeeze. But he says the severity of the current downturn will really test the credit market over the next year, and the outcome is still uncertain.
“There are tens of millions of
clients all around the world who are seen in their villages every week on their
doorstep. How do they get there? The bank workers get there on their
motorbikes or something inexpensive, and with fuel costs going up, the
microfinance institutions’ costs of getting the bank workers to the clients
each week goes up. So this is a
particularly challenging time. And
there was talk in some of these interviews and some of these responses about
‘we’re going to see the strong getting more efficient and the week disappearing
in the field of microfinance’,” he predicted.