A major route out of poverty for millions of people across the globe is under threat as the global economic recession starts to bite – new research has revealed.
A team from The University of Manchester, University of Delhi and the United Nations’ International Fund for Agricultural Development say systems of small loans to the poor – known as microfinance – are already being hit hard by the crisis.
The loans are used to help the world’s neediest find work and fund small businesses.
A panel of microfinance managers from India, Bangladesh, Pakistan, London and the United States revealed that foreign financial investment in microfinance is drying up.
“There is a real apprehension that in trying to save the existing financial architecture the poor and vulnerable may not get the attention they deserve,” said Dr Katsushi Imai from the University of Manchester’s Brooks World Poverty Institute.
“It’s a shame that international development has not figured prominently in the discourse on the global recession – especially in the recently concluded G20 summit in Washington DC.
He added: “The lack of funds from banks and the scaling down of targets is a real issue.
“The problem is partly a result of the huge rise in the level of the LIBOR: the London Interbank Offered Rate at which banks charge each other for short-term eurodollar loans.
“New covenants raising interest rates are being imposed and as a result the cost of funds has gone up – in one case, by 450 basis points.
“Many microfinance initiatives are being abandoned as money gets tighter and investors raise their credit standards.
“And that impacts on many microfinance clients: some are being forced to curtail their food consumption, others are trying desperately to find alternate sources of fuel.”
The team uncovered recent evidence which suggests that the higher interest rates and lower loan maturity periods associated with the global crisis are likely to affect women and low income households adversely.
Dr Imai said: “Microfinance has the potential to ameliorate some of the worst forms of deprivation
“But the contraction of credit in general and the risk aversion of investors, together with a looming global recession underlie gloomy prospects for the poor.”