Microfinance and the Global Food Crisis

August 1, 2008 Posted by Update

The following article is adapted from the July 2008 issue of Unitus’s partner newsletter, “The Accelerator.” The piece is specifically focused on helping MFIs prepare for and respond to the drastic increase in food prices occurring throughout the developing world.

As economies adjust to the global rise in food prices, the growing crisis is expected to have a disastrous impact on poor communities. This year alone, rice prices have soared 114 percent since January. World Bank President Robert Zoellick recently said that soaring food prices threaten to push 100 million more people in low-income areas deeper into poverty, undoing many of the dramatic improvements made over the past decade.1

The food crisis could have a devastating impact on microfinance clients. The world’s poor spend more than half of their income on food, and this figure can climb as high as 80 percent in some communities.2 Malnutrition, disease, and child development issues may arise as a result. Some MFIs have reported clients selling livestock or taking other actions for short-term boosts of income, despite long-term consequences.

How can MFIs prepare for the food crisis? Unitus recommends that MFIs be proactive in assessing their clients’ exposure to the growing crisis and in planning their response, beginning with the following steps:

1) Watch PAR closely. MFIs should watch PAR (portfolio at risk) closely over the next months to ensure defaults are not increasing as clients devote a larger percentage of their household income to food consumption.

2) Survey clients. MFIs can use a range of survey tactics to assess and plan for the magnitude of impact. Options include implementing a full market research study using quantitative or qualitative tools, or simply devoting time during center meetings to discuss how rising prices affect clients. Surveys should aim to determine the impact on clients’ businesses and consumption patterns, discover trade-offs clients are making, and identify opportunities where MFIs can help to meet client needs. In lieu of surveying clients, MFIs might choose to survey branch managers or loan officers to learn about what they are seeing in the field.

3) Be proactive. MFIs should actively seek out clients likely to be suffering from the crisis and develop a plan to help them meet their basic needs.

How can MFIs help respond? There are a number of short-term and long-term levers that MFIs can use as mitigants if they find their clients are suffering from rising food prices. Please note that because these mitigants may increase operational costs—in some instances significantly—Unitus recommends a rigorous strategic planning process and cost-benefit analysis before implementation.


1) Help clients plan for the crisis. Through diversifying their businesses, securing larger inventories, or buying ahead, clients may be able to protect their businesses during the crisis. MFIs should encourage clients to take these measures and provide training and support when possible.

2) Create discussion forums. Providing a forum for clients to share their experiences during center meetings could help borrowers find opportunities to assist one another and brainstorm solutions.

Long term:

1) Ramp up business training, client support, and other services. MFIs that offer business training and support have seen fewer defaults than MFIs that just focus on microcredit products. As an example, Fonkoze has an ultra-poor program that targets clients with no productive assets. Interestingly, these clients have fared better during the food crisis than clients with just a microfinance loan. Anne Hastings, CEO, attributes this to the business enterprise training and regular problem-solving visits with caseworkers that have helped clients to plan for the future and take steps to mitigate the crisis.

2) Seek operational improvements to decrease costs. By identifying key areas for improved operational efficiency, MFIs can reduce operating costs. This will help to mitigate the effects of declining revenues and stabilize operational self-sufficiency.

3) Consider partnerships with other organizations. Partnering with food aid agencies, health care providers, and other social service organizations could allow MFIs to refer clients to additional services that may be necessary during this crisis.3

4) Consider impact on employees. Some MFIs may need to consider raising salaries or providing other benefits to assist struggling employees. Some Unitus partners have taken measures such as increasing rice stipends provided to employees.

5) Offer flexible products. If possible, MFIs could permit flexibility in their products for clients suffering from the crisis. By restructuring loans and extending loan terms, MFIs can help borrowers keep their current businesses afloat. This measure should only be taken if there is demonstrable repayment capability to avoid the risk of further increases in loan defaults.

6) Consider offering consumption loans. Many MFIs have seen increased demand for consumption loans as clients have fewer resources to devote to business investment. MFIs considering offering consumption loans as a solution to the food crisis should proceed carefully. Some MFIs have seen significant increases in defaults after offering consumption loans. Others have seen costs rise dramatically as they have had to increase training for loan offers and adapt accounting systems. MFIs should ensure there is demonstrable repayment capability and be confident in the ability of their systems to manage the increased burden of consumption loans before considering this as a solution.

7) Avoid increasing interest rates and debt forgiveness. Raising interest rates could force defaults up even further and exacerbate the crisis for both MFIs and their clients. Debt restructuring is preferable to debt forgiveness, which is not a sustainable solution to a long-term crisis. MFIs should avoid both of these measures.

1 Speech given at IMF – World Bank Spring Meetings. April 14, 2008
2 FAO Global Information and Early Warning System Global Watch. December 11, 2007
3 Unitus interview with Anne Hastings. May 29, 2008