The Financial Crisis & Microfinance: MBK Ventura

March 1, 2009 Posted by Update

Founded in 2002, Unitus partner MBK Ventura is a microfinance institution (MFI) offering loans to low-income households in West Java, Indonesia. Recently named by MIX Market as the top-performing MFI globally, MBK Ventura is the only MFI in Indonesia focusing on the poorest 25 percent of Indonesians. Since partnering with Unitus in December 2006, the number of clients served by MBK has nearly quadrupled, rising from 26,000 to more than 100,000.Unitus interviewed Chairman and Founder of MBK, Dr. Shafiq Dhanani, in February 2009 for its MFI network newsletter, The Accelerator. The following is an excerpt from that publication.

Q: The global financial crisis has led to severe strains in capital markets around the world. Indonesia was hit particularly hard in late 2008 as the rupiah devalued against the dollar. What impact have these factors had on MBK Ventura?

A: The global financial crisis has had a major impact on MBK on three fronts. First, the credit crunch following the global financial crisis has resulted in the total drying up of funding for on-lending from domestic banks and social investors abroad. MBK achieved rapid growth of more than 100 percent per year before the crisis and reached 100,000 clients in September, yet has not been able to expand since then. Second, the sudden depreciation of the local currency has resulted in potential foreign exchange losses of nearly USD 500,000 because MBK has relied heavily on foreign investors to fuel its expansion. It did so because domestic banks were, and still are, reluctant to lend to the microfinance sector. Third, the existing loans to MBK have become more expensive both from domestic banks, which have increased their interest rates, and from social investors, because of the higher cost of hedging loans in foreign currency. In sum, the global financial crisis has hit MBK very hard indeed.

Q: MBK Ventura is one of the fastest-growing microfinance institutions in Indonesia. How has the global financial crisis affected your growth plans?

A: Instead of growing by 100 percent per year as before, we are now forecasting growth of 40 to 50 percent at most in 2009. Even this is based on a very optimistic scenario in which we assume that some domestic banks and foreign social investors resume their funding to MBK. Yet the demand for microfinance remains strong (and may even be stronger) because many employees that were formerly in the formal sector may turn to self-employment activities such as petty trading, agriculture, livestock rearing, and so on.

Q: MBK Ventura is the only MFI in Indonesia focusing on the poorest 25 percent of Indonesians—a particularly vulnerable segment of the population. Have your clients been affected by the global financial crisis?

A: Besides the increase in the direct cost of borrowing, we think that our clients have also been affected indirectly, though this is more difficult to quantify. Many export-oriented factories have retrenched their workers. The lower purchasing power of these now unemployed workers will certainly mean less purchase from our clients, most of whom provide final consumption goods including prepared food, fish, poultry, and household items.

Q: Opinions vary widely as to what impact the financial crisis will have on MFIs in the long run. What do you think is the long-term outlook for MBK Ventura?

A: In this risky and yet very worthwhile business of ours, we have to remain optimistic. Let me emphasize that the risk is not to do with our low-income women clients, but in providing financial services in an unstable financial environment. We think that the domestic banks, foreign banks, and social investors will resume lending to MBK because even in a period of crisis, microfinance has proved to be a safe business with portfolio at risk remaining low (and nearly zero at MBK). That will take care of the supply of microcredit. On the demand side, there is a huge untapped market out there in Indonesia and other countries for providing universal access to microfinance to low-income micro-entrepreneurs.

QIf you had one piece of advice to give others in the Unitus network, what would it be?

A: Like MBK, you may have little choice but to borrow in foreign currency to expand your outreach because domestic banks remain shy in your country. Do so with extreme caution and hedge your foreign exchange exposure. We hesitated in taking this crucial measure because we did not want to pass on the higher cost of hedging in the form of higher interest to our clients. In good times, we passed on the benefits of lower borrowing costs and economies of scale to our clients. In bad times, we passed on the higher cost of funds to them, and they mostly accepted this because of our previous goodwill and flexibility. We feel that this rapport and transparent dialogue with our clients has helped us in retaining our clients.

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