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From boom to bust: how different has microfinance been from traditional banking?

  • Wagner, Charlotte
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    This paper presents an in-depth analysis of developments in the microfinance sector before and after the Lehman Brothers collapse in 2008 by comparing them with developments in traditional banking sectors of emerging market economies and developing countries. The findings indicate that microfinance has been part of the same credit boom observed in the traditional banking sector. Moreover, as in the traditional banking sector, the boom was fostered by substantial inflows of foreign capital. This raises the question whether the crisis resilience the microfinance sector has shown in the past remains a characterizing feature of microfinance or whether the same risk factors associated with excessive credit growth lead - as in the traditional banking sector - to greater vulnerability. The findings indicate that microfinance markets with strong capital inflows, high credit growth rates and rapidly increasing competition experienced a substantial decrease in credit growth and deterioration of portfolio quality in the post-Lehman period. This is in line with the evidence found for the traditional banking sector in emerging markets and developing countries. The paper concludes that by becoming part of the global financial system, microfinance has lost one of the characteristics which distinguish it from traditional banking, namely its higher resilience towards crises in domestic and global financial markets.

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    Paper provided by Frankfurt School of Finance and Management in its series Frankfurt School - Working Paper Series with number 156.

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    Date of creation: 2010
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    Handle: RePEc:zbw:fsfmwp:156
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    1. Gian-Maria Milesi-Ferretti & Assaf Razin, 1998. "Current Account Reversals and Currency Crisis; Empirical Regularities," IMF Working Papers 98/89, International Monetary Fund.
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    9. Romain Rancière & Aaron Tornell & Frank Westermann, 2002. "Systemic crises and growth," Economics Working Papers 854, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2004.
    10. Vogel, Ursula & Winkler, Adalbert, 2010. "Foreign banks and financial stability in emerging markets: Evidence from the global financial crisis," Frankfurt School - Working Paper Series 149, Frankfurt School of Finance and Management.
    11. Cull, Robert & Demirguc-Kunt, Asli & Morduch, Jonathan, 2006. "Financial performance and outreach : a global analysis of leading microbanks," Policy Research Working Paper Series 3827, The World Bank.
    12. Lehner, Maria, 2009. "Group Lending versus Individual Lending in Microfinance," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 299, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    13. McIntosh, Craig & Wydick, Bruce, 2005. "Competition and microfinance," Journal of Development Economics, Elsevier, vol. 78(2), pages 271-298, December.
    14. Giovanni Dell'Ariccia & Robert Marquez, 2006. "Lending Booms and Lending Standards," Journal of Finance, American Finance Association, vol. 61(5), pages 2511-2546, October.
    15. Patten, Richard H. & Rosengard, Jay k. & Johnston, Don JR., 2001. "Microfinance Success Amidst Macroeconomic Failure: The Experience of Bank Rakyat Indonesia During the East Asian Crisis," World Development, Elsevier, vol. 29(6), pages 1057-1069, June.
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