Microcredit loans fall for first time in 13 years

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The number of people around the world who have access to microcredit financing has fallen for the first time in 13 years, reflecting turmoil in the sector and the fallout from the global financial crisis.

The total number of people with access to microloans and other financial services tumbled by 10 million in 2011 from a year earlier, an annual tally by the Microcredit Summit Campaign to be released Tuesday shows. It is the first decline since the organization began tracking these numbers in 1998.

Microcredit refers to small loans, given largely to low-income women who lack access to basic banking services so they can start small businesses, such as a fruit stand. The sector had ballooned since the 1990s, reaching hundreds of millions of people, many of whom rank among the poorest of the poor, and expanded to include insurance, savings and other financial products.

In 2006, Bangladeshi banker Muhammad Yunus and Grameen, the bank he founded, won the Nobel Peace Prize for the initiative, and big-name proponents and wealthy donors, such as Bill Gates and George Soros, flocked to the sector.

It has been rocky times since. Microfinancing in India has been in turmoil after a rush of lending and aggressive loan collectors in the state of Andhra Pradesh sparked a wave of suicides there. Its government has since clamped down on the sector.

Bangladesh has also seen a chill in the industry after the government seized control of Grameen Bank (last year, it ousted Mr. Yunus from the bank). Meanwhile, academic research continues to question the impact that microfinancing has on alleviating poverty rates – all of which appears to have driven off would-be investors.

Events in Asia are a key reason for the contraction, said Larry Reed, director of the Washington-based Microcredit Summit Campaign. "Over-lending in a few markets in India led to a government crackdown, and, in Bangladesh, a maturing market coupled with political uncertainty led many lenders to scale back," he said in a news release.

The total number of people with access to microcredit fell to 195 million in 2011 from 205 million in 2010. Among families living in extreme poverty – defined as living on less than $1.25 (U.S.) a day – the number fell to 124 million, from 137 million.

The report highlights several reasons that fewer loans are going to the poorest people. First, reaching the very poorest and most remote customers tends to be more costly. Donor fatigue is another factor, as is investor wariness, and a "herd mentality" among investors and microfinance institutions means they tend to "flock to locations where others have already been."

The findings are a "wake-up call to the industry about the need to focus more on the growth of our clients' businesses than on the growth of the institutions that provide them financial services."

The global economic crisis may also be playing a role: Slower economies in the developed world have tilted government spending toward domestic priorities, while donations to international charities have dwindled and remittances have ebbed.

Microfinance isn't offered only in developing countries. Grameen America now operates in six cities in the United States, while in Canada, some credit unions offer microfinance services to new immigrants and low-income customers. The University of Toronto's Rotman School of Management, in conjunction with partners, is expanding its microcredit services in Ontario for people who have a history of mental-health challenges.