At the end of October, I was at the Riverside Church, one of New York’s great centers of social action and charity, for a panel held as part of Columbia's annual Social Enterprise conference.   The gothic setting was an odd match for the panel, but the timing was perfect for the topic: "Transitions in Capital Market Financing for Microfinance Institutions." If there was ever a time for thinking about financial transitions, this is it.

I’ve heard two opposing views on the link between today’s financial crisis and the fate of microfinance.   One is optimistic.  The argument is that since most microfinance customers operate in economic sectors that are only loosely tied to the global economy (or even to the main engines of national economies), microfinance is a relatively safe place to park investments when alternative investments are heading south.  Exhibit A is the solid performance of the microbanking division of Bank Rakyat Indonesia during the Asian financial crisis of 1997.  Exhibit B is the generally high levels of loan repayments achieved by the leading microfinance institutions, across peaks and troughs of business cycles. 

On November 10, Vikram Akula announced that SKS, the microfinance institution he runs in South India, just closed a $75 million round of equity funding.  He’s bullish:

The fact that this investment has come during the global economic meltdown is proof of the confidence that investors have in SKS—and more importantly of the resilience and entrepreneurial abilities of the poor not only to survive in today’s economic crisis but actually to prosper because the poor are largely de-coupled from global trends.

But the trough we’re in now is different from anything we’ve been in for a long time, and the pessimists worry that even though customers may be “de-coupled” from the broader economy, investors are not.  Many microfinance institutions get their capital, directly or indirectly, from the banks that are faltering.  The liquidity crisis that’s hitting Wall Street has thus hit microfinance institutions globally.  It’s harder to get leverage, and reports indicate rising capital costs. 

What does this mean for microfinance?  Some see a world where the commercial promise gives way to reliance on continuing subsidy – to the extent that donors are still willing and able to contribute.  A more hopeful outcome is that the financial crisis propels efforts to expand deposit-taking and appropriate prudential regulation.

The “microfinance is de-coupled” argument is a hard sell but is not crazy.  The fact is, though, that the notion has never been seriously tested by a circumstance anything like the present one.  The paradox is that most investors are not in a mood to gamble, even when the promise is reduced portfolio volatility.