Could the economic crisis harm microfinance? It seems possible that high expectations paired with a collapse in funding (archetypical elements of bubbles when bursting) may erode confidence in this development tool, which – for right or wrong reasons – is currently a dominant element of international development governance.

Recently, I got my hands on a publication by Deutsche Bank Research from December 2007, predicting a fantastic acceleration of growth in the microfinance industry over the coming decade. That they would publish such a view is unsurprising, given that DB is the issuer of several microfinance investment funds; in fact, according to this paper, for every Dollar currently invested in microfinance there are a full ten Dollars of untapped demand. DB expect this situation to be remedied until 2015 by a ten-fold increase in investments from the private private-sector, bringing the total volume of investments in microfinance to 20 billion Dollars (about six times the equity value of Commerzbank). Private-sector investments already more than trebled between 2004 and 2006.

Does this kind of prognosis sound familiar, in any way? Certainly, predictions of ever faster growth in a niche market in which most firms have not yet earned a single Dollar, based on wild assumptions about unmet demand, were all too common practice during the bubble of the late 90s. 

Would it be too pessimistic (or just too early) to coin the phrase “microfinance bubble”? Well, maybe it just got coined here, and possibly for good reasons.

Overoptimistic expectations have a tendency to disappoint those who hold them, and key actors in the worldwide microfinance project have been trumping each other with predictions market growth for many years.

Of course, microfinance is believed to be far more resilient against downturns than other financial investments; and possibly for good reasons. It is true that the poor have better “absorptive capacities” for economic shocks (they are used to going hungry in order repay their debts), and their businesses are “less integrated into the formal economy”, thereby less prone to the business cycle (the flip-side of which becomes apparent in boom-times).

But all positive predictions assume a continuing supply of finance; not a liquidity (or even solvency) crisis like the current one. So, given that DB based its estimates of microfinance’s growth on a ten-fold increase in private funding, what does the current crisis mean for the microfinance industry?

Neither the MicroBanking Bulletin (Autumn 2008) nor the CGAP website mention the world economic crisis yet, but it should be interesting to see how they deal with it soon. It seems doubtful that, with mortgages write-offs, bank failures, generalised liquidity dry-up, etc., that institutional and private investors will continue to find the necessary pocket money to stick into microfinance and other “social investments”; especially not ten times as much money they have deemed microfinance worthy of so far.

Assuming that microfinance really does increase the incomes of the poor, that it really is demanded by the poor (and not just taken for lack of an alternative), that it really does empower women, and so on – several assumptions which still must prove their mettle in rigorous assessment –, it would be a shame to see it land on the ever-growing rubbish heap of discarded and dismissed development concepts, just because it failed to become “sustainable”. By the way, “sustainable” means profitable without needing subsidies, in World Bank-Speak.

There is a high risk that overinflated expectations plus the worldwide economic crisis (the full extent of which is far from apparent) could lead to microfinance disappearing quietly from donor and financier agendas.