I hate to say “I said so”, and I know it’s horrible style. But sorry, this issue is too important to be ignored. My fears about the credit crunch and microfinance are being confirmed. 

The current economic crisis threatens to set back development and poverty reduction by years. Who coul really be surprised? In a globalised world, when Wall Street sneezes, everyone else catches the Flu.

In January, I posted an entry about my worries that, despite claims that microfinance is a crisis-resistant business, the recession would in time also hit the microcredit industry.

Last week, the World Bank confirmed this. The World Bank Group published an article on its website, which it also reported via its in-house microfinance mouthpiece, the Microfinance Gateway, stating:

“The World Bank group has said that the spreading global economic crisis is trapping up to 53 million more people in poverty in developing countries. With child mortality rates set to soar, the crisis is posing a serious threat to achievement of the Millennium Development Goals (MDGs). New estimates for 2009 suggest that lower economic growth rates will trap 46 million more people on less than US$1.25 a day than was expected prior to the crisis. An extra 53 million will stay trapped on less than US$2 a day. This is on top of the 130-155 million people pushed into poverty in 2008 because of soaring food and fuel prices.”

The World Bank also wrote in this article that extra funding would now be needed to keep microfinance institutions from failing.

Even the poorest people on this Earth are directly or indirectly linked into the world economy, and microfinance in fact seeks to further deepen these links. What is too often forgotten is that those with least to lose are those hardest-hit by crises of capitalism.

So what now? Here are a few ideas.

1. In the interests of the world’s poor and those microfinance institutions which seek to serve them, leniency is now needed. If the poor can’t repay, help them out; this is where the World Bank should step in.

2. Forget the goal of profitability. If running microfinance programmes as strictly for-profit businesses ever was a desirable aim, it is even less desirable now (and less realistic). The imposed institutional convergence of the past years toward a single, profit-seeking model has been destroying the diversity which microfinance needs in order to be resilient and effective.

3. Consider other tools for poverty reduction. The institution of the financial market as a tool for growth is currently under question, and for valid reasons. In Europe, the USA and East Asia, industry, planning and strong governments preceded the extension of credit (i.e. debt) to the masses. Developing countries need the same chances to prosper.