Global Perspectives | Spring 2009

Tale of Two Borrowers

The impact of the global economic crisis on microcredit clients

Gregorio Perez busily works through the lunch rush at his food cart business in Nicaragua. By noon each day, he has sold all his food and juice

Gregorio Perez, a microloan recipient, operates a food cart in Ocotal, Nicaragua. Like many in Latin America, he has experienced the recent increase in the price of corn and other goods. “Things have gotten very expensive,” he says. “Before, it cost me $40 to $50 to buy all my supplies. Now, it’s more like $70.” Despite his narrowing profit margin, Gregorio has made the decision not to raise his prices in order to maintain his customer base. “I’m earning less than I used to because I haven’t increased my prices, but it’s still enough to support my family and pay my loan.”

Carpenter Alberto Augstín Zul is in a similar situation. Alberto crafts beds, closets and doors in a small workshop in Totonicapán, Guatemala. “Things have gotten pretty bad. I used to sell 50 to 70 beds a month, but now it’s more like 10 to 12. Before, I would sell everything I had in stock, but now no one is buying much.” As sales of consumer products like beds are on the decline, Alberto has wisely altered his business model and now produces primarily doors, which he sells to builders who buy them in greater quantity. “I have faith that things will get better,” he says. “Already things are looking better.”

Microentrepreneur Alberto Augustín Zul in his workshop. Alberto recently completed law school while working full time and supervising eight employees in his furniture-making business, a skill passed down to him by his father

As these two stories illustrate, the global economic crisis is having an impact on the lives of those we serve, but maybe not in the way we think or to the degree we might expect. The most immediate impact of the economic crisis on microloan borrowers isn’t the limited access to credit; it is the increase in commodity prices. With remittances decreasing and the cost of goods increasing by 30 to 50 percent throughout Latin America, families like Gregorio’s and Alberto’s are faced with difficult decisions about how to spend their earnings. And as the recession continues, it may become more difficult for their respective financial institutions to receive access to capital.

New market conditions will require microfinance institutions (MFIs) to remain focused on portfolio growth, taking care to identify and work with borrowers who are motivated to succeed. Likewise, organizations like Global Partnerships (GP) must increase engagement with MFI partners to understand the factors underlying an institution’s performance reports. Fortunately, GP already has systems in place. Through a rigorous screening methodology and monthly reporting, GP is in regular communications with MFI partners. Furthermore, with a team of seven professionals on the ground in Latin America, GP is uniquely positioned to select and monitor partner MFIs and the impact they are having on the families of microloan borrowers.

And while market forces have slowed the flow of capital worldwide, GP has been able to provide new funding at a critical time for our MFI partners. The closing of Microfinance Fund 2008 (MFF 2008) this past November will bring an additional $20 million in capital to GP’s current MFI partners as well as expand the portfolio to include partners in Ecuador and Mexico. Once fully disbursed, GP will be working with 30 MFI partners in eight countries, reaching nearly 1 million families.

Families like those of Gregorio Perez and Alberto Augustín Zul are all too familiar with the struggles that come with limited access to resources. Despite the challenges they have faced, with access to microcredit they are able to provide for their families and build a foundation for the future. Alberto recently finished law school and is waiting for the results of his bar exam. Once he begins his law practice, his younger brother, who is also his carpenter apprentice, will oversee operations at Alberto’s woodworking shop. That is, he explains, until such a time that his only child, his four-year-old daughter Christine, is old enough to decide whether she’d like to go to college or go into the family business.

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