From Boom to Bust: How different has microfinance been from traditional banking?

This paper presents an in-depth analysis of developments in the microfinance sector beforeand after the Lehman Brothers collapse in 2008 by comparing them with developments intraditional banking sectors of emerging market economies and developing countries. Thefindings indicate that microfinance has been part of the same credit boom observed in the traditionalbanking sector. Moreover, as in the traditional banking sector, the boom was fosteredby substantial inflows of foreign capital. This raises the question whether the crisis resiliencethe microfinance sector has shown in the past remains a characterizing feature of microfinanceor whether the same risk factors associated with excessive credit growth lead – as in thetraditional banking sector – to greater vulnerability.The findings indicate that microfinance markets with strong capital inflows, high creditgrowth rates and rapidly increasing competition experienced a substantial decrease in creditgrowth and deterioration of portfolio quality in the post-Lehman period. This is in line withthe evidence found for the traditional banking sector in emerging markets and developingcountries. The paper concludes that by becoming part of the global financial system, microfinancehas lost one of the characteristics which distinguish it from traditional banking, namelyits higher resilience towards crises in domestic and global financial markets.