This Sri Lankan woman was able to start a broom-making business with help from microfinance. Will the economic crisis limit these opportunities? Photo: Michael Foley: flickr

Microfinance institutions (MFIs) are going to be badly hurt by the global financial crisis. Or will they? Reports and opinions differ widely.

Some argue that the financial crisis has hampered small-scale lending.

One reason is that the value of local currencies are fluctuating too much, relative to more stable currencies like the U.S. dollar or Euro. Because of this, many MFIs are having to either seek new loans or convert existing loans into these "hard currencies." Over the course of these loans, many local currencies continue to devalue — leaving MFIs on the hook to make up the difference.

On top of this, interest rates on loans that MFIs need to fund their operations have increased. Survey findings reveal that 41 percent of MFIs are now taking loans at higher interest rates than before the economic crisis. Financial columnist Sarah Bauerle cites this as one of the crisis' "deleterious effects" on the microfinance industry.

Then there's the issue of available funds.

Roy Jacobowitz, managing director at the microfinance nonprofit ACCION International, says "a liquidity crisis is the very worst-case scenario for microfinance institutions."

Others say the credit crunch could actually be a good thing for MFIs, while some add that the funding spigot is still on.

"There is evidence that microfinance is resilient to global market movements, compared to traditional lending, as it falls outside of the mainstream economy. And there does still seem to be equity available for microfinance," says Mary Ellen Iskenderian, CEO of Women's World Banking.

Iskenderian cites India as an example, though it's worth noting that India is weathering the economic crisis incredibly well.

Investors are still banking on microfinance. The privately owned Oikocredit increased microfinance investment by 32 percent in 2008.

Muhammad Yunus, who pioneered microfinance in Bangladesh and won a Nobel Peace Prize for his efforts, remains optimistic. He said in October that he sees "good news in the middle of all these bad news: microfinance still works."

Lucy Conger's story "The Big-Country Enigma" examines why micro-credit has flourished in smaller countries like Peru and Bolivia while remaining somewhat small in scale in countries such as Brazil.

Does both over and under government regulation stand in the way to microfinance?

Business Week's "The Ugly Side of Microlending” presents a seemingly untold story regarding microfinance. Many (if not all) in the aid and development sector laud the triumphs of micro-credit for the world's poor; and, in truth it has been a driving force for positive change in a number of people's lives. However, when there is a profit to be made a variety of more unsavory business practices arise.

Keith Epstein and Geri Smith do a great job of investigating the variety of for-profit banks that operate within Mexico, painting a bleak picture for unsophisticated and largely uneducated borrowers. Drawn by lack of regulations and a government bogged down by corruption Mexican banks are charging anyway from 50% to 120% annual interest on loans.

So, what does that mean exactly? After a 104 week payment plan of $23 a month, an average borrower will end up paying more than double for a $1,100 Whirlpool refrigerator. What's more-- large corporations such as Wal-Mart are moving onto the scene, having obtained their Mexican banking license last year.

The flip side of microfinance is one that should receive more attention. With the advent of micro-credit to the world's radar screen one cannot blithely assume that all lending institutions are created equal. So what's the answer? More regulation? Increased education? I suppose one cannot discount that America has similar institutions-- the Pay Day cash lending services that frequently appear in strip malls often invite sharp criticism domestically. Either way—it seems clear that for profit banking institutions charging astronomical interest rates seem to be perpetuating the very poverty they are supposedly attempting to alleviate.