By now, it is clear that the global coronavirus pandemic and the resulting government-imposed lockdowns have had an unprecedented impact on the global economy. But what may not have been sufficiently clarified to date is how critical the situation has become for the groups most at risk from this downturn. Specifically, low-income groups in developing countries and emerging economies not only face the prospect of abject poverty in many cases, but also the likelihood that their financial systems are not robust enough to help them. through these dark times.
Among the most crucial components of these systems is microfinance, a sector that is typically engaged in providing small business loans, savings accounts, and non-financial support to help boost financial inclusion. and entrepreneurship in low income communities. Over the past 15 years or so, microfinance institutions (MFIs) have received considerable acclaim by reaching out to communities that have been largely ignored by the traditional financial system as well as focusing on the financial empowerment of women. Indeed, about 80 percent of the currently estimated 140 million global microfinance clients with an outstanding gross loan portfolio of $ 124 billion are women.
Today, the microfinance industry covers a wide range of financial services, each of which tends to have a different degree of popularity depending on factors such as geographic region. But several reports have emerged in recent weeks to suggest MFIs are under increasing pressure as the COVID-19 pandemic continues to reduce business opportunities for micro, small and medium enterprises (MSMEs). As such, they have been forced to adapt in order to continue to provide the best possible support to their clients. The Consultative Group to Assist the Poor (CGAP), an independent think tank for financial inclusion involving more than 30 leading development organizations, for example, recently found that its PAR30 measure of overdue loans 30 Days saw a high 41 percent increase at the start of the crisis compared to a baseline scenario before the pandemic in June 2019.
This strongly implies that MFI portfolios are under increasing pressure due to the ongoing recession. That said, CGAP also attributed this deterioration to the decline in portfolio growth, which may mask underlying weakness. “When growth stops or reverses, PAR levels rise, and this is one of the likely drivers of the April / May peak,” the group acknowledged. And it would appear that, as expected, small MFIs are having a much harder time than their larger counterparts. In this case, CGAP found that the PAR30 levels of small MFIs were almost double that of larger MFIs.
A joint July survey of 108 MFIs around the world by renowned microfinance institutions ADA (Autonomous Development Support) and the Grameen Crédit Agricole Foundation, alongside microfinance-focused investment manager Inpulse, found that the most large institutions (level 1 in the graph below) are “better equipped to overcome the financial difficulties resulting from the health crisis and epidemic containment measures, as well as to take crisis management measures and make use of the specific measures put in place. in place by local authorities ”. But small MFIs (Levels 2 and 3) are “more likely to offer their clients non-financial services to help them cope and are keen to continue developing non-financial services in the future.” Although large MFIs appear to be more resilient in times of crisis, furthermore, smaller ones “rise to the challenge and stay true to their powerful social mission,” the survey observed.
Microfinance in some regions and countries also appears to be more affected than in others. Cambodia, for example, claims to have the highest average per capita microfinance loans in the world, at $ 3,804. But there are very few consumer protection measures in place for those who have failed to repay their loans, with Prime Minister Hun Sen even asking MFIs to seize assets. “Many Cambodians are more worried about losing their land than of catching the coronavirus because they cannot repay their loans, and the government has done little to help them,” said Phil Robertson, deputy director of the Asia division of Human Rights Watch. “The Cambodian government should immediately order a freeze on the collection of debts and accrued interest of those affected by the pandemic, and hold accountable financial institutions that do not comply. “
And in India, where the sector last year recorded a total loan portfolio of $ 1.785 billion and is therefore one of the most successful microfinance hotspots in the world, recent data from the central bank shows that serious problems have arisen in recent months, especially with loan recovery. “Due to disruptions in the supply chain and business operations, the likelihood of loss of livelihoods and consequent decline in household income is high,” the Reserve Bank of India’s September report observed. “FCNB [non-banking financial company]-MFIs, being specialized institutions providing unsecured loans to low-income groups, are particularly exposed to credit risks in this scenario.
So what do we do to solve the difficulties of the microfinance sector? It would appear that different regions offer different solutions. In Europe, for example, the Employment and Social Innovation Program (EaSI) is doing a lot to support microfinance initiatives during the pandemic. Normally, the mission of the program is to improve access to microfinance for at-risk groups who wish to develop business ideas, and it receives assistance in this regard from the European Union (EU) through the ‘EaSI guarantee instrument, which facilitates connections between financial intermediaries and micro and social enterprises; the EaSI capacity building instrument, which helps facilitate the growth of financial intermediaries to better serve its businesses; and the EaSI-funded instrument, which provides loans to help financial intermediaries increase their lending capacity.
As part of the € 400 million guarantee instrument, it was announced in July that the European Investment Fund (EIF) and the European Commission (EC) would launch new COVID-19 support measures to improve access to finance for micro-borrowers, micro-enterprises and social enterprises affected by the socio-economic consequences of the pandemic. “The aim of the new COVID-19 measures is to provide more incentives for financial intermediaries to lend money to small businesses, by mitigating the sudden increase in perceived risk triggered by the coronavirus pandemic and by easing fund constraints. turnover and liquidity of the end beneficiaries targeted by EaSI. program ”, said the Commission. “The main features of these new measures include higher risk coverage, a broadening of certain parameters, such as an increase in the maximum exposure for microenterprises and social enterprises, and more flexible conditions. “
CGAP, meanwhile, observed four key ways in which MFIs responded to the conditions imposed by COVID-19:
- Offer leniency to clients: CGAP records that around 85% of MFIs are implementing some kind of leniency mechanism in response to the pandemic, while nearly two-thirds issue a moratorium or restructure loans to provide respite for borrowers suffering from declining income . Almost half of the MFIs surveyed grant a moratorium to those who request it, while 14% grant a general moratorium to all their clients.
- Reduce loans: More than two-thirds of MFIs have reduced the amount they lend to their clients. And significantly, with two-thirds of them cutting in half and around 10% completely stopping loan disbursements. While unconfirmed, CGAP points to declining customer demand, higher risk, lower risk tolerance and tighter regulations as possible reasons for the withdrawal.
- Flexible staff arrangements: Less than a sixth of all MFIs have closed branches or laid off staff. The majority, meanwhile, strengthened flexibility measures, with more than half allowing staff to work from home and 41% reducing staff working hours or placing them on paid or unpaid leave.
- Scaling remote channels: Despite the implementation of containment measures, MFIs are strengthening their remote channels to reach clients. About a third of MFIs have expanded their call center operations or digital channels, and just under a third have established new digital channels. And about 40% of MFIs reportedly perform “at least some” transactions on digital channels, although only one in seven do 30% of transactions digitally and a significant quarter do not carry out any digital transactions.
Indeed, with the pandemic seemingly leading the world to use digital channels more, it would seem reasonable to assume that the microfinance industry will follow the same mold to continue serving clients. Ajay Kanwal, managing director and CEO of Jana Small Finance Bank in India, for example, believes digitization will become the norm for the industry in a post-COVID-19 world. “The most positive feature of the whole crisis is that we are going to move towards more digital approaches to customers, banks and finance companies, which in a way will help formalize a bit more and, therefore, the ability to give more credit to underserved people will become easy. “
However, if foreclosure measures were to be relaxed in the future, some of the operational challenges that MFIs face should ease in the face of improved mobility, more opportunities to interact with clients, and more opportunities to interact with clients. greater ability to disburse loans and collect repayments.