By Nathan Were
Microfinance Institutions (MFIs) service about 140 million low-income people worldwide, with savings and credit services, according to the MIX market – a data repository for MFIs. The MIX also reports that as of 2018, the value of their credit portfolios was USD124 billion with 80% of the MFI customers being women; 65% operating in rural areas and 35% urban and largely in the informal sector.
The Covid-19 pandemic is threatening the survival of MFIs, as millions of informal sector clients have their businesses disrupted and remain under lockdown. The disruption in business activity has significantly impacted their earnings and thus affected the capacity to service micro-loans month on month. MFI clients run very low margin businesses and extended lockdowns are now threatening business survival and may not only wipe out the little profits/savings they had, before the lockdown, but also their working capital. By the time countries like Uganda, loosen up the lock-down, thousands of these clients will have nothing to get back to.
An MFI liquidity analysis from the MIX has shown that 46% of MFIs would have no trouble covering a full year worth of operations using the existing reserves, 35% would be able to cover at least six months, while 19% would only manage two months. While this analysis covered Credit only institutions, it points towards a sector that is headed for tough times and could see several MFIs either merge, get acquired, or close.
The economics of microfinance requires high repayment rates. A slip in repayment rates from 95 to 75 or 65% would render many MFIs insolvent in less than a year. This pandemic is doing exactly that – threatening repayments that could easily erode MFI capital and render them insolvent. But what will it take to save institutions that are powering millions of small businesses around the world?
Regulators: The central bank and other supervisory agencies of MFIs will have to play a very critical role in supporting liquidity constraints that MFIs under their supervision are going to face. There might be a need to ease legal reserve requirements in the short to medium term as many MFIs are likely to suffer liquidity arising from Non-Performing Loans and increased cost of running loan recovery efforts. As lenders of last resort, the central bank might have to step-in and bail-out some MFIs that will suffer adverse liquidity challenges arising from an increase in on-demand deposits that some MFIs may not be able to handle as most of the funds remain stuck with the borrowers.
Lenders: Owing to the inability to raise enough deposits to fund their loan book, most MFIs source funding either through debt or equity from external lenders. These are going to be key in helping rescue the MFI industry. This is not the time for lenders to panic and exit but to work together to save a sector that has delivered consistent returns for lenders over the years. Lenders will need to come together and launch a joint strategy that should start with a moratorium on principal and interest payments due in the short to medium term to help ease liquidity for distressed MFIs. They will also need to find new money to help capitalize some of these institutions as their inability to lend due to liquidity could worsen their situation.
Client protection: As MFIs receive moratoriums on principal and interest payment from their lenders, and an injection of fresh capital – through new debt or equity -, they should be prepared to pass the same benefits to their clients. This is not the time to push for hard recovery efforts from clients that have lost everything. MFIs should carefully study their portfolio, segment it with a focus on sectors that are most affected, and then tailor strategies to address the client’s repayment issues accordingly. Clients should be allowed every chance to recover their economic condition before the pressure to repay the loans can be mounted. This is not the time for MFIs to start attaching the client’s assets to recover the loans.
Finally, governments around the world will need to do everything humanly possible to save the microfinance sector as its collapse will not only have systemic effects on the financial sector but could mean an end to millions of livelihoods and jobs around the world.
Mr. Were is an Access to Finance Specialist at the World Bank Group.
Email: were.nathan@gmail.com