COVID-19 has unequivocally arrived in the developing world. Hundreds of cases have been reported across Latin America and South Asia, and now there are at least 30 countries in Sub-Saharan Africa reporting infections. South Africa and India both announced yesterday that they would go into lockdown for three weeks, and others may soon follow. With health-care systems ill-equipped to cope with a pandemic, there are many reasons to believe that the effects of the virus in these countries will be even more damaging than in the developed world, with higher mortality rates.
The countries the virus hit first have recognized the devastation that the disease, and economic lockdown responses to it, could wreak on small businesses, the financial institutions that serve them and on their economies as a whole. The questions being debated in these countries are not about whether urgent action is needed but about the scale of the response.
To date, however, we see very little evidence that the global microfinance community has woken up to the full extent of the crisis as the virus takes hold in less developed countries. As the international community mobilizes to respond to the COVID-19 crisis, we need to take steps now to ensure the global industry that provides financial services to the poorest is not left behind.
Take a few moments to consider just a few of the factors about the looming economic crisis the industry confronts and the likely implications for poor customers:
- Even before the virus arrived in the global south, macroeconomic conditions had deteriorated rapidly enough to cause serious shocks to many developing economies. Natural resource prices plummeted as global demand shrank and China shut down its factories. The global garment industry has essentially stopped. Migrant workers are losing jobs or being sent home, and international remittance flows seem to be dropping sharply. Capital is fleeing to safe assets as stock markets have crashed. Tourism and travel have stopped. Poor people are among the first to feel the impact.
- The only way to stem the infection rate is social distancing, and many developing countries are implementing quarantine policies of some sort to stem the spread of the disease. These policies will likely be less comprehensive than they have been in Singapore or South Korea, but they will nonetheless have a devastating effect on the ability of poor people to sustain their livelihoods. A recent study of the Ebola epidemic concluded that the worst hit sector was informal, urban non-agriculture firms — essentially, the majority of microfinance borrowers globally.
- MFIs serve 140 million low-income people worldwide with savings and credit services, according to MIX data. As of 2018, the value of their credit portfolios was $124 billion. Their customers are 80 percent women, and 65 percent live in rural areas. They are among the poorest and most vulnerable segments of many societies. While MFIs play a critical role in supporting the income-generating activities for the poor, these numbers under-report the range of credit services poor people rely upon. Cooperatives, fintechs and pay-as-you-go (PAYGo) companies also play important roles.
- The economics of microfinance require high repayment rates. A slip in repayment rates from 95 to just 85 percent would render many MFIs insolvent in less than a year, and we see significant risk that repayment rates may fall by more than this as borrowers struggle to make ends meet in the face of a precipitous income shock. Microfinance crises of the past have an important lesson to teach: when repayment rates drop, they do so rapidly. Beyond this, high-touch business models may face additional challenges as social distancing measures are implemented.
It has been pointed out by some observers that microfinance has endured previous crises, and there are certainly lessons that can be learned from this history. And we can anticipate that this crisis will impact different households, institutions and countries differently. But we haven’t seen market disruptions on this scale in the history of microfinance. We certainly hope we’re wrong about the devastating effects COVID-19 could have on developing countries, on their economies, on their poorest citizens — the ones that microfinance was created to serve. But we don’t think we are.
If the microfinance sector is going to survive the pandemic, we need to treat COVID-19 as the fundamental threat to the industry that it likely is. We need every part of the sector to start mobilizing around easing the terms of debts that borrowers cannot service when economies seize up, keeping MFIs solvent and preparing to recapitalize them so they are in a position to lend again and play their vital role in recovery once the crisis recedes.
What might that look like?
- Social investors should consider temporarily suspending and rolling up returns on their outstanding loans to MFIs, pushing out repayment terms and relaxing covenants they might have on such factors as repayment rates, net asset values and capital adequacy ratios.
- Many central bankers are already making plans to provide substantial liquidity support to their financial sectors by easing reserve requirement ratios in countries where these apply. We are concerned that the microfinance lenders that operate as non-bank financial institutions may not get the relief they need in the broader effort to shore up the financial sector. While these institutions do not represent a systemic risk in any given market, failure to include them in government-supported relief measures would deny them the assistance they desperately need to continue operating.
- Governments should also be supporting means to reduce travel and face-to-face interactions in microfinance and to drive traffic to digital channels. This includes allowing the use of digital signatures and loan disbursements on the basis of biometrics and approving credit rollovers remotely. Limits on digital transactions could be increased and fees waived or reduced, as M-Pesa recently announced it would do in Kenya. As governments look at providing direct relief to low-income citizens, regulatory limits on mobile transactions and related KYC requirements may need to be temporarily eased, so people can be shifted rapidly on to digital platforms and resources can flow to them.
- Development finance institutions, multilaterals and bilaterals should be studying prior financial crises to consider how to structure rescue packages for MFIs, including lessons learned in buying up loan portfolios, creating regional financial support facilities and facilitating mergers. This is the time for blended finance providers and, particularly, donor capital to step up.
- MFIs may be forced to make hard decisions about how to support their customers by suspending repayments, restructuring existing loans and providing liquidity to their customers to manage the crisis. There is a risk that some governments may make these decisions for lenders by imposing payment holidays without careful consideration of the impact on lenders, and the sector needs to be prepared to face this challenge if it arises.
If the solutions were easy, this wouldn’t be a crisis. It seems likely that without significant support and concerted action, many MFIs are at risk in the coming storm. The question is: what steps can we take now to ensure the industry survives and can contribute to the eventual economic recovery? Without taking on hard questions and beginning to put plans in place for COVID-19, it won’t be poverty that is in a museum, but potentially the modern microfinance movement.
That’s why we’re convening partners from around the world to tackle this problem with the urgency it requires. CGAP, with the help of the Financial Access Initiative, will be organizing discussions with different parts of the inclusive finance industry in the coming days to hear how the crisis is affecting them and what they are doing to help anticipate and mitigate the impact of the economic slowdown that is necessary to contain the spread of the virus. We are gathering information on decisions made by policy makers in countries around the world to understand the effects their policies may have on MFIs and inclusive fintechs. And we are reaching out to investors and funders to understand how they plan to support the microfinance industry to ride out a crisis that is not of their making. We have opened up a portal on the FinDev Gateway to hear from the inclusive finance industry and would encourage you to share information and make your voices heard.
The global microfinance industry was built through collective action, bringing together providers, donors, investors, policymakers, academics and other practitioners to make inclusive financial services available to the world’s poor. We have achieved much together. We now need to mobilize as an industry to ride out this crisis and secure the hard-won gains of the last four decades. The hundreds of millions of poor people globally who rely on inclusive finance to borrow, save and send money are counting on us.
Timely and well written. Regulators in the developing economies must consider how to maintain liquidity in the microfinance sector. With economic activity almost grinding to a halt and repayment risk going overboard, the microfinance sector needs to be liquid to support the recovery process post COVID-19.