As the COVID-19 pandemic unfolds, there rightly has been a lot of concern about the impact on microfinance institutions (MFIs) and their clients. The CGAP Global Pulse Survey of Microfinance Institutions has helped to shed some light on these impacts by showing the deterioration of loan portfolios, the liquidity levels of MFIs and other indicators. However, there has been less focus to date on how the MFIs themselves have responded to the crisis: How are they adjusting their operations? To what extent are they offering leniency to their clients? Have they been forced to lay off staff and close branches? Thanks to the pulse survey, we have some answers to these questions, too.
1. Leniency to clients
The most common response to COVID-19 is to give leniency to clients. A full 85 percent of MFIs are taking some leniency measure, with nearly two-thirds either issuing moratoria or restructuring loans for clients in response to the pandemic. These measures can offer vital breathing room to borrowers who may have lost all or part of their incomes.
Moreover, most MFIs are taking these measures because they choose to, not because regulators are forcing them to. Two-thirds of MFIs offering moratoria say that they are doing so voluntarily. This may raise important questions about the value of policy mandates.
In terms of who qualifies for a moratorium, the most common approach — adopted by nearly half of MFIs in our sample — is to grant it to all clients who ask for it. Some (14 percent) go further and give blanket moratoria to all clients without the need for an application. Other MFIs grant moratoria more selectively. Most determine their own qualification criteria, but some report that the authorities have decided who gets a moratorium and who doesn’t.
For the most part, MFIs have not started writing off loans yet. Just over 1 in 10 say they are doing more write-offs due to COVID-19. That makes sense: only after moratoria run out and restructured loans come due will write-offs come into question. Leniency measures are only punting payments further down the road, but they will come due eventually. The ability of borrowers to repay at that point will determine whether MFIs make it through the pandemic or not.
2. Reductions in lending
The second most common change MFIs have made is to cut back on their lending. More than two-thirds of all MFIs have reduced disbursements due to COVID-19. While a draw down is not unexpected, the sheer extent still is somewhat shocking. What is more, most MFIs that have cut lending have done so by significant amounts. Two-thirds say they have cut disbursements by more than half compared to normal levels. One in 10 claims to have stopped lending entirely. No wonder MFIs reported larger liquidity buffers than many expected after the crisis hit, as we wrote about a few weeks ago.
We don't yet know why MFIs have reduced lending. There could be any number of reasons, including lower demand from clients, increased riskiness of clients, lower risk tolerance by the MFI, tighter regulatory standards or just general hoarding of cash to meet an uncertain future.
Whatever the reason, the bottom line is that most of the MFIs we surveyed are lending at somewhere between one-third to half of their pre-COVID levels, depending on how large the cutbacks have been within the “more than half” and “less than half” categories. Even a best-case scenario amounts to a stunning contraction in core business that raises questions about how long MFIs can sustain current conditions. More importantly, these cutbacks raise concerns about the implications for low-income clients who rely on microfinance to support their livelihoods.
3. Flexible staffing arrangements
The third most common type of measure taken is flexible staffing. Branch closures and layoffs do not appear to be widespread. Less than one in six MFIs has closed any branches or laid off staff. MFIs that have resorted to these measures have done so on a limited basis. Moreover, they appear to have done either one or the other, not both. Just over a quarter of MFIs that furloughed staff also closed branches, and only one in five MFIs that closed branches furloughed staff. Instead, most MFIs have adopted more flexible measures. Over half have some staff working from home, and 41 percent have staff on reduced hours or leave (paid or unpaid).
However, a small subset of MFIs has been hit hard with closures and layoffs. Nearly 1 in 10 MFIs has closed more than 80 percent of its branches, and 6 percent have furloughed or fired more than 80 percent of their staff. Around one in eight MFIs has more than 80 percent of staff on leave or reduced hours. It is worth noting that in each of these cases, the sample is small and the exact figures are therefore subject to some uncertainty. That said, it seems clear that a small share of the sector is under extraordinary pressure at the moment.
4. Scaling up remote channels
The fourth most common response is to scale up remote channels to reach customers despite stay-at-home orders and infection fears. Around one-third of MFIs have expanded their call center operations or digital channels, with only slightly fewer implementing new digital channels to customers.
There is, however, great diversity in the combination of these channels. Among the MFIs that expanded call center operations, just over half did not expand or implement any digital channel. The remainder was split evenly between implementing new digital channels, expanding current digital channels, or both. Conversely, around half of the MFIs that expanded current digital channels also added new ones, while less than a third of them expanded call center operations.
About 40 percent of MFIs in our sample say that they are now doing at least some transactions over digital channels. That said, only one in seven MFIs is doing more than 30 percent of transactions digitally, and a quarter of MFIs say they aren’t doing any digital transactions at all. Strikingly, 47 percent of MFIs in our survey are not expanding any of these remote channels, drawing a notable dividing line between those who are leveraging technology — whether voice or digital — and those who are not.
Taken together, these figures paint the picture of a microfinance sector that is under significant strain but responding with flexibility, offering breathing room for both clients and staff while building out new ways to reach customers remotely. For now, this flexibility is allowing MFIs to stave off the worst outcomes as they try to adapt and get through the crisis. This is encouraging for lenders and borrowers alike. However it raises the question: How long will these measures suffice?
This will be the focus of our next blog post in this series, so stay tuned.
The CGAP Global Pulse Survey of Microfinance Institutions is a global effort that depends on the participation of MFIs around the world. To learn more and participate in the survey, visit www.cgap.org/pulse. This post is part of our blog series "Microfinance and COVID-19: Insights from CGAP's Global Pulse Survey." We will regularly update the series with analysis of the survey results.