MICROCAPITAL BRIEF: 9 Microfinance Investment Vehicles Coordinate Response to Effects of Pandemic on MFIs, MSMEs in 80 Countries

The COVID-19 pandemic and efforts to reduce its health impacts have had major negative economic consequences for micro-, small and medium-sized enterprises (MSMEs). These enterprises thus are having difficulty repaying the loans they have outstanding from microfinance institutions (MFIs) and other retail lenders, leading to liquidity challenges for these lenders. In response, nine investors in these lenders, which have an aggregate of USD 15 billion invested in 80 low- and middle-income countries, are working together to support the long-term viability of the retail financial services providers (FSPs).

The nine investors, which manage a range of microfinance investment vehicles (MIVs) and other funds seeking to generate positive social impact, have arrived at a non-binding agreement to adjust FSPs’ payment obligations. To reduce the reporting burden on FSPs, they also have created a common Crisis Assessment Tool to collect data on FSPs’ operations, portfolios and liquidity, as often as two times per month.

The agreement, which other investors are invited to join, sets out a range of intentions, such as minimizing the involvement of legal counsel and communicating as a group rather than bilaterally, to the extent reasonably practicable. The memo also promotes the injection of fresh funds so strongly that these “may be treated with some preference” in the event of default by the FSP.

The agreement defines four categories under which FSPs are to be treated, with a preference for acting under the earliest that is deemed workable:

– Category A: For the strongest FSPs, minimal restructuring is envisioned.

– Category B: FSPs in this category are expected to need repayment moratoriums of three to 12 months. Agreements are to be made via email rather than complex legal documents. The goal is to rollover loans with the terms unchanged, other than the maturity. Additional costs are to be capitalized only if needed due to foreign-exchange fluctuation.

– Category C: While the investors believe these FSPs will outlast the crisis, they are at high enough risk to warrant legally binding restructuring.

– Category D: These FSPs are at the highest risk for failing to survive the effects of the pandemic. They will undergo a traditional restructuring process.

For investees in categories A, B and C, the focus will be on rescheduling principal payments while maintaining interest payments, even as interest continues to accrue. The MIVs agree that none of the FSPs in any category will be subject to penalty fees or accelerated repayments that may be enforceable under pre-existing loan agreements. The MIVs also agree to forgo any prepayments.

Sources and Additional Resources

Memorandum of Understanding for MIVs to coordinating MFIs’ refinancing needs
http://www.e-mfp.eu/sites/default/files/news2020/2020-04-24%20MIV%20Covid-19%20coordination%20MoU.pdf

Crisis Assessment Tool
http://www.e-mfp.eu/sites/default/files/news2020/2020%2004%2027%20MIV%20Crisis%20Assessment%20and%20reporting%20Tool%20Final.xlsx

European Microfinance Platform press release
http://www.e-mfp.eu/news-and-events/e-mfp-endorses-investor-mou-coordinated-covid-19-response

More news from MicroCapital on COVID-19
https://www.microcapital.org/?s=covid

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