MICROFINANCE PAPER WRAP-UP: “Crisis Roadmap for Microfinance Institutions: COVID-19 and Beyond,” by Julie Abrams, Published by CGAP

The author structures this publication as an 11-step “roadmap” for microfinance institutions (MFIs) to respond to the COVID-19 pandemic and its economic impacts as well as to develop resilience going forward.

(1) Foundational, Ongoing Steps

(i) Leadership: Effective leadership is essential to ensure a “quick response” during a crisis.The board of directors and senior management must establish in advance and be ready to implement a business continuity plan to “minimize the operational, financial, legal, reputational and other material consequences arising from a disruption.”

(ii) Investor Relations: MFIs should keep all of their investors informed of how they are “coping” with the pandemic. With equity investors, MFIs may discuss suspending dividend payments or request additional capital infusions. In the case of debt investors, MFIs should perform cash flow analyses to determine their liquidity available for repayment of principal and interest. Based on these analyses, the MFI may request loan restructuring, repayment moratoria or covenant waivers to avoid potential breaches.

(iii) Government Moratoria and Other Relief Programs: MFIs should monitor closely for any government decrees regarding the status of MFIs – whether relating to their role as lenders or borrowers.

(2) Business Continuity Steps

(i) Ensure Staff Safety and Communications: MFIs should ensure the wellbeing of staff members, for example by allowing them to work remotely, if possible. For staff working onsite, MFIs should provide personal protective equipment (PPE) and ensure compliance with social distancing. The author also suggests communicating regularly with staff about “current best practices regarding COVID-19 health and safety measures recommended by the national government and World Health Organization.”

(ii) Ensure Customer Safety and Communications: To strengthen the MFI-client relationship, MFIs should look for ways to increase the safety and wellbeing of clients and their families. In the case of deposit-taking MFIs, depositors should be informed about the MFIs’ “financial health and ability to service all deposits without delay and any government measures in place that affect depositors.” In the case of borrowers, loan officers should contact each customer to keep MFIs informed about the customer’s wellbeing as well as the status of the portfolio.

(iii) Ensure Ongoing Operations: Even during a crisis, MFIs should ensure that “good basic internal controls” are in place. A crisis management committee can be useful in this respect.

(3) Financial and Portfolio Steps

(i) Manage Cash Flow and Liquidity: Frequent projections of cash flow and computations of burn rate are important. MFIs should estimate liquidity, focusing on incoming and outgoing funds, including customer deposits held and withdrawn. MFIs should “consider and prioritize” essential operating expenses, factoring in new costs such as PPE and reconfiguring office space for social distancing. The author suggests “halting or decreasing” capital expenditures.

(ii) Manage Solvency: MFIs should measure and reassess solvency, increase liquid assets and “reduce or suspend long-term investments.”

(iii) Segment the Loan Portfolio: As “the pandemic affects sectors differently, even in the same city or rural area,” segmenting borrowers in the portfolio based on type of loan (productive/non-productive), geography (urban/rural) and government decree status (essential/non-essential business) can be helpful.

(iv) Renegotiate Loan Portfolio: Following loan segmentation, MFIs can provide “repayment relief to the negatively affected segments” rather than across the entire portfolio.

(v) Conduct Cash-Based Forecasts, Scenario Planning and Stress Testing: Useful tools include cash-based financial forecasts; scenario planning, such as generating different forecasts for best- and worst-case scenarios; and stress testing to prepare for undesirable scenarios.

This is a summary of a paper by Julie Abrams, published by CGAP (Consultative Group to Assist the Poor), February 2021, 44 pages, available at https://www.findevgateway.org/paper/2021/02/crisis-roadmap-microfinance-institutions-covid-19-and-beyond

By Aakansha Shenoy, Research Associate

Sources and Additional Resources

CGAP homepage
https://www.cgap.org/

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