MICROFINANCE PAPER WRAP-UP: “Weathering the Storm II: Tales of Survival from Microfinance Crises Past;” by Daniel Rozas; Published by Accion’s Center for Financial Inclusion, e-MFP

Mr Rozas evaluated 16 case studies of microfinance institutions’ (MFIs’) reactions to various crises that arose between 2004 and 2018 as a follow-up to the paper, “Weathering the Storm,” which was published in 2010 as a response to the global financial downturn that began in 2007. The new publication considers “the decade that followed the original paper, to see what became of the organizations profiled within it and how they’re facing the COVID-19 crisis.”

Mr Rozas outlined a “Hierarchy of Needs During Crisis,” with four levels of importance modeled as a pyramid. The most important is liquidity – at the base – followed by confidence, portfolio management and – at the top – capital. Regarding liquidity, the recommendations are: (1) MFIs should maintain a six-month buffer of liquidity to fund operations “even when inflows from portfolio repayments are minimal;” (2) MFIs that accept deposits should follow economic trends that may indicate an upcoming currency crisis so they can react “accordingly, for example, by reducing reliance on local-currency deposits;” and (3) because liquidity crises are most likely to occur due to repayments owed to creditors, MFIs may need to replace an investor or restructure debt by refinancing or establishing inter-creditor agreements.

To maintain the confidence of MFIs’ stakeholders during crises, Mr Rozas suggests: (1) MFIs honor depositors’ withdrawal requests, which can be easier if withdrawals by larger depositors are minimized by preemptive communication regarding the institutions’ crisis plans; (2) loans and collections should continue in order to show strength and maintain client relationships; (3) MFIs may reduce staffing if needed, as long as top performers are retained and the level of communication to staff is high; and (4) to avoid defaults, MFIs should work closely with investors, such as by providing a high level of transparency and hiring a crisis management consultant. If regulators lose confidence in MFIs, they may impose regulations that hurt MFIs’ recovery. To respond to regulatory intervention, MFIs may engage crisis management consultants or merge with other, stronger MFIs. MFIs also can work with regulators by, for example, lobbying to create new laws and policies that benefit MFIs’ recovery.

Regarding portfolio management, MFIs should: (1) continue collections by “segmenting” to collect from groups less impacted by the crisis; (2) continue lending by adapting to the crisis, including by prioritizing reliable clients that can become the MFIs’ “spokespeople;” and (3) seek out “new lending opportunities” in the form of new markets or new products such as loans backed by gold.

Losses of capital may be manageable via “early provisioning” in advance of a crisis, potentially over the course of several years. Capital inflow can be generated during a crisis through collecting overdue loans or accepting government subsidies and grants, often from central banks.

In reviewing the experience of MFIs after the global financial crisis, Mr Rozas found that women-led MFIs were more likely to survive than those led by men. Since 2010, all of the four women-led MFIs within the scope of this paper and its predecessor “survived” their respective crises whereas only four of the 10 men-led MFIs did so. The two MFIs led by a mix of men and women both failed.

This is a summary of a publication by Daniel Rozas; published by the Center for Financial Inclusion and the European Microfinance Platform (e-MFP); June 2021; 35 pages; available at
https://www.centerforfinancialinclusion.org/weathering-the-storm-ii-tales-of-survival-from-microfinance-crises-past.

By Harriet Ritchie, Research Associate

Sources and Additional Resources

CFI “Weathering the Storm” report, 2010
https://www.centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there

CFI homepage
https://www.centerforfinancialinclusion.org/

European Microfinance Platform (e-MFP) homepage
https://www.e-mfp.eu/

More MicroCapital research summaries
https://www.microcapital.org/?s=wrap

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