SPECIAL REPORT: “Capital in the Age of COVID” at European Microfinance Week

European Microfinance PlatformAt this presentation on the effects of the COVID-19 pandemic on financial inclusion, which was subtitled “Navigating the Uncharted Sea of Insolvency,” Lucia Spaggiari of MFR (formerly known as Microfinanza Rating) predicted that the solvency challenges brought on – or simply exacerbated – by the pandemic may haunt institutions for the next 10 years. Although she described the solvency challenges of 2020 as “not drastic,” 22 percent of financial services providers (FSPs) in her dataset still significant solvency risk. Ms Spaggiari believes this may increase to as high as 34 percent over the next two years.

As for the potential effects on clients, there are clusters of greater risk among: FSPs in sub-Saharan Africa, where 17 percent of institutions are in danger; smaller FSPs, those with assets under USD 10 million; FSPs with smaller loan sizes; and FSPs organized as cooperatives. Coops have done less well than NGOs and for-profit FSPs during the pandemic, which presents a special challenge because they can only raise additional capital from their members. On a positive note, Ms Spaggiari reports that FSPs serving more women have lower solvency risk, on average.

Edouard Sers of the Grameen Credit Agricole Foundation described his organization’s partnership with ADA to survey FSPs every other month during the pandemic. Of the foundation’s FSP partners, 60 percent needed additional equity as of January 2021, but that number was down to 22 percent five months later. “There is a very strong resilience in the sector, but still there is this 20 percent to tackle,” he said.

Momina Aijazuddin of the International Finance Corporation agreed that many commercial FSPs have showed strong resilience over the last two years, but that a significant number of FSPs remain in trouble. Some of these may have lost market share because they don’t offer digital services. Some of these as well as some smaller FSPs are under pressure to consolidate, with some of this pressure coming from regulators.

Deborah Drake, representing the Financial Inclusion Equity Council, agreed that consolidation is to be expected. For example, an FSP that is less digitally oriented might merge with one that is strong in that area. Michael Blockx of Incofin Invement Management expressed optimism about consolidation. He believes it can reduce the cost of serving clients who are more difficult to serve. Similarly, he said, the drive for growth may push FSPs to expand into rural areas and otherwise boost outreach to underserved people.

Ms Drake recognized the collaboration of debt funders early in the pandemic to coordinate concessions for their investees. However, she noted that equity funders often lack the flexibility of debt funders. While a debt funder may accept a delay in repayment, an equity funder may not have additional capital to deploy. Likewise, equity funds sometimes have closed-end structures that cannot be adjusted.

Mr Blockx noted that some FSPs have been preemptively strengthening their capital reserves to be ready for future downturns. To prioritize the needs of their clients, he added, some founders may have to give up control of their organizations by taking on new equity partners.

This feature is part of a sponsored series on European Microfinance Week 2021, which took place online November 17 through November 19. The event is held annually by the European Microfinance Platform (e-MFP). MicroCapital has been engaged to promote and report on the conference each year since 2012.

Additional Resources

European Microfinance Week 2021
https://www.e-mfp.eu/european-microfinance-week-2021

MicroCapital coverage of European Microfinance Week, including the European Microfinance Award
https://www.microcapital.org/category/european-microfinance-week/

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