SPECIAL REPORT: Resilience Among Microfinance Institutions? “Region of Crisis” Relatively Stable; “Moratorium Veil” Yet to Lift

As part of the opening day of European Microfinance Week, Mohammed Khaled of the World Bank Group’s International Finance Corporation stated that the effects of the COVID-19 pandemic on the microfinance sector in the Middle East and North Africa (MENA) so far have not been as bad as was feared earlier in 2020. Most of the large microfinance institutions (MFIs) in the region have maintained 30-day portfolio-at-risk (PAR) ratios below 4 percent. Mr Khaled said, “Among leading MFIs, PAR did not rise as high as expected. We thought [it might rise to] 10 percent to 20 percent, but many MFIs have kept things under control.” Part of the reason for this, he believes is that “this is a region of crisis.” After challenges such as the microfinance crunch in Morocco in 2008 and the Arab Spring, which began in 2011, MFIs came into the pandemic better prepared for crisis than their counterparts in other regions. Regarding pessimistic predictions, Mr Khaled added, “We need to be careful about the message we are sending about the sector. Some [development finance institutions] are seeing the sector as too risky.”

Greta Bull of the US-based nonprofit CGAP discussed her organization’s Global Pulse Survey of Microfinance Institutions, which has been active since April. The monthly results indicate that the liquidity crunch expected from the COVID-19 pandemic “did not materialize.” However, solvency may yet become a problem, especially for Tier-2 and Tier-3 institutions. “It is too soon to let down our guard,” Ms Bull said.

PAR data remains unclear as two thirds of MFIs responding to Pulse have given borrowers moritoria on repayments. One third of Pulse MFIs anticipate greater challenges within the next six months, a time period during which we expect the “moratorium veil” to be lifted. At the onset of the pandemic, three quarters of MFIs cut lending to some extent. Many reduced lending by as much as half during lockdowns. Since then, however, lending has recovered to 80 percent to 90 percent of pre-COVID levels.

As did Mr Khaled, Ms Bull said MFIs are looking more to digital services. However, only 40 percent of Pulse MFIs are offering remote services. Much of these are via call centers, and they are often used only lightly.

Eric Campos of the Luxembourg-headquartered Grameen Credit Agricole Foundation also shared data collected from MFIs since the onset of COVID-19. This dataset, gathered in cooperation with several partners, covers approximately 100 institutions. The Grameen Credit Agricole Foundation shared the survey results with both the participating MFIs and a range of investors, with the aim of avoiding any potential panic regarding the effects of the pandemic on the financial inclusion industry.

This data, like the Pulse data, reveals no liquidity crisis. The reasons seem to be that: (1) increases in withdrawals of savings were minimal; and (2) investors coordinated efforts to work with MFIs on how to manage their wholesale loan repayments. Among the surveyed institutions, the peak increase in client withdrawals from savings was 19 percent, and that level is down to 12 percent as of September. The portion of MFI portfolios in moratorium peaked at 32 percent and decreased to 21 percent as of August. About one third of MFIs report that at least 90 percent of their clients are back to work, and another half of MFIs report that most of their clients are working. In response to the pandemic, 70 percent of MFIs are looking to start new initiatives. Most have become more interested in lending for agriculture, which was less impacted by lockdowns.

Sanjay Sinha of India-based rating agency M-CRIL revealed data from auditing the financial statements of large MFIs along with data gathered informally from stakeholders in five Asian countries. As with MENA, Mr Sinha noted that “Indian microfinance has long experience with crises” such as the crunch in the state of Andhra Pradesh in 2010 and the nationwide demonetization in 2016. While PAR-30 in the country jumped from about 0.3 percent to 8 percent in 2016, Mr Sinha expects the COVID-19 spike to exceed 20 percent. As it took two years for MFIs to recover from demonetization, he expects it will take four or five years to recover from the pandemic. Moreover, he warned that PAR-30 may never go back below 0.5 percent, more likely hovering in the 3 percent to 4 percent range.

The moderator of the session, Barbara Magnoni of US-based EA Consultants, asked the group about the underlying weaknesses of MFIs. Mr Khaled argued that institutions that failed in prior crises had already been weak and that the crisis simply exposed those weaknesses. He added that this crisis is easier to manage in some ways because it is hitting sectors differently, while other crises tended to hit all sectors more similarly.

Many MFIs are lending more money post-COVID, but they are doing this by increasing loan sizes to repeat clients while taking on fewer new clients. Hence in MENA, borrower numbers are sometimes down while portfolios are growing modestly. Mr Khaled noted that the industry is quite consolidated in MENA, with many strong institutions. “Some of our MFIs [in the region] are better off than local banks because they have stronger systems,” he added.

Ms Bull argued that, globally, there remain many MFIs that must “up their game on risk management,” with some having “really struggled with data.” This is particularly true among smaller institutions. MFIs also need to improve their scenario planning and legal expertise. While better data helps with risk management, it also has a wealth of other benefits, including to “help understand clients better.” As an extension of this, Ms Magnoni highlighted the notion of client retention as risk management strategy.

As many institutions have turned to digital financial services to counter the risk of spreading COVID-19, Mr Sinha said that the challenge of “going digital” is larger than people realize. It may be seen by some as “the next panacea, but there are many people for whom smart phones are a black box.” Much work remains to spread digital literacy and financial literacy.

In closing, Mr Khaled noted the need to balance the priorities of people and institutions. While moratoria are important to protect consumers, there is value in institutions being able to retain their staff. He cited the example of Tunisia, where MFIs may charge partial interest during moratoria; they may not charge the customary rate, but they may charge enough to cover their cost of funds. This is a way to balance needs that can seem to conflict. Mr Khlaed says, “Letting institutions collapse is not in the interest of customer.”

This feature is part of a sponsored series on European Microfinance Week 2020, which took place online from November 18 through November 20. The event is held annually by e-MFP. MicroCapital has been engaged to promote and report on the conference each year since 2012.

Additional Resources

European Microfinance Platform (e-MFP) information on European Microfinance Week 2020
http://www.e-mfp.eu/european-microfinance-week-2020

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