Financial regulators must enhance support to microfinance institutions (MFIs) as vital financial lifelines for individuals and small businesses hit by limited liquidity and business disruptions amid COVID-19, speakers said during a webinar on 13 July 2020.

“The microfinance sector is crucial and impossible for us to neglect in our work to enhance financial inclusion, as it addresses women, small or informal businesses, rural and urban poor as well as the forcibly displaced persons,” said AFI Executive Director Dr. Alfred Hannig during his opening speech.

“MFIs are critical financial front liners and it is very important to safeguard them in order to mitigate the negative effects of the crisis on individuals, households and small businesses,” he said.

More than 200 participants from across the AFI network and beyond gathered for the virtual event to discuss the impact of COVID-19 on the microfinance sector from the customer, business and policy perspective.

Addressing her fellow regulators, Superintendencia de la Economía Popular y Solidaria de Ecuador (SEPS) Superintendente Dr. Margarita Hernández urged greater cooperation with stakeholders and the exploration of all available options to “ensure business continuity for small and medium businesses and for micro-financial institutions”.

“There are a lot of challenges related to financial inclusion … but we have to work with those to achieve recovery and create stability in the financial system,” Dr. Hernández said. She added that this “is why we are working now on Ecuador’s first national financial inclusion strategy to find a way to make the step out of the crisis and help people who cannot reach financial services”.

Also sharing his country’s experiences was SASRA Chief Executive Officer John Mwaka, who said that many clients of Kenya’s savings cooperatives, popularly known as SACCOs, were now. Among the worst-hit sectors have been aviation, transportation, road transport and hospitality, he said, adding that the situation will continue to be tough.

“There are clear signals that COVID-19 will adversely impact the performance of credit unions into the far-off future, but we’re still analyzing the data to understand what will be the real impact,” he said.

Despite this, Mwaka remained positive, saying that SACCOs must embrace technology to maintain business continuity, explore loan restructuring and ensure the quality of loan portfolios.

SACCOs and other MFIs are key to bridging the financing gap between formal financial institutions and low-income households and businesses that would normally struggle to access credit – such as loans, deposits and insurance – from banks. While the global microfinance loan market is worth around USD 112 billion – of which the largest chunk (USD48.3 billion) comes from Latin America and Caribbean – the COVID-19 downturn has meant that many customers are finding it increasingly difficult to repay their debts.

Demonstrating the seismic impact of the pandemic, National Bank of Cambodia Deputy Director General Heng Bomakara shared how the value of restructured loans in Cambodia’s MFIs had topped USD817 million in May compared with just USD4 million in March.

Tracing this rise, Bomakara recommended that communication and financial literacy must be enhanced “not just among the regulators and financial institutions”, but also so that consumers understand the terms of new loan restructuring and other mechanisms.

While recognizing the need for government and regulatory interventions, Telenor Microfinance Bank Chief Executive Officer Mudassar Aqil questioned their impact on the “credit culture”, explaining that “it has taken decades for small MFIs to train people on how to use credit responsibility and now that balance is being disturbed”.

He added that digital platforms could provide opportunities to move businesses away from traditional “brick-and-mortar” shops and into having an online presence, but that this model must be made available to all, since individual technology costs were often prohibitive for smaller companies.

Mayada El-Zoghbi, managing director at Accion’s Centre for Financial Inclusion reiterated the need to harness technological innovation, explaining that in recent months, some businesses in China had seen a jump in trade linked to their level of connectivity with digital channels.

She also cited research that showed 34 percent of MFIs were introducing new digital outlets, though for many this meant expanding their call centers. While emphasizing digital as a long-term investment, she contrasted how the short-term credit moratoria had raised questions over future cash flows.

“What will happen once the moratoria end in three- or six-months’ time? Will people be able to repay?”, she asked.

El Zoghbi disagreed in moratoria as a “blanket response” to the pandemic, but advocated that a more appropriate option would have been for government to consider MFIs as an “essential service”, saying that this would have helped keep local economies running.

Cautiously optimistic CGAP Lead Financial Sector Specialist Denise Dias explained that despite the need to provide immediate relief and protect the most vulnerable, efforts to shield the microfinance sector must be balanced by “taking into consideration different types of measures” from loan restructuring to credit guarantee schemes. At the same time, she emphasized that as we are still in the “middle of the crisis”, it was very difficult for providers to differentiate between the borrowers that deserve additional support, compared with those that would have been unable to survive smaller crises.

She also noted the importance of fostering digitalization, saying that while it “will not deal with this crisis, it will deal with the next one”, and added that data – particularly granular data – was key for analysis at the sector level.

Offering guidance to regulators, FINCA Impact Finance President and CEO Andrée Simon highlighted three main areas of focus: near-term liquidity, longer-term capital adequacy and client resilience.

While microfinance, she explained, is typically among the more resilient financial sectors because “our clients have such small businesses that they can stop and restart them quickly,” she noted potential challenges going forward.

“What we’re seeing in the data we’re collecting [from surveys] is that clients are facing massive food insecurities … in urban areas, we serve a high proportion of retail businesses that have shut down and the appetite for credit is dampened,” she said, a point supported by her colleague, Scott Graham, who noted that over a third of global customers had reported reducing their number of daily meals.

Although some microfinance investment vehicles had provided financial flexibility to help stave off near-term defaults, FINCA’s Simon said that “those institutions are also going to be under financial pressure as we move forward, so their appetite and interest in funding future liquidity needs must be considered”.

In support of more investment in technology, she said that “microfinance has always had higher costs associated with the delivery model – because social connections are really critical – but this has to come down, so we have to figure out how to leverage technology … such as through call centers”.

Bolstering women entrepreneurs

Echoing the importance of MFIs in providing vital lifelines for women and women-owned micro, small and medium-sized enterprises (MSMEs) was AFI Deputy Executive Director Norbert Mumba. He stated that “microfinance services are recognised as key tool for alleviating poverty through social and economic development especially where special emphasis is made on empowering women”.

Underscoring the need for women to be part of short- and long-term solutions to financial inclusion, was SEPS’ Dr. Hernández, who noted that women have been disproportionately affected by COVID-19.

Emphasizing the importance of using data to gain insight into tailoring financial products that women would be confident using, she pointed out that “women have different financial behavior compared to men … and it is our role of understand how women can be a part of the financial system”.

“We need to open the doors to women with the right systems, the right time and in the right way,” said Dr. Hernández highlighting that up to 75 percent of microfinance beneficiaries are women in Ecuador.

In addition to their work on gender and women’s financial inclusion, several AFI members work directly on regulating the microfinance industry in their respective jurisdictions. Furthermore, many of AFI’s working groups, particularly SME Finance Working Group and Digital Financial Services Working Group, continually explore emerging topics and themes that are impacted by MFIs, such as access to credit for MSMEs. Through these efforts, members are supporting core network pledges, such as the Maputo Accord.