By Nathan Were
It has been one year since the Covid-19 pandemic hit the world. It has destroyed livelihoods, shuttered people’s dreams, and sunk businesses. The containment measures that followed the onset of the pandemic have been more disruptive than the disease itself. One sector that was predicted to suffer from the aftermath of the pandemic following lockdowns and restricted movements, was microfinance – a sector that mobilizes small savings and extends microloans to micro and small businesses, largely operating in the informal sector. Earlier predictions had shown, that the pandemic would wipe out many institutions’ equity and lending capital because of the inability to recover loans from micro and small business borrowers most of whom suffered the greatest effects of the pandemic.
An analysis conducted by the MIX market – a global data resource for inclusive finance – last year in June, showed that about 35 percent of global MFIs [MFIs that report data to the mix] would suffer liquidity challenges and only manage six months of operation with the monies they had at the time should the pandemic persist, another 19 percent would only manage to operate two months and close if the pandemic and spillover effects persisted longer. 12 months later, these institutions have remained resilient. Although the pandemic largely impacted the quality of repayment, led to massive client drop-out, a significant drop in the loan portfolio size, fall in savings volumes [for those that legally mobile deposits], the crisis did not lead to the total collapse of MFIs as it had initially been predicted.
So, how have MFIs in Uganda and around the World worked their way into survival?
Moratoria: Several microfinance institutions implemented moratoria – a practice that allowed these lenders to stop loan repayments and extend some form of grace period in the future to borrowers who had started showing signs of inability to re-pay. With the support of the central banks, Moratoria provided short-term relief to borrowers whose income source had come to a sudden halt, but also helped prevent MFIs from being deemed insolvent due to the enormous provisions they would need to apply if a growing number of borrowers were unable to continue paying off their loans. Although this practice provided temporary relief to the borrowers, it increased the cost of these loans as interest continued to accrue during the “grace period” while some MFIs charged interest on accrued interest further raising the cost of these loans.
Companies Rise or Fall on How Well They Renew Their LeadersSwitch to digital: With restricted movements, a ban on gatherings, the pandemic greatly disrupted the microfinance business model that largely relies on a human to human interaction. The Group Lending methodology – a microfinance lending model that allows co-guarantors and regular meetings among borrowers to collect repayments was greatly disrupted and non-performing loans for institutions that deploy this model significantly went up. Most MFIs quickly moved to activate alternative delivery channels setting up call centers to maintain client relationships, follow-up on loan repayment, and scope for new loans while other MFIs intensified the use of the mobile money platforms for disbursement and loan repayment. MFIs that had been reluctant to go digital, Covid19 was a wake-up call.
Relief from the lenders: Equity and debt investors played a critical role in ensuring continuity of MFI business. Most MFIs are unable to raise sufficient savings to fund their loan book and often take up loans but also invite shareholders to stake equity. These funds are what help these institutions to extend loans to micro borrowers. Most lenders extended moratoria on principle and interest payment to MFIs while extending short to medium financial support to plug operational cost gaps for these MFIs. This relief was key in helping MFIs maintain liquidity while building back their loan portfolio.
Although the sector is not completely out of the woods, it has demonstrated a very strong degree of resilience in what can be described as a tough year for the business. Most MFIs have resumed lending and working towards cost optimization to remain afloat. The pandemic has taught MFIs how to build resilience and strengthened their ability to wither any storm in the future.
Nathan Were is an Access to Finance Specialist
