By Miren Bengoa, Administrator, member of the Finance, Risks and Impact Committee,
Grameen Crédit Agricole Foundation & Director of International Action, SOS Group

A director of the Grameen Crédit Agricole Foundation since 2020, Miren Bengoa has been the new Director of International Action for the SOS Group since January 2021. Since 2011, she has headed the CHANEL Foundation, which supports projects that improve the economic and social situation of women. Here's her take on the impact of the Covid-19 crisis on gender equality and the responses to it.

— What is the impact of Covid-19 on the status of women?

MB: Rising gender inequality is one of the immediate consequences of the Covid-19 crisis. During this pandemic, we have seen an increase in violence against women and girls and a decline in girls' learning as school dropout rates and child marriages increase. Tens of millions more women have fallen into extreme poverty, as they lose their jobs at a higher rate than men, and suffer from their difficulties in accessing new technologies and their lack of digital skills.

— In a few words, what is the panorama of gender inequalities in the world today?

MB: Current projections indicate that gender equality will not be achieved for another 130 years. In 2020, women represented on average (globally) 4.41% of business leaders, 16.91% of board members, 251% of parliamentarians, and 131% of peace negotiators. Only 22 countries currently have a female head of state or government (UN Women, 2020). We need better representation of women that reflects women and girls in their diversity and capabilities.

— How can female entrepreneurship be a response to the crisis?

MB: Women entrepreneurs have been on the front lines and heavily affected by the decline in economic activity. However, they also bring innovative solutions and must be supported as much as possible by funders and public authorities. Being heavily involved in responding to community needs, they were able to adapt their activities to the constraints caused by the pandemic. This wasn't easy: they sometimes gave up a lucrative activity to prioritize taking care of their families.

— Promoting women's empowerment is one of the Grameen Crédit Agricole Foundation's missions. What should be the priorities to strengthen this ambition?

MB: Since its creation, promoting women's empowerment has been at the heart of the Foundation's work: among the 7 million clients of the microfinance institutions it supports, 73% are women who have benefited from microcredit to create or develop income-generating activities. Maintaining funding, providing flexibility in deferring repayments, and frequently analyzing the needs of these institutions are and will continue to be key to enabling them to regain their capacity to act in favor of women's entrepreneurship.

 

Spotlight on the joint interview of Sylvie Lemmet, Chair of the Finance, Risks and Impact Committee, Jérôme Brunel, Chair of the Compliance and Internal Control Committee, and Bernard Lepot, Chair of the Investment Committee, to be discovered in the Foundation's 2020 Integrated Report.

Looking back at the time the crisis occurred, can you tell us what your perception was at that time?

Bernard Lepot: As early as March, we all understood that we were in "terra incognita" for an indefinite period, with unclear systemic consequences. All continents were affected, including Africa and Asia, where we have most of our activities. The risk of serious difficulties for our partners was likely, with possible significant provisions for the Foundation. Despite this lack of visibility, the Board needed to quickly define the Foundation's position, which we summarize as follows: support for our existing partners and consultation with other international lenders.

Sylvie Lemmet: Last March, we were in a state of total uncertainty. We felt that the crisis would hit developing countries hard and that we would face potential bankruptcies and losses for the Foundation. We were worried about our partners.

Jerome Brunel: I feared that the impact of the pandemic, which I thought would affect developing or less developed emerging countries more strongly – which has not been confirmed – would weaken the solidity of the Foundation's counterparties, resulting in a substantial amount of provisions, which has not been the case so far thanks to the resilience of the supported organizations as well as the coordination and joint actions of the various players in the inclusive finance sector.

What was the role of the Committee you chair in this context?

JB: The Compliance and Internal Control Committee fully played its role by adapting the internal control system to the rise in Covid-19 risks, organizing training on debt restructuring methods, adapting the provisioning policy, and deepening the collection of information on our counterparties' end clients. But in truth, it was primarily the Finance, Risks, and Impacts Committee that played the primary role in mobilizing the Foundation's governance to address the consequences of the pandemic.

SL: The Finance, Risk, and Impact (FRI) Committee already includes the Chair of the Compliance and Internal Control Committee among its members. Last year, we immediately felt the need to liaise with the Investment Committee, and its Chair also sat on the FRI Committee. The evolution of governance with this ad hoc committee has been extremely positive. This has allowed us to build, together with the Foundation's Executive Committee, a good understanding of the overall situation (the impact on the portfolio, liquidity, and margin) and an intervention doctrine, which we have evolved as the crisis progressed. The objective: to provide the necessary oxygen to our partners while monitoring the risk of repayment default.

BL: Once the roadmap was established, the Investment Committee continued to meet monthly but by videoconference with a reduced activity of new files of course but with close monitoring of the deadline extensions granted to microfinance institutions that requested it and more generally, reinforced risk monitoring. The Board had also decided to create an ad hoc body bringing together the 3 Chairs of the Specialized Committees to examine and deepen possible adaptations to the Foundation's strategy. This structure met several times allowing for exchanges with the teams and insights from the Board before decisions.

One year later, what lessons have you learned from this experience and what prospects do you see for the Foundation in 2021?

SL: One year later, I am above all reassured by the quality of the women and men who make up the Foundation's executive team, who were able to react with great flexibility, professionalism, and commitment in an unprecedented situation. We were able to manage financial risks without abandoning our partners in difficulty. We were able to test the resilience of the organizations we supported, which reassures us both about their quality and the microfinance sector's resistance to shocks. This is a point that will need to be explored further to better understand the mechanisms that were implemented locally and the real social impact behind the good financial performance. For 2021, we all hope for the return of a less chaotic situation and the resumption of activities. We will have to learn the lessons from remote instructions and juggle with an activity that seems to be resuming but travel that remains limited. The pandemic is not yet behind us, but I hope it will remain under control in our countries of intervention.

JB: The health crisis has demonstrated, firstly, the solidity of the commitments made by the Foundation, that is to say, the judicious choice of its counterparties. Secondly, the quality of the team's response – and that of its General Delegate – to adapt to this unprecedented context, aided by the mobilization of its Board and its specialized Committees. Finally, the Foundation's commitment to continue its lending activity despite this "hostile" environment and to support microfinance institutions through an international initiative to harmonize the policies of other lenders and through specific dialogue with each of the borrowers.

BL: One year later, it is worth highlighting the remarkable mobilization and adaptation of the Foundation's teams, with strong collaboration between the various functions. To date, we should also note the great resilience of our portfolio, perhaps even beyond what we expected. The Board's careful information and involvement allowed it to express its unreserved support and solidarity with the Foundation's strategy and actions. For 2021, things are still very uncertain, with perhaps better visibility in the fourth quarter, but again, nothing is certain. Let's hope that 2021 will be a transition year allowing us to resume our development activities in 2022.

Download the 2020 Integrated Report here.

ADA, Inpulse, and the Grameen Crédit Agricole Foundation partnered in 2020 to monitor and analyze the effects of the Covid-19 crisis on their partner microfinance institutions around the world. This monitoring was carried out periodically throughout 2020 to gain a better understanding of the crisis's international developments. We are extending this work this year, on a quarterly basis. The findings presented in this article follow the first quarter of 2021. With this regular analysis, we hope to contribute, at our level, to the development of strategies and solutions tailored to the needs of our partners, as well as to the dissemination and exchange of information between the various stakeholders in the sector.

In summary

The results presented in the following pages come from the sixth survey in the joint series (1) of ADA, Inpulse and the Grameen Crédit Agricole Foundation. The responses from our partner microfinance institutions were collected during the second half of April 2021. The 87 responding institutions are located in 47 countries in Eastern Europe and Central Asia (EAC-25%), Sub-Saharan Africa (SSA-29%), Latin America and the Caribbean (LAC-25%), South and Southeast Asia (SSEA-13%) and the Middle East and North Africa (MENA-8%) (2).

While the general improvement in local contexts related to COVID-19 is enabling microfinance institutions to better conduct their activities, our latest survey shows that MFIs nevertheless had considerable difficulty achieving their development objectives in the first quarter of 2021. The reasons given are mainly linked to the difficulties encountered by MFI clients. The latter are reluctant to commit to new loans, and if they do, it is with smaller amounts than in the past. At the same time, their risk profile has deteriorated due to the crisis, and MFIs will have more difficulty financing them.

This general trend of rising risk has materialized in a decline in the quality of MFI portfolios. In 2020, this ultimately had an impact on institutions' income statements with an increase in provisioning expenses. This will likely be the case again this year, with additional reserves but also loan write-offs.

In fact, MFI operations have been reduced or slowed, generally with a decline in their capital levels. Indeed, one in two MFIs, regardless of size, reports capital needs in 2021. Two trends are emerging: MFIs are counting on their current shareholders to cover losses related to the crisis. On the other hand, international investors are expected to support their development this year. The responses from our partners therefore highlight the need for recapitalization this year, which will involve all stakeholders in the sector.

1. Despite the reduction in constraints, disbursement levels are mixed

While we have been seeing a gradual but definite decline in operational constraints for MFIs since the summer of 2020, this phenomenon continues in the first quarter of 2021. In total, 50% of MFIs indicate that the measures in place in their countries are less restrictive in April compared to the end of 2020. This point is particularly marked in sub-Saharan Africa (64% of respondents in the region) and Latin America and the Caribbean (59%). This is found to a lesser extent for MFIs in Europe and Central Asia, where the situation is either improving or stable. Finally, the situation is opposite in South and Southeast Asia, with 45% of respondents in the region reporting a more difficult context, with the Cambodian and Burmese situations weighing in particular on results.

 

Overall, nearly half of those surveyed report no longer encountering any operational constraints in carrying out their activities. This is reflected in the resumption of MFI activity: 52% of those in sub-Saharan Africa can operate as before the crisis. In Latin America, the vast majority of them are gradually resuming activity since the first difficulties encountered. In Europe and Central Asia, the situation is again divided between gradual or almost complete recovery. Conversely, for MFIs in the SSEA region, the deteriorating context is materializing in activities that are either still constrained or once again affected by new measures to contain the epidemic.

Despite these continued positive signals regarding our partners' activity levels, it appears that the level of loan disbursements expected for the quarter is still difficult to achieve. Thus, 55% of respondents indicate that they did not meet their loan disbursement targets in the first quarter of 2021. Only 10% of respondents exceeded their expectations, while 35% managed to meet their targets. The responses do not appear to be solely linked to the resumption of activities: for example, 80% of MFIs in sub-Saharan Africa did not meet their disbursement targets in the first quarter, while half report having resumed activity close to pre-crisis levels.

When MFIs failed to achieve their growth targets at the beginning of the year, three reasons emerged to explain this phenomenon. First, the fact that clients are still reluctant to take out new loans (58% of this group), particularly in a still rather uncertain context. Second, this is explained by the risk profile of clients that has deteriorated (50%), and who are no longer eligible for loans, or are only eligible for smaller amounts (38%).

These last two arguments are also mentioned by MFIs that have achieved their objectives without exceeding them. However, this dynamic is partly offset by the fact that institutions have adjusted to the crisis and have implemented products adapted (digital, targeted sectors, etc.) to the current contexts to meet demand (47%).

Finally, the trend is quite different for MFIs that have exceeded their disbursement targets: the main factor is the strong demand received (78%), while the adjustment of supply (33%) and the increase in the amounts requested (22%) support this trend.

2. A persistently high credit risk continues to have a significant impact on the profitability of institutions

Alongside these loan disbursement issues, the issue of credit risk remains a major challenge for 64% of our partner MFIs, as we have observed since the beginning of our survey series. While late payments by clients can still stem from ongoing moratoria (20% of respondents, particularly in the South and Southeast Asia, and Latin America and the Caribbean regions), the end of the moratorium has mainly resulted in a shift from the "moratorium" portfolio to the risky portfolio, either as unpaid loans or as restructured loans. In total, 61% of respondents indicate that fewer than 90% of their clients are repaying their loans, and 25% are affected by repayment rates lower than 70%.

Another major challenge is the decline in MFI profitability since the start of the COVID-19 crisis. At the end of Q1 2021, 55% of our partners raised this point. In detail, we discover that a proportion of respondents managed to maintain a certain profitability in 2020, thanks to certain measures (33% – indicated in green in the graph below). We then find a group of institutions (49% – indicated in orange) for which an impact on profitability was felt, but without endangering the institution. Finally, a last group stands out (18% – indicated in red), in a less favorable position since the losses incurred in 2020 have direct consequences on the institutions' equity. Among these, this even implies for some that the company's capital falls below the minimum levels required by the regulator or financiers.

 

The provisioning of the risk portfolio actually emerges as the main factor impacting profitability (61%). This may have led to a breach of contractual commitments with its lenders for some institutions (26%). At the same time, there are still few massive loan write-offs, since only 13% of those surveyed have already resorted to debt cancellation to a greater extent than in previous years.

However, the impact of credit risk on MFI profitability is expected to continue in the coming months. Loan write-offs in large proportions, above usual standards, are expected to affect 25% of our surveyed partners. At the same time, 24% anticipate that PAR provisioning, particularly through the moratorium exit, will continue to have significant consequences on their financial results. Finally, it should be noted that the aging of the current risk portfolio could also lead to additional provisioning expenses.

3. Strained equity leads to search for investors

The decline in profitability, which could therefore continue in the near future without any improvement in credit risk, must be analyzed in both the short and long term. In the short term, controlling the risky portfolio is a major challenge to avoid a (further) deterioration in profitability. This then has a direct impact on MFI operations. According to our partners, this observation has in fact led to a downward revision of growth projections (55%) for the coming years. It also appears that risk management requires particular attention to the type of client activity (31% have suspended disbursements to certain sectors – often tourism, international trade, etc.) and to eligibility criteria (29%). This increased caution reflects the current emphasis on risk management.

The other, longer-term perspective raises the question of the solvency of microfinance institutions in the face of declining revenues or losses. Currently, a majority of institutions (61%) have not taken any action regarding their equity since the beginning of the crisis. When this was the case, existing shareholders provided support to MFIs, while subordinated debt (tier 2 equity) was also implemented, to a lesser extent.

However, a very large proportion of these institutions (48%) reported a need for equity capital in 2021. This significant proportion reflects the extent of support needed within the sector to ensure its development. Moreover, there is no real archetype of the MFI that highlights this expectation of support for the balance sheet in 2021: regardless of the size of the MFIs, approximately half of each category of Third Parties expresses capital needs.

To meet these capital expectations, the types of shareholders microfinance institutions wish to turn to depend on the reason why this support is necessary. Thus, regarding the institutions mentioning a need for support at the 2021 equity level, we note that when the MFI needs help to cover losses, it then turns overwhelmingly to its existing shareholders (83% of cases, 10/12). On the other hand, when MFIs seek support to continue to develop, they will then call more on international investors (56% of cases, 14/25), beyond the potential contribution of existing shareholders. Finally, note that subordinated debt may be favored over a capital injection, this option being mentioned by 5 institutions.

 

All of our partners' responses therefore suggest that the impact of the crisis, through credit risk, logically creates capital needs for a large proportion of entities, since they are facing either financial losses or a limitation of their recovery capacity. While 41% of those surveyed say they want to focus primarily on improving portfolio quality this year, our partners here reiterate the essential role that international and current investors will have to play in maintaining a satisfactory level of capitalization conducive to their development.

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(1) The results of the first five surveys are available here: //www.gca-foundation.org/observatoire-covid-19/, //www.ada-microfinance.org/fr/crise-du-covid-19/ And //www.inpulse.coop/news-and-media/
(2) Number of responding MFIs by region: EAC 22 MFIs; SSA 25 MFIs; LAC 22 MFIs; SSEA 11 MFIs; MENA: 7 MFIs.
(3) Tier 1 means that the MFI manages a portfolio greater than $50 million, Tier 2 applies to portfolios of $5 million to $50 million, and Tier 3 applies to portfolios less than $5 million.