By Grameen Crédit Agricole Foundation

The establishment of an observatory dedicated to monitoring the effects of the health crisis in conjunction with 80 partner microfinance institutions (MFIs) and social business enterprises in around forty emerging countries allows us to regularly collect information to share and draw the best lessons from it.

This week we have been focusing on how microfinance institutions are using digital channels to overcome the difficulty of direct contact with borrowers, which traditionally takes place either in branches, during group meetings, or during fund disbursements (microfinance overwhelmingly uses cash when handing over borrowed sums) or monitoring funded projects.

In our survey conducted in early April, 68% of our partner microfinance institutions indicated that they had increased their use of digital channels to overcome contact difficulties, as a result of lockdown measures or bans on group meetings. This strong growth in usage observed in the traditional finance sector is therefore also observed in the microfinance sector, where the industry is adapting at a rapid pace.

Technological means and processes including digital tools are being rapidly developed by Institutions of all sizes (the smallest having client portfolio sizes less than 10 million $, the largest well in excess of 100 million $). Since the beginning of the crisis, institutions have been producing business continuity plans, the basis for new discussions and exchanges with their funders, in which they very frequently include new digital uses.

For most institutions, the first step is to raise customer awareness about the possibility of using remote payment methods. This step is implemented through SMS messages (particularly suitable for 2G network coverage) but also through social media, when the telephone network allows it.

“[We] encourage SMS clients to use mobile money platforms for repayments as it is the safest mode at the moment” – MFI in Uganda

“[We] are starting to inform clients through social media and SMS about the possibility of repayment via terminals, mobile wallets and internet banking” – MFI in Tajikistan

For the many MFIs that did not yet have it in their range of services, the first process that was quickly developed at the start of this health crisis was that of paying installments by electronic money. This practice of remote payments is encouraged by many regulators, this is particularly the case of the Bank of Central African States (BEAC) for countries under its authority or the Central Bank of West African States (BCEAO) which decided to reduce the transfer and use fees for this form of currency. This implementation of remote payment is accompanied by mass sending of information messages to clients to explain these new modalities.

“We send numerous SMS messages to our clients reminding them how to use the mobile money code to make their loan repayments and the hotline they can call for assistance or complaints.” – MFI in Uganda

These remote services allow customers to pay their installments without having to travel (and therefore use public transport) by using the network of telephone operators' payment kiosks, which are generally dense and present even in rural areas.

The introduction of these payment methods also now allows for the disbursement of loans to customers' electronic wallets, with customers visiting these same kiosks not to pay their installments but to obtain cash disbursements for their microcredits. During the lockdown period, the use of electronic money therefore allows financing activities to continue.

“The Palestinian Monetary Authority urges microfinance institutions to provide low-interest loans to finance income-generating projects through digital channels” – MFI in Palestine

Yet, surprisingly, this crisis is being experienced by some institutions as a real opportunity to accelerate the implementation of digital platforms and the launch of new services to gain operational optimization or even relational excellence. For the leaders of partner institutions, having to invest in digital tools for reasons that are now "vital" for their institutions seems to them to be a way to accelerate investment plans that they were thinking about before the crisis. It thus allows them to immediately begin the modernization of their distribution model and their process, which has not failed to surprise us very favorably even though we know the vitality and capacity for innovation of our partners.

“This had been considered before the COVID issue […]. However, discussions are now underway regarding the possibility of launching [the mobile payment solution] accessible to all clients” – MFI in Sri Lanka

“In times like these, when everything can be considered a vector for the transmission of the virus, it is prudent to reduce cash handling. [We] have therefore taken advantage of this crisis to improve [our digital platform] to detect gaps and reduce flaws in our system” – MFI in Ghana

The economies of some countries that were already highly digitalized, such as those in East Africa, appear to be more resilient to the effects of the crisis. Microfinance institutions operating in these areas have demonstrated remarkable adaptability. For example, the Kenyan economy, which is particularly open to payment, financing, and investment transactions through electronic wallets, operates remotely, minimizing the risk of spreading the virus.

“Kenya is better prepared than other countries because of the high penetration of mobile money. The concept is widely used by the population” – MFI in Kenya

Many institutions tell us that they will be more structured and more efficient in the aftermath of this crisis. These experiences, sometimes vital to continuing their activities, seem very useful to them for considering operational performance gains in the future.

“Our team has adapted our mobile application to add a feature allowing remote loan restructuring requests. […] We have introduced a new criterion in our monitoring tool – “emergency (coronavirus)”, which means that loan officers will have to monitor their clients remotely, obtain information and enter monitoring data into the software” – MFI in Kazakhstan

“Our new strategy focuses on transforming [our] current way of operating to adopt more digital solutions, reduce the need for physical interactions between employees and clients, and replace cash transactions with mobile payment capabilities” – MFI in Georgia

These positive effects of digitalization, achieved through the rapid changes made by microfinance institutions, are also reflected in the social enterprises in our portfolio of investments. The digitalization of operational processes is a very effective way to combat the constraints of lockdown for companies that deal directly with the public or with raw material suppliers. This is the case, for example, of a Senegalese company that, thanks to digital payments, has seen its milk collection and dairy product sales activities continue and generate growth that exceeds forecasts.

For another social enterprise, specializing in drinking water treatment, the health crisis has also led to the development of home water delivery following an online order.

Our partners are aware that the use of digital solutions is not a comprehensive solution to address all the issues raised by this systemic crisis. They expect their clients and operations to encounter economic recovery challenges, to which digital technology can only provide limited assistance. Despite the increasingly intensive use of digital channels, the commercial activity of microfinance institutions is slowing. They are all focusing on supporting their clients, taking care to address the increasing number of requests for payment deferrals while maintaining risk control and good operational quality.

In some areas, the supervisory authorities have issued directives or strong recommendations for MFIs to grant moratoriums to their clients that can last several months, which imposes a very significant activity on the institutions.

However, in the majority of the testimonies we have collected, the health crisis is perceived as a sequence that requires the various management committees of our partners to deeply reflect on their operational performance under constraints. The experiences lived and the solutions found to deal with the health crisis will be very useful for "the day after," our partners are convinced.

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Discover other articles on: Covid 19 Observatory.

By Grameen Credit Agricole Foundation

The crisis is beginning to produce its economic effects

A few days after our last publication, the impact of the coronavirus continues to spread and intensify. The milestone of one million infections worldwide has been surpassed, and new outbreaks of the epidemic are being confirmed.

The Grameen Crédit Agricole Foundation, in constant contact with its network of nearly 80 partner microfinance institutions (MFIs) in 40 countries, continues its work of collecting information, analyzing, and sharing its observations. Over the past few days, we have focused our monitoring on the consequences of the crisis and the work of MFIs to address it. This information is very important. It allows us, at our level, to make the most relevant decisions for the management of the Foundation, for the support of our partners, and for the effectiveness of our action as closely as possible to their difficulties and anticipations. It also contributes to the sharing of information among the actors in this sector who are organizing collectively in these times of crisis.

The results we obtained confirm the trends anticipated in the information reported during the first weeks: the crisis is very severe, undoubtedly beyond our initial forecasts from early March, but resistance is being organized. The effect of the health crisis is systemic. No stress model had anticipated it. The response must therefore also be systemic if we are to avoid a major failure of this industry.

Small local businesses are entering a recession

78% of our partners are seeing the first effects of the economic recession on their areas of activity.

In the initial feedback we received, rural areas seemed to be escaping the initial effects of the crisis, especially in food-producing areas. Now, regardless of the size of the institutions (the smallest have a financing portfolio of less than $10 million, and more than $100 million for the largest) and their geographical location, they are all, more or less, facing similar problems: the impossibility of travel (74%), the decline in disbursements to borrowers (77%), the ban on group meetings (63%) are the reasons most cited by our partners regarding the causes of the slowdown in their activity.

“As indicated in the first analysis, the expected direct impact (up to 6 months) is the possible deterioration of the quality of the portfolio in the tourism, transport and hospitality sectors, as well as that of loans financed by remittances from abroad. A medium-term impact is also expected due to the general slowdown in the economy and the reduction in the solvent clientele.” – Partner in Georgia

More than a third of our partners are experiencing near-total lockdowns (36%) and the others are adapting to restrictive pre-lockdown measures.

“[Our] business has been significantly impacted so far, with clients’ businesses primarily affected by general public fears and more directly by the strict guidelines put in place by the government to try to control the spread of the virus. It is also anticipated that there will be an increase in the cost of living […]. Imports are decreasing, production costs are increasing. It is likely that Kenya’s GDP will fall and inflation will increase, which will affect the country’s economy.” – Partner in Kenya

“We are seeing increasing government action to restrict travel and business activities. For example, one regional government has specified that all microfinance activities in the region must be suspended during the month of April. We are receiving similar requests from village authorities in other regions.” – Partner in Myanmar

Effects that now impact the institutions' accounts

These difficulties are beginning to be reflected in MFI figures. For example, 74% of the institutions report an increase in their portfolio at risk (PAR 1) compared to the end of 2019. This increase is currently contained to less than 10% in absolute value for 8 out of 10 institutions.

Institutions are clearly accelerating and intensifying their use of digital technology to compensate for the inability of sales teams to travel and arrange in-person disbursements. For example, 681,300 respondents reported increasing use of digital services to carry out their activities remotely.

Loan restructuring operations have already begun for nearly one in two MFIs (43%). The announced intervention of regulators and legislators in the financial sector is confirmed: nearly half of the respondents (44%) are encouraged to proactively propose moratoria and restructurings for the benefit of their borrowers (the countries that have imposed these measures include Kazakhstan, Kyrgyzstan, Sri Lanka, Cambodia, India, Uganda, Burkina Faso, Rwanda, Senegal, the DRC, Egypt, Morocco, and many Eastern European countries). New initiatives are also beginning to be considered, such as the implementation of emergency products (such as minimum subsistence allowances) in the coming months.

Institutions are putting in place crisis plans

This systemic crisis has prompted an in-depth review of MFIs' business plans and financing needs. Upon examination, the increase in loan deferrals granted to borrowers has not yet significantly translated into additional financial resource needs for the MFIs surveyed. Thus, at the time of the survey, 48% of them did not yet perceive any changes in their liquidity needs compared to the projections made for the year, and a third even envisaged a decrease in their needs due to a significant decline in their activity.

At this stage, only one in five MFIs (19%) anticipates an increase in its financial needs, linked to the increase in the price of inputs (seeds, fertilizers, raw materials, etc.), which will trigger an increase in borrowers' financial needs, mainly in the rural areas of our intervention territories. The major international microfinance networks are behind this prospective analysis.

“In addition to the Covid-19 crisis, Kazakhstan has been hit by the sharp drop in oil prices, which weakened the national currency from 380 tenge to 445 per dollar” – Partner in Kazakhstan

Our partners' responses now reveal other factors of concern, particularly in their ability to finance their activities: a quarter of them anticipate a loss in the value of their local currency against the dollar (26%) and a significant increase in currency hedging in their future financing (23%). One in five MFIs is already experiencing financing difficulties with their usual donors.

To be able to more closely manage the rise in risks and financing changes, more than half of MFIs (55%) report having finalized, or are in the process of doing so, a Business Continuity Plan including precise liquidity monitoring. This responsiveness is remarkable, and such plans are an essential element in helping MFIs cope with and manage the consequences of the crisis.

Our analysis leads us to observe an apparent correlation in the quality of Business Continuity Plans following the Coronavirus crisis and the past experience of a major crisis that has already affected the MFI. The lessons learned from past crises thus seem to play a very important role in the resilience of institutions in the face of a crisis, whether financial, political, health-related, etc. However, many institutions with less experience in this area also demonstrate a remarkable willingness to innovate and an ability to anticipate.

Donors also reacted very quickly. Also informed by lessons learned from past crises, they have demonstrated, in recent weeks, a remarkable capacity for intervention and anticipation in a sector that is, despite everything, still young. Thus, in all regions of the world, international lenders, foundations, investment funds, and local banks are working on joint action plans. Multiple meetings are being organized around the world to anticipate the crisis and ensure that its effects, which would be devastating without this awareness and rapid and determined commitment, are absorbed; all agree on the need for effective information sharing and coordination between the various stakeholders. Donors are organizing their actions around responses tailored to the financing needs of MFIs impacted by the crisis, but also by offering monitoring tools, technical assistance plans, and training to strengthen the capacities of MFI teams in the face of this sudden and exceptional situation.

All these elements underscore the extent to which this crisis is a matter for all microfinance stakeholders. The involvement and rigor of local institutions, the coordination of international networks, the support of public and private donors, and the confidence of investors will be the key values of our collective ability to overcome the challenge of this health tsunami.

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Discover other articles on: Covid 19 Observatory.