By Devesh Sachdev, CEO, Fusion

©FGCA

The microfinance model of providing small, collateral-free loans to “bottom-of-the-pyramid” clients previously neglected by the formal sector has emerged as an effective and sustainable model of financial inclusion. Financial inclusion has, understandably, been the primary focus of policymakers over the past few decades, given the portion of our population that remains unserved and/or underserved. It doesn’t take a complex analysis to understand that if India, as a country, is to improve its per capita income and lift people above the poverty line, access to finance must be key.

Despite the policy push through the traditional banking system, few factors have acted as obstacles to this national goal of financial inclusion. First and foremost, the fact that our formal banking system has largely developed its policies and outreach (whether physical or digital) to cater to the urban/semi-urban population with established track records/income and collateral that match their defined risk/reward matrix as an asset class. Second, the “delivery cost” for small transactions in the balance of payments market has become a buffer for banks. The lack of financial literature has also acted as a constraint.

The microfinance model of providing small, collateral-free loans to bottom-of-the-pyramid clients previously neglected by the formal sector has emerged as an effective and sustainable model of financial inclusion. It was conceptualized to seamlessly deliver financial services and products to the doorsteps of these same clients in a manner that is very easy to understand. The concept of joint liability leveraging social capital combined with direct delivery to the client has helped the microfinance sector gain trust and acceptability.

The microfinance “journey” over the past decade has revolved around two major themes. On the one hand, it has withstood severe setbacks like the 2010 Andhra crisis, the 2016 demonetization crisis, the NBFC liquidity and credibility crisis, and is currently battling the global Covid-19 pandemic. All these events have created the impression in the minds of stakeholders that microfinance in itself is a risky asset class, as unfortunately for the sector, it has been affected by these unforeseen events once every 3 to 4 years.

Fortunately, however, there is a brighter side to the sector:

1. Today, the sector serves around 60 million unique customers with a combined portfolio size of Rs 23 billion across 620 districts in 28 states and eight union territories. This makes it the 2nd largest sector after mortgage lending. However, what is even more commendable is that the sector has recorded a growth of 30% in the last 3 years compared to 17% for the retail banking sector
2. Another strength of the microfinance sector has been offering financial products and services through a careful fusion of "Touch and Tech" at the lowest cost among its global peers. The sector leverages advances in technology to consistently provide greater transparency, data security, confidentiality, and proximity accessibility to its rural clients.
3. With both reach and operational efficiency, microfinance is today a sustainable business model, calibrated to leverage its network to provide other goods and services to rural populations, thus contributing to the significant growth recorded by India.
4. The sector also generates significant employment opportunities not only by hiring in the hinterland, but also by enabling its clients to provide employment opportunities to others through extensive financial support.

The sector has demonstrated remarkable resilience over the past decade and this has been made possible by some key contributing factors:

• The 'inherent' need for such a model in an aspirational India, where a large unserved/underserved population is yet to be given an opportunity to jump on the bandwagon, has ensured that microfinance remains a 'preferred' vehicle for both policy planners and practitioners over the years.
• The significant support and enabling policy framework provided by the Reserve Bank of India has been a catalyst in pursuing the financial inclusion mission of the microfinance sector. The sector has been assigned a special category within the Reserve Bank's broader category of non-banking financial services, giving it a distinct identity and strong credibility as the country's first self-regulatory organization recognized by the Reserve Bank.
• The operation of MFIN (the industry association) as a self-regulatory organization since 2010 has enabled the sector to build its growth on solid pillars. The main pillars of MFIN's work have been customer protection, the sector's code of conduct, and policy advocacy, all of which contribute to building a responsible finance ecosystem.
• Because microfinance is a far-reaching model, it has ensured the highest degree of client-centricity and knowledge. Response time in crisis situations is much faster, and the solutions offered are highly targeted. This aspect helped the sector overcome the challenges posed by demonetization in 2016, but more recently, this model has proven its resilience and sustainability in the current Covid-19 crisis. Frontline soldiers ensured that the wheels of financing kept moving when clients needed them most during the pre- and post-lockdown periods. Operating platforms were quickly modified to operate remotely and provide digital lending services.

The strong bond with clients has stood the test of time and engendered a high degree of mutual understanding and cooperation. Most financial experts were wrong when the microfinance portfolio showed better-than-expected post-Covid portfolio indicators following the moratorium period mandated by the Central Bank.

Today, the microfinance sector partners with the government to roll out various social programs, from Shishu loans under the Mudra program to Pradhan Mantri Svanidhi. The importance of the sector was recognized by the Prime Minister in his speech at the United Nations General Assembly, describing it as a tool for promoting women's entrepreneurship.

As they say, “It’s not how many hits you take that makes you a winner, it’s how you always get up stronger despite the hits you take and emerge a winner” and this is an apt description of a resilient microfinance sector in India, so far… but the journey has only just begun!

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Source : BW Businessworld

ADA, Inpulse, and the Grameen Crédit Agricole Foundation have partnered to monitor and analyze the effects of the Covid-19 crisis on their partner microfinance institutions around the world. This monitoring is carried out periodically and will continue throughout 2020 to gain a better understanding of how the situation is evolving. With this regular and in-depth 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.(1)

In summary

This article is based on responses provided between July 23 and August 6, 2020, by 91 partners in 42 countries across Europe, Africa, Asia, and Latin America (2). Feedback from microfinance institutions (MFIs) shows the continued evolution of the COVID-19 health crisis. While measures to reopen countries and restart the economy increased during the month of July, the health impact of the crisis was mentioned more significantly by our partners, whose clients and employees are ultimately also directly affected.

It is in this uncertain yet evolving context that MFIs have been braving the challenges they have faced for more than a quarter now. With operational difficulties still present, institutions remain vigilant about their portfolios and the risk they carry, which appears to have generally stabilized, albeit at a much higher level than before the crisis. Nevertheless, there are some encouraging signs regarding other issues. Thus, the vast majority of MFIs believe they can survive this crisis without undergoing major strategic changes. It also appears that the issue of liquidity has been managed rather well since the beginning of the crisis.

The battle against the virus is not yet won, however, and its repercussions are particularly strong on the informal sector of the economy. It appears that clients in the informal economy are more affected, particularly because they ultimately do not benefit from the support measures that governments can provide. However, MFIs are sensitive to these needs, and some of our partners are considering providing specific services to help their clients cope with the crisis.

1. Operational constraints still present for MFIs

Overall, our partners are reporting further progress in terms of easing containment measures in their countries, following the initial relaxations of measures in certain regions of the world in June (notably in Eastern Europe, Central Asia and sub-Saharan Africa). Comparing the responses of our partners who responded to our survey for July and June (3) (graph below) reflects this improvement regarding operational difficulties. These results are also in line with the general results obtained for the month of July.

All MFIs report an improvement in travel options for their staff. However, this remains a major constraint in Latin America and the Caribbean, while fewer than 20% of MFIs in other regions are affected. Moreover, while freedom of movement is improving significantly in these regions, meeting clients in the field remains a significant issue for more than 30% of MFIs. Finally, with the exception of Latin America, meeting clients in branches currently appears to be the least problematic solution.

In fact, while there has been an overall improvement in client contact across all regions, collecting loan repayments or disbursing new loans at standard pre-crisis levels remains very difficult, with difficulties encountered by more than 50% of the MFIs surveyed in each region (70% and 66% overall, respectively), with some difficulties being linked to national or local regulatory constraints.

“Although other MFIs are starting to operate again, we are still waiting for permission from the regional government” – Partner in Myanmar

Especially since MFIs are still in the process of restructuring clients' loans in July (80% of respondents).

“Communication on the postponement of deadlines constitutes a brake on the repayment of credits” – Partner in Senegal

And while we have been noting for several months the singularity of the Latin American region in the responses collected due to a particularly difficult COVID-19 health context, the information obtained shows that the situation is not resolved in other regions.

Doubts about a potential return to normal for MFI activities have not been dispelled, as the health crisis remains the central issue of the current period, and it persists. The news in July was notably marked by the occasional resurgence of cases in certain countries. This is reflected very significantly and for the first time in our surveys by a sharply rising proportion of partners who are affected by the health crisis, both among their staff and their clients (graph opposite (4)).
Thus, at the global survey level, 51% of our partners reported in July 2020 that some of their clients had contracted COVID-19, and nearly a third indicated that this also affected their employees. While we do not have data to determine the proportions of clients and staff affected respectively, this trend is nevertheless significant. More specifically, more than three out of four MFIs in Central Asia and Latin America had clients infected with the virus (one in two in June). While Latin America is largely affected on both the client and staff sides, the figures are also slightly up for staff at MFIs in Europe and Central Asia. South Asia and Sub-Saharan Africa appear to be generally more behind on this point, but the figures nevertheless encourage continued vigilance.

“More than 10 clients have died from Covid-19” – Partner in Honduras

2. MFIs continue to face major financial challenges

As we have observed since the beginning of our surveys, the increase in the portfolio at risk and the reduction in outstanding credit are the two main direct consequences of the crisis for a microfinance institution. Other financial difficulties, on the other hand, are in lower proportions and are stable from June to July (figure below (5)). This point applies to all regions except Central America, where our partners who responded to all of our surveys report problems and growing fears regarding issues of equity, lack of liquidity or increased expenses.

The detailed analysis shows that the contraction in outstanding credit is a heterogeneous phenomenon. For example, at the level of all respondents, 39% of MFIs in Central Asia reported suffering from a reduction in their portfolio, compared to 55% in Sub-Saharan Africa, 71% in South Asia and 88% in Latin America during the same period.

On the other hand, it appears that the increase in portfolio at risk is a problem common to all MFIs, regardless of their region or size, and it concerns more than 80% of our partners. However, while the PAR 30 of microfinance institutions has deteriorated since the beginning of the crisis, it no longer undergoes major changes between June and July, while remaining at a level well above that of before the crisis. As shown in the graph below, the structure of the PAR30 of the partners in the sample of 54 MFIs is fairly stable from one month to the next. And this is a trend we see across all respondents: between 15 and 20% of MFIs see a declining or stable PAR30, while around 40% have seen their PAR30 increase without doubling since the end of 2019. Finally, the riskiest cases regularly represent between 30 and 40% of respondents.

“It is difficult to cover the costs of provisions for bad debts” – Partner in the Democratic Republic of Congo

However, all these difficulties shouldn't be fatal for our partners. When asked about possible strategic changes following the crisis, 93% of respondents do not anticipate any in the short or medium term. Our partners therefore do not feel concerned by potential sales of part of their assets, administrative administration, or liquidations, a sign of a certain confidence in the future.

Finally, the latest information from our partners indicates that a liquidity crisis appears to have been avoided, with 24% of respondents highlighting this problem (compared to nearly 40% in our May survey). Moreover, in detail, the proportion of MFIs raising this point in each region does not exceed one-third.

The first explanations lead us first to the multiple deadline extensions granted to MFIs by their foreign and local investors, but also to the reduced levels of disbursements since the beginning of the crisis. It is also worth noting the low proportion of MFIs that have experienced a significant withdrawal of savings since the beginning of the crisis, helping with cash flow management. Among the MFIs that report this difficulty, most come from Sub-Saharan Africa and Asia and do not report significant additional needs compared to other MFIs. These various factors influence the liquidity needs of MFIs. Thus, on a global scale, 47% of the respondents have no additional financing needs for 2020. For nearly a quarter of MFIs outside Sub-Saharan Africa, these have even decreased. Finally, only a quarter of the respondents report significant additional needs.

3. In July, an exposed informal sector

While microfinance institutions are still exposed to the crisis, so are their clients. 92% of our partners indicate that clients operating in the informal economy are either moderately affected by the crisis or the most affected by it. Like all other entrepreneurs and MFI clients, they are suffering from reduced activity, but are also suffering the consequences of major international and national pandemic management measures, for example in the tourism, textile, and cultural sectors. With limited relief resources and reduced activity that cannot generate sufficient income, they would be more vulnerable. This statement is made by a very large majority in Central Asia and Latin America (more than two-thirds of respondents in these regions), while in Sub-Saharan Africa, feedback indicates that clients in the informal economy are impacted in the same way as those in the formal economy.

“Due to current economic and market conditions, it is difficult for small businesses to restart their current economic activities to the level they were at before the COVID-19 crisis” – Partner in Sri Lanka

The reasons given by our partners are primarily financial: the vulnerability of workers in the informal sector is said to stem from the lack of financial support from governments to the sector. This explanation is put forward by a vast majority (78%), who also note at 57% that clients in this sector do not have access to appropriate non-financial services (business development, financial education, health education, etc.). The lack of insurance services is also raised by 50% of these MFIs. On the other hand, the lack of access to savings services is only very rarely mentioned.

MFIs are already thinking about how best to meet their clients' needs. For example, 48% of the MFIs with a vulnerable informal sector say they plan to launch financial education programs, and 33% envision supporting clients in managing their businesses. However, only a small proportion of them envision launching microinsurance products (maximum 11%). MFIs justify these ambitions for two main reasons: to get closer and focus on underserved populations, to strengthen client relationships, but also to meet a demand for adapted and new offerings during a particular period. For some MFIs, this could translate into other initiatives, such as the development of the agricultural segment (always strongly mentioned by MFIs) or the development of digital solutions for clients, to prepare for the world after. As a partner in Latin America tells us:

"We are planning digital financial education and business management programs to introduce clients to using social media to sell their products, as the main problem they have had is that their retail locations were closed."

The findings of this article highlight the operational and financial challenges faced by MFIs during this first half of the year, as well as their initial steps toward understanding the problems and finding solutions. This context challenges us to continue to explore the most beneficial recovery actions for each region, how they can be implemented, and how the various stakeholders, both directly and indirectly, in the microfinance sector can contribute to its recovery. These questions represent significant challenges, but also important elements for considering the necessary solutions.

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1 The results of previous surveys are available here for the first and here for the second.
2 The total number of MFIs responding to the survey for each region is as follows: South Asia (“Asia”) 14, Latin America and the Caribbean (“LAC”): 24, Europe and Central Asia (“ECA”): 18, MENA: 6, and Sub-Saharan Africa (“SSA”) 29. For a total of 91 institutions. The small sample size for the MENA region does not allow for tracking of the region’s figures.
3 This comparison is based on a sample of 54 MFIs: 12 in Asia, 7 in EAC, 13 in LAC, 22 in SSA.
4 This comparison again concerns the sample of 54 MFIs.
5 Idem

VisionFund Uganda has been working in Obongi District since May 2019 and has disbursed US$92,000 to 100 savings groups, representing 2,264 individuals. VisionFund began training savings groups in Yumbe District in late 2019 but has not yet funded any groups. Savings groups have been operating in both districts for some time, and all groups have existed for at least two cycles (or two years). VisionFund Uganda is the first microfinance institution to offer loans to these groups. Between April and May, a study was conducted to understand the effect of the Covid-19 crisis on savings groups, both at the host community and refugee levels.

Savings Group Meetings

The majority (81%) of groups continue to meet; only 19% of the groups have stopped meeting. The main strategy has been to continue meeting (65%), but in smaller groups, in accordance with government requirements for social distancing. One explanation for the greater resilience of refugee groups may be that these groups received more support in their formation than groups in host communities. Almost all refugee groups are still saving (some are saving less), while 24% of the groups in host communities have stopped saving. The conclusion is that refugee groups have not only adapted to the new guidelines surrounding the organization of meetings but have also found ways to continue meeting, showing higher levels of resilience.

When asked about the group's future, of the 417 respondents, 65% plan to continue saving. However, it is worrying to note that 28% of respondents expect to stop saving, a figure that rises to 39% of respondents for host communities. It is therefore important to better understand what this means in the long term.

Impact on households

At the household level, challenges are evident on two fronts. 881 respondents reported an increase in staple food prices, putting pressure on household budgets. Nearly all refugees (961 respondents) reported an increase, likely reflecting the reduction in their WFP rations. Meanwhile, 921 respondents reported some level of financial stress due to reduced business activity (341 respondents), reduced income (231 respondents), difficulties saving (251 respondents), and food insecurity (111 respondents). It is relevant to conclude that all households are affected by the COVID-19 pandemic, but even if refugees are more impacted, they appear to be more resilient.

Despite these tensions, households are not resorting to increased demand for savings group social funds or selling their assets (87% did not have to sell any assets). In terms of requests to the savings group social fund, 58% groups reported no change in the number of requests (with little difference between host communities and refugees), but it is noted that among those who have used the social fund, the amounts requested are larger.

Commercial impact

Savings group members engage in multiple economic activities. Similar to other studies on the impact of Covid-19, 93% of respondents reported a decline in their income. More than half of the groups reported either a sharp decline in income (47%) or a complete cessation of income (11%). Interestingly, 6% reported an increase in their income, reflecting that business opportunities exist even during a crisis.

In conclusion, the following three points can be highlighted:

• Refugee savings groups are resilient: The resilience demonstrated by these refugee savings groups (compared to groups in host communities) continues to support the view that the formation and support of refugee savings groups is a critical response to the development of long-term livelihoods for refugees.
• Covid-19 is having a dramatic impact on the livelihoods of the rural poor: This survey, conducted in a remote part of Uganda, confirms that rural communities are just as affected by the Covid-19 crisis as others.
• Surveys can be conducted safely in lockdown situations: Finally, this report shows that even in lockdown situations, the use of a simple digital tool and the implementation of social distancing guidelines can be quickly implemented.

For more information, Click here.

July 2020. Two groups of microfinance donors and stakeholders publish a set of principles to support the microfinance sector and vulnerable clients during the Covid-19 crisis. The two groups have coordinated their efforts to increase their complementarity and coherence.

Microfinance institutions (MFIs) play an important role in the fight against poverty. They provide low-income populations with financial and non-financial products and services to support income-generating activities. During the Covid-19 crisis, support for the microfinance sector is therefore essential to protect the most vulnerable populations. This requires a collective approach within the sector.

That's why we, the leading microfinance lenders, impact funds, platforms, and networks spanning markets in Africa, Asia, Central Asia, the Middle East, Eastern Europe, and Latin America, have entered into two complementary agreements. These outline a series of principles to support MFIs in avoiding a credit crunch, which would be extremely dangerous for vulnerable microfinance clients. We have published both documents as guides for investment teams, investors, investee entities, and other stakeholders.

• " Key principles to ensure the protection of microfinance institutions and their clients in the context of the Covid-19 crisis » : The agreement is essentially based on the pooling of available information, analyses and forecasts as well as the concerted implementation of shared decisions. The signatories, including lenders, impact funds, platforms and networks, agree to coordinate policies, technical assistance and resources to help microfinance institutions cope with the crisis. The guiding principle will be to protect both microfinance institutions and their clients in order to guarantee the continuity of access to financing under the best possible conditions and ensure the well-being of clients and staff.
• "Coordination agreement between managers of microfinance funds and social impact investment funds in the context of the Covid-19 crisis" This MoU addresses the impact on liquidity flows within financial institutions in the context of the Covid-19 crisis and related measures to prevent its spread. The MoU developed by the MIVs further recognizes the importance of speed and cooperation between lenders and other stakeholders and presents a framework for managing debt rescheduling in relation to Covid.

The signatories of the Pledge and the Protocol acknowledge and express their support for each of the two documents, as they are considered complementary and pursue a similar objective. Other public and private actors in the financial inclusion sector are invited to support, endorse, and act in accordance with the principles presented. In particular, the signatories believe that it is essential for the public sector to align with private sector practices to strengthen the impact investment sector and its social impact on low-income households and small businesses.

The involvement of all stakeholders is vital to strengthening the impact of microfinance. We are committed to continuing to support our partners' efforts to promote financial inclusion worldwide.