For microfinance lenders, covid-19 is an existential threat
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IN NORMAL TIMES, says Samir Shah, of Dvara Trust, a private company based in Chennai in southern India that helps bring financial services to the rural poor, the default rates on the small loans it promotes are d ‘about 5%. But nowadays, over 90% of borrowers are unable to repay loans even if they want to and have money. Traditional microfinance is a personal matter. Reimbursement is made in cash to a visiting agent. Like so many others around the world, India is in lockdown and no exceptions are made for debt collectors. But the banks and investors that Dvara’s lenders get their funds from expect to be paid back. Lenders are at an impasse. Most of these microfinance institutions (MFIs) have a cash buffer of a few months. When that is exhausted, their future will be in danger.
A similar story can be heard around the world, with potentially devastating implications for the small businesses that so many of the world’s poor will depend on for their jobs when economies thaw. FINCA Impact Finance, a network of microfinance lenders based in Washington, DC in 20 countries, conducted a survey in one of them, Uganda, and found that 70% of clients surveyed were not in able to operate and 70% had no emergency. savings. Trevor Gosling, from Lulalend, a lender in South Africa who has imposed one of the toughest lockdowns in the world, says more than 85% of small businesses have been unable to operate there. Even under the somewhat more relaxed regime that began on May 1, 80% will have to remain closed. In Bolivia, Banco Solidario, a commercial bank dedicated to lending to small businesses, says 70 to 80 percent of borrowers have gone out of business. The microfinance arm of BRAC, a large Bangladeshi NGO, says that in the seven African and Asian countries where it works, it has suspended loans, collections and interest.
“The financial engine of half of the world’s jobs is about to crash,” said Michael Schlein of Accion, a Massachusetts-based nonprofit financial inclusion group, in a blog post. The World Bank estimates that small businesses (or “MSMEs” – micro, small and medium-sized enterprises) account for around 90% of businesses and over 50% of jobs in the world. Many of them, especially the “micro”, are excluded from conventional sources of finance in the formal banking system. In recent years, the number of institutions designed to serve this large non-bank segment has grown significantly: charitable and for-profit MFIs, which have around 140 million clients worldwide; fintechs, using digital technology to reach the poor; and a wide range of other “non-bank financial corporations”.
They have made great progress. The most recent edition of a financial inclusion index published by the World Bank, for 2017, estimated that the number of “unbanked” in the world had fallen to 1.7 billion, down from 2 billion in 2014 and 2.5 billion in 2011. Now, according to Schlein, “decades of progress in reducing poverty and increasing financial inclusion – all of this is under threat.”
Many MFIs have not received money for weeks. Investors and lenders are naturally wary of them. Qasif Shahid, of Finja, a fintech based in Lahore, Pakistan, said venture capitalists his industry is seeking equity financing are waiting to see which companies survive the recession, hoping that valuations will drop to low. affordable levels. During this time, clients of lenders are often unable to repay them. Many have granted their borrowers time off on principal and interest payments. Some did it on their own initiative. Grassland Finance, an Accion-affiliated microfinance lender in China, for example, did so when China’s lockdown began in January. Of Lulalend’s clients, around 60% have restructured their debts.
Sometimes, as with Dvara’s microfinance lenders in India, the party is dictated by circumstance and sometimes encouraged by regulators. Dozens of central banks in countries, including those of Angola, Bolivia, Egypt, Jordan and Sri Lanka, have granted discretionary or mandatory moratoria to borrowers affected by the lockdowns, allowing lenders to defer payments and often freezing borrowers’ credit scores before lockdown levels.
The Reserve Bank of India (RBI) moratorium, announced in a circular on March 27, covered a three-month period from March 1. The RBI also injected liquidity into the system. But Mr. Shah from Dvara says the money is not reaching the companies that lend to India’s poorest. Rather, it “ended up going to the cash rich”. The transmission mechanism is the banking system, and banks remain cautious about committing capital to the poor. Many have balance sheets overloaded with nonperforming loans anyway. On April 30, the Supreme Court intervened to task the RBI with ensuring that the relief promised in its circular is actually extended to borrowers. Mr Shah points out the irony: In a financial system plagued by bad debt, India’s poor have so far proven to take very good risks – evidenced by the very low default rates of loan lenders. microfinance.
Few doubts, however, that these rates will increase. A recent telephone survey conducted by Dvara of 600,000 microfinance borrowers found that 56% would repay their loans if they could. Under the current circumstances, that seems like a lot. But that implies a default rate which, if maintained, would be terminal for many lenders.
One way to reduce it would be to use more mobile money accounts to pay off loans on a phone. Last year, the number of such accounts worldwide exceeded one billion. Mr Shah sees it as a silver lining in this crisis that more Indian borrowers are willing to use one. Mr. Shahid from Finja in Pakistan, who operates entirely digitally, has seen a surge in one of his core businesses – providing supply chain finance to the myriad of small local stores that have been a lifeline. rescue in so many countries during the lockdown. The only lenders left, he says, are digital lenders. The digitization of finance, expected in the next 10 to 15 years, “will now take place over six months”.
Mobile money can solve many problems. But he cannot conjure up an oasis of creditworthy borrowers and liquid lenders in a pandemic desert. Around the world, there are concerns that poor borrowers will find themselves in an increasingly difficult situation for three reasons. The first and most important is that the loss of livelihood will worsen poverty. An estimate by World Bank economists concluded that the pandemic is likely to cause the first increase in global poverty since the Asian financial crisis of 1997-98. The share of the world’s population living on less than $ 1.90 per day is expected to rise from 8.2% in 2019 to 8.6% in 2020, or from 632 million people to 665 million.
The second is that the financial system vacuum that has been filled by non-bank lenders could widen again, with some of them going bankrupt. Shameran Abed, head of the microfinance arm of BRAC, is delighted with his experience in Liberia and Sierra Leone after the Ebola crisis forced him to shut down operations for seven months in 2014-15. Remarkably, he got most of his money back. “Our customers have proven to us time and time again that they are extremely resilient,” he says. “This is something we should be banking on. “
But third, progress towards financial inclusion can also be reversed. Some of those who have entered the financial system in recent years may find themselves excluded again. In India and many other countries, credit scores are frozen. But, when the blockages are lifted, some borrowers will inevitably face downgrades. Ioann Fainsilber, from Pintek, a lender in Indonesia, says he avoids reporting defaults to the country’s credit bureaus unless he concludes they try – using the pandemic as an excuse . A common fear is that central bank-guaranteed payment holidays will pollute the lending culture and loosen payment discipline.
But with governments everywhere worried about public health risks, and with rich countries dismayed at the prospect of deep and possibly protracted recessions, the financial interests of the world’s poorest are not getting enough attention. “Fires are burning all over the world,” says Andrée Simon, Managing Director of FINCA Impact Finance. “Now is the time to reflect on the impact of extreme poverty and extreme inequality. These invoices are always due.■
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