FinDev Blog

Urgent: A Rescue Plan for the Microfinance Sector

A proposal for key principles and structures to help MFIs and their clients survive the pandemic-induced economic crisis
Flooding in India. Photo by Avishek Das, 2017 CGAP Photo Contest.

You can now engage in a discussion on this topic with the blog authors, Ira and Paul, and other microfinance experts on covid-finclusion.org, a forum for discussion and debate about the challenges and solutions for the financial inclusion sector in response to the COVID-19 pandemic.  Join the conversation: A rescue plan for the microfinance sector: what should it look like?

If historical experience is any guide, the microfinance sector will soon face deep distress. Given the extent of the coronavirus health crisis and the depth of the economic fall-out throughout the world, it is doubtful that national or multilateral institutions will be able to provide the full support that the sector - and the 140 million low income people it serves - needs. Industry leaders must come together urgently to organize a rescue effort that focuses on the following key principles:

1. A standstill or moratorium on principal repayments is the first step. Industry leaders - microfinance investment funds (MIVs), development finance institutions (DFIs), and large microfinance networks - need to come together now and launch this effort. They should start with a standstill or moratorium on principal and interest payments due on loans for 90 days, extendable for three 30-day periods, so a self-rescue program can be organized and instituted by the industry. In addition, new money will need to be found, possibly through regional emergency liquidity funds, to provide liquidity to MFIs.

2. Responses must be agile. Crisis experience tells us that initial approaches to crisis resolution do not always work or are not always the best ones. Therefore, responses will need to be flexible and adjusted over time. For example, we suggest that mutually negotiated modification of debt, or debt workouts of MFIs, should be done over a time-bound period of 90 days, with a 30-day extension allowed for arbitration if the parties cannot agree to the workout. Initial workouts will invariably focus on financial re-scheduling or restructuring with little focus on more fundamental restructuring. As the crisis ensues, some percentage of workouts will need to be re-done or re-negotiated more than once. The key is to agree on the first workouts quickly and recognize the need for future iterations. 

3. Strong top-down leadership and institutional capacity. During crises, existing institutions rarely have sufficient capacity to address all of the challenges which arise. The microfinance sector will need to create new institutions for the rescue plan to work.  We recommend a coordinating secretariat led by CGAP to work with a Steering Committee (discussed below) and to communicate with various sector institutions such as MIVs and MFIs seeking or receiving support. In effect, CGAP would serve as the communications hub for the sector during this rescue effort, articulating key guidelines and principles to facilitate and speed deliberations, such as:  Are there any “preferred” creditors? How is new money to be protected? What is reasonable conditionality?

  • The Steering Committee should be made up of senior representatives of MIVs, DFIs and microfinance networks, in close coordination with banking supervisors when microfinance banks and other deposit-taking institutions are involved. The steering committee would confirm guidelines and principles. Representing a substantial portion of many MFI balance sheets, it would also confirm agreements on liquidity support and restructuring of MFIs and engage the support of other key actors such as regulators, rating agencies, and donors. 

  • A crisis group by each microfinance institution, led by a senior manager, would be responsible for implementing reporting, financial and operational arrangements agreed upon with the steering committee.

4. Emergency liquidity funds need to be set up on a regional basis to start infusing liquidity into the sector and taking bad loans off of MFI balance sheets. This worked well during the 2008 crisis when an Emergency Liquidity Fund for Latin America (ELF) was funded by several DFIs and foundations. ELF provided short-term loans to MFIs in distress. A sister fund was created for Haiti after the 2010 earthquake that removed bad loans from the books of the MFIs and also provided loans for on-lending to their clients.

5. Reliable information is needed to shape the response. During a crisis, leaders need to make decisions frequently and often do not have access reliable information. Information sharing and transparency are the key to more informed decision-making. Leaders in the sector should start gathering and sharing information on MFIs - standard financial and operating data, focused on non-performing loans (NPLs), write-offs and deposit withdrawals. The MIX will need to reposition its mission to report out on MFIs on a monthly basis to support fact-based decision making.

6. Efforts to save MFIs should focus on minimizing loss of services to clients. Given the high number of MFIs that are likely to go into distress, it will be necessary to segment who is supported and in what priority. Not every MFI can be saved. So, we will need to determine which MFIs will be given top priority. Will it be MFIs in which external MIVs and DFIs have the most exposure - equity and debt? Will it be MFIs which have the most outreach in terms of number of clients? Will it be microfinance banks which are regulated and mobilize deposits to protect deposits and to prevent regulators from stepping in to take control of the institution? Or will it be smaller, rural or women-focused institutions, that reach clients otherwise overlooked but which may require significant grant funding to continue operations? 

Efforts to save MFIs should focus on minimizing loss of services to clients.

Different investors and funders will focus differently, but in each case a critical mass of support will need to be mobilized if rescues are to be successful. At a minimum, the approach needs to be segmented:

  • “Too big to fail” MFIs: If one of the largest institutions, with hundreds of thousands or over a million clients and a large base of mobilized deposits, were to go into distress, a workout would need to be organized by industry leaders, led by lead creditors and investors. The banking supervisor will need to be consulted early in the process to make sure that they do not step in to take control of the MFI.
  • Large and mid-size MFIs: Many viable MFIs should be assisted by a workout process that is standardized and time-bound. The leading creditors should form a workout committee and be bound to complete a workout in 90 days, with the possibility for a 30-day extension if no agreement can be reached, and an arbitration panel to settle any outstanding issues. Second and third rounds of workouts for some of the institutions could be organized down the road when the immediate crisis is over.
  • “Impact First” MFIs: Some priority will need to be given to those MFIs which work with very poor, hard-to-reach populations, such as subsistence farmers. Emergency liquidity funds focused on rural MFIs and populations could be considered. We need to make sure not to overlook MFIs that may be effectively filling a need for very vulnerable clients and whose disappearance would be missed, even if they are grant-dependent and not viable in a strict commercial sense.

7. Creditors and investors will need a heterogeneous mix of financial instruments as they work with MFIs to implement a rescue plan. These should include:

  • Medium-term debt re-scheduling.
  • Grace periods sufficient for the medical crisis to abate.
  • Debt restructuring as necessary with the use of diverse instruments such as:
    • Subordinated debt.
    • Debt equity swaps.
    • New equity and fresh working capital. During crises, experience has shown that fresh or new money is difficult to obtain, but it is always critical to a sound resolution.

8. Clients need to be protected throughout the process. To the extent MFIs receive fresh resources, debt rescheduling and new equity, they in turn should be prepared to extend loan repayments for their clients. A client moratorium might also be considered with large, regulated MFIs, but that will be difficult to organize and coordinate. Loan defaults will occur, and MFIs will need to give consideration to the circumstances surrounding the default. Clients should be given every chance to recover their economic condition and repay loans at a later time. Workouts will need to consider taking some amount of bad debts off of MFIs’ books. Deposit withdrawal may also turn out to be a critical issue. Depositors need to be protected and that will be a priority consideration for regulators. MFIs and regulatory supervisors will have to consider difficult choices, including whether to place caps on the amount of deposit withdrawal by clients.

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MFIs and their clients are already starting to feel the effects of the economic meltdown caused by the COVID-19 pandemic. These key principles can help us form a solid but flexible rescue plan for the sector. We need to act now to put structures in place and coordinate responses in order to have the best chance of success in mitigating the effects of this global crisis.

You can now engage in a discussion on this topic with the blog authors, Ira and Paul, and other microfinance experts on covid-finclusion.org, a forum for discussion and debate about the challenges and solutions for the financial inclusion sector in response to the COVID-19 pandemic.  Join the conversation: A rescue plan for the microfinance sector: what should it look like?

Comments

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Feleke Borga , Microfinance, Ethiopia
13 May 2020

Thanks for writing this paper. I found it important for the MFIs to reach out to our customers during this pandemic time because many of us unable to reach our branches to transact due to the lockdown and movement restrictions. Some customers are unable to withdraw from their accounts as a result. Communication with customers should flow continuously through SMS and other feasible channels. To help customers who are unable to access their accounts remote enrollment on channels such as mobile banking (M-birr) should be allowed and functional in operational areas

Abby Augusta , CGAP
15 May 2020

Thank you for your comment, Feleke. You can now engage in a discussion on this topic with the blog authors, Ira and Paul, and other microfinance experts on covid-finclusion.org, a forum for discussion and debate about the challenges and solutions for the financial inclusion sector in response to the COVID-19 pandemic. Join the conversation: A rescue plan for the microfinance sector: what should it look like?
https://www.covid-finclusion.org/forum/discussion/a-rescue-plan-for-the…

Joseph Ukpong , Development Finance Professional, Nigeria
06 May 2020

Interesting times the world is facing with this pandemic, it becomes even more interesting when you consider the demand and supply gap of financial inter mediation which hitherto exited in the MFI space. This is especially so for poorer nations where there already exist a large number of undeserved. Clearly, there would be losers (lots of them) but also there would (be some) winners, its not a hopeless loss loss situation.

My contribution however, drives towards looking at those key elements that will help MFI identify and focus on the "customer" segment that will deliver wins both in the short and long run while other recovery plans are on going.

1. Technology as the enabler and equalizer: Digital technology will become the game changer as the world of work and business changes. Product and services (loans, savings, deposit, remittances, payments, insurance) may not change significant, but the method(s) of delivery will certainly have to change radically.

2. First movers: Early adopters of end to end technology in customer acquisition, underwriting, loans origination, payments, remittances, collections and so on will win as the world slowly (or hurriedly, as the case is today) move away from cash handling.

3. Positioned for DFI support: Liquidity crunch is a major concern for FSPs as deposits dwindle. MFIs that shows a strong position and are properly aligned to get DFIs support and donor agency grants, will win during and post covid 19 pandemic.

Prabin Kumar Lama , Infinity Laghubitta Bittiya Sanstha Ltd., Nepal
01 May 2020

I think in this covid-19 situation we need to classifie our loan client and indentifie their situation with digital meeting (Mobile, massenger, vibor etc.) with group chief and member. After that we decide for suuport client busines, addition small liquid money or collection only interest or principal. Which required by digital meeting.

Sarah Odden , Envest Microfinance Coop, United States
30 April 2020

We are a MIV that lends to small "impact first" but financially solid MFIs in 10 countries that have very few other sources of credit . Thank you for this article, it resonates with all the steps we've already been taking and the frequent conversations we've been having with all of our partner MFIs. We are taking a case-by-case approach (instead of a global moratorium on principal) just as Geert Peetermans suggested above, but our clients know we are here and ready to work with them if and when they need tosome flexibility.

I would like to note that one of our Central Asian MFI partners, while seeking some relief, does not believe they will benefit from delaying a principal payment yet as the Russian rouble depreciates, leaving their currency exposure more risky. We would be interested to hear other's experience in similar scenarios.

I would also like to know how we could get involved. Our CEO/Founder would serve as a wealth of knowledge to the secretariate CGAP may put together about the impact and response for some of the most rural and financially underserved clients in the world. Like many of you, Envest has lent and stayed profitable through crises in the past, in fact, we have substantially increased our portfolio in Nicaragua since the 2018 crisis began. We recognize this crisis is unprecedented, but nonetheless believe our experience in the past is a benefit through this crisis. Please reach out to us if you would like to utilize Envest's niche knowledge, we would like to be part of the conversation.

Rodwell Nyanyirai , Business Development Specialist - MFI, Zimbabwe
29 April 2020

Thank you very much for the Write Up. The piece is quite informative particularly to MFI practitioners during and after this pandemic period.
I also want to emphasize that Effective Internal and External communication is key as MFIs work on implementing the relevant recovery strategies.
We need the support of all stakeholders for us to win!

Yengi Lokule , Rural Finance Initiative - RUFI. , Uganda
29 April 2020

We are providing financial services to refugees in Uganda. The lockdown has also resulted in Food Ratios being reduced so our clients are facing a double-edged sword - drop in working assets as they have converted some of these into cash and low food ratios. Some are contemplating sneaking back into South Sudan hoping that the situation could be better there.

As a lender to refugees in Uganda, we need to come up with strategies that first of all can convince our clients to stay put and secondly put stimuli in place to revive their businesses. And these have to start even before the pandemic is over, whenever that will be. Strategies suggested in this article will help us plan accordingly.

SUBHODIP GANGULI , SFB, INDIA
28 April 2020

On the Indian Context many SFBs (Small Finance Banks) have welcomed the decision taken by RBI(Reserve Bank of India) and have allowed a grace period of 90 days to the clients. On this context I would say that SFBs are in a better commanding position than MFIs due to their deposit base which would provide a sustainability during the crisis period however we have to keeping mind few things
1) Communication of the grace period to the beneficiaries.
2) Prevention of frauds against persons impersonating as employee and collecting repayment.
3) Strong account keeping (in case there is a reduction in repayment rate then all small transactions and NPA accounts to be carefully monitored ).
4) Providing small amount of emergency to clients so that they can manage their expenses during initial months of financial stress.

Adebimpe Esther Ogunleye , Microfinance , Nigeria
28 April 2020

Post-Covid19 pandemic on MFIs will be really strong and the most important issues is around keeping the clients comfortable through constant communication to assure them of the deep understanding of the impact of the pandemic over their livelihood by the MFI. Furthermore, that the MFI is willing to support them in getting back to their economic activity, This will be achievable with an MFI that also keeps its staff members comfortable in assuring them of their job protection. The Account Officers are the link between the clients and the bank hence conscious effort to gain their loyalty towards keeping the clients well informed to protect the MFI's interest is very critical. MFIs have to be circumstantial in reviewing their loan portfolio in other to take informed decisions on the management of their risk asset portfolio and also the hygiene of it. Opportunity of getting intervention funds and grants to manage post covid19 impact on the business of MFIs is very important to address liquidity issues that will arise because of loss opportunity to collect repayments and the need to reflate the bank with new business. With a professional and diversified Board membership, initiatives leaning on their experiences will go a long way to address the issues that will arise post-covid19 for MFIs. Strong team work and commitment to rise above the effect of the pandemic must start from the top and be so implemented within the organization.

Habtamu Debela , Grand Microfinance Institution S.C., Ethiopia
28 April 2020

Thanks for your write up, and important and useful information. It is very important for financial sector to address the current burden issue.

Sam Ekwuribe , Pathtogrowth Savings & Loans Cooperative limited, Nigeria
28 April 2020

This is so helpful.

I run a cooperative in south east Nigeria and with the lockdown in place, we already forsee a liquidity crisis when this lockdown is lifted.

A lifeline in the form of low interest loans or repayable grants will help Cooperatives from going under.

Sadly the regulators and government interventions focus on banks and Microfinance banks leaving out the coops who are truly the last mile service providers to people at the base of the pyramid.

I hope help comes. And fast too. [email protected]

Bart De Bruyne
28 April 2020

Great debate!
Generating new equity to cover for losses, might be even harder for cooperatives, that have no capital based shareholding structures!

Babafemi Oyewole , Board Member, FINADEV MFI, Benin Republic, Benin Republic
28 April 2020

This is a very good write up. This period is a very difficult one for both Microfinance institutions and their customers. There is a need for frequent communications between the two to ensure that their relationship are not jeopardised at this time. Customers should be segmented and analysed to understand their peculiar situation and know the type of measures that would be suitable to resolving their problems. There is also the need for MFIs to step up the monitoring of their customers and motivate their staff to be professional in seeking to assist customers. Adequate liquidity is needed to mitigate the risks that could arise as a result of the lockdowns and lull in business activities at this period.

Grace Akinyi , MFI, Uganda
28 April 2020

Thanks for the write up. I find it important for the MFIs to reach out to their customers during this time because many are unable to walk to their branches to transact due to the lockdown restrictions. Some customers are unable to withdraw from their accounts as a result. Communication to the customers should flow continuously through SMS and other feasible channels. To help customers who are unable to access their accounts remote enrollment on channels such as mobile banking should be allowed.

Prasanna Utagi , Annapurna Pariwar, Pune, Maharashtra , India
26 April 2020

Thanks for the write up. Very useful information.

Olubukola Olayiwola , University of South Florida, United States
24 April 2020

Obviously, many of the informal sectors operators are affected by this COVID-19 pandemic. I would like to point to some of the existing financial vulnerability issues suffered due to default/repayments particularly by women borrowers for instance in southwest Nigeria. This is where I conducted my dissertation research. In terms of the suggestion "Reliable information is needed to shape the response," I think at this time, there is need to make use of jingles via radio houses and text-messages to let MFBs/MFIs customers/borrowers know that their interests take precedence at this crisis period. This will keep their minds at rest as they battle with other immediate issues in their various households. Also, loan officers (particularly with default portfolios) equally are expected to be treated with utmost consideration by their immediate supervisors and employers.

In addition, it is important to for various MFBs/MFIs to treat their customers based on their specific situations as the impacts are of different magnitude depending on existing issues prior to this pandemic.

Promise NWANKWO , Financial Inclusion Platform Limited, NIGERIA
24 April 2020

Restructuring on case by case basis should really be on the front burner for MFI's as well as their lenders. Risk management and risk analysis has a very critical role to play here. The Central bank also has a big role to play. While not ignoring their regulatory and compliance enforcement role, the support, advisory and guidance role should come handy at this time. MFIs' and their clients' survival and sustainability should be given a priority as many small and marginal players may likely go under if life line does not come from the regulators and key fund providers. Intervention funds at a relatively low interest rate could be very helpful to cushion impending liquidity crisis.

John Edoviobaghogho , Nigeria
23 April 2020

Great!

Funmilayo Elebe , Cooperatives, Nigeria
23 April 2020

Grace period for loan repayment should be on individual basis not a blank general approach. Client's are involve in different products and services even in this lock down or stay at home, some are doing well in their business. Those that have capacity to pay might not pay once they hear moratorium, there by leading to a repayment crisis.

Loan or field officers need to be involve in the strategy any MFI want to adopt during this period, they will be able to give a better picture of their markets.

Amaury MARTIN , Togo
13 May 2020

A really important point indeed, thank you.

Ayotunde Eniola , Asha MFB, Nigeria
23 April 2020

Thanks for this write up.

Geert Peetermans
22 April 2020

Dear Paul and Ira,

Fully appreciate the appeal and the opportunity to explore the best possible responses.

Here are my 2 cents why I believe a staged approach to deal with clients that require a restructuring is preferable.
1. It’s in nobody’ interest to push all the MFIs we lend to into comprehensive work-out (WO) procedure
• As in the healthcare system, we try to avoid sending all patients to the ICU (Intensive Care Unit) –in our case the Risk department- immediately. COVID health measures by hospitals also use separate stations to filter the patients before they go to ICU.
• MIV!’s Risk departments have limited capacity, and would quickly be overwhelmed.
• Hence we aim to “flatten the curve” of the number of cases reaching the ICU-stage and keep that workload manageable.
2. It’s key consider the inherent strength of the MFI to avoid pushing healthy clients into ICU-treatment.
• It would require much (wasted) time for both a healthy MFI and for its lenders (including us) to immediately move into a full WO process
• By using the approach of different stages, we aim to serve many clients on shorter timelines. Less critical cases get ‘light” restructuring, not full-blown WO.
• This will allow stronger MFIs to focus on their operations instead of dealing for too long with their lenders.
• Lighter restructuring also allows the strongest MFIs continue to receive new funding which several lenders – including ourselves – are still willing to provide.
3. Providing a quick solution to hopefully many of our clients
• In order to restore trust with the MFI that is having a good basis to weather the crisis
• In order to send a strong signal to other lenders and stakeholders of that MFI.

So in summary, not agreeing with the idea that a global moratorium on principal repayments would be a suitable response. Rather we are preferring to apply a more diferentiated approach, and are in consultation with many other sector playerss to get aligned on the way forward.
I’m confident that in the near future we can arrive at a coordinated response, meanwhile stay healthy!
Geert Peetermans
Managing Partner & CIO of Incofin Investment Management

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