Microfinance and COVID-19: A Framework for Regulatory Response
Regulators and policy makers face critical decisions in meeting the challenges to microfinance in the COVID-19 crisis. While CGAP’s ultimate concern lies with low-income households and their livelihoods, this paper focuses on microfinance providers (MFPs), specifically regulated MFPs. Although the brief is not recommending specific measures, it is presenting a framework for identifying and assessing crisis responses. These responses inevitably will be highly specific to diverse contexts. In addition, regulators sometimes do not know the microfinance sector well or are familiar only with the few larger MFPs. These factors argue for dialogue between policy makers and sector representatives such as microfinance associations in crafting responses to the crisis.
A review of current practice in a range of countries suggests six key steps at the regulation and policy level. These should be understood as decision points in the crisis response, not as policy prescriptions. Specific measures and the sequence followed will differ across countries. The steps are as follows:
- Enable MFPs to operate safely.
- Provide relief to microfinance clients.
- Make additional liquidity available to MFPs.
- Defer noncritical supervisory processes.
- Restructure or liquidate troubled MFPs.
- Think ahead to the challenges of the recovery, balancing urgent rescue against longer-term values such as legal certainty, risk-based regulation, and sustainability.