Role of Microfinance in Enhancing Opportunity and Resilience in Response to Covid-19
The economic and financial effects flowing from lockdowns to curb the spread of Covid-19 have been severe in most Asia-Pacific economies, with substantial declines in the incomes of people at the base of the economy, many of whom rely on microfinance to manage their household or microenterprise cash flows.
Like everyone else, people and enterprises at the base of the economy rely on financial products and services for basic needs such as savings deposits, receiving and sending payments, loans etc. However, in developing and emerging economies such services are often only available from microfinance providers such as microfinance institutions, cooperatives, NGOs, savings associations or self-help groups. In many economies the ability of these institutions to continue providing financial services has been disrupted by the pandemic, putting the poor and the financial service providers they rely upon in a precarious position.
As part of the Asia-Pacific Financial Inclusion Forum in 2020, an APEC policy initiative, FDC set out to capture emerging lessons from the experiences of different economies as the Covid-19 crisis unfolded. These lessons have formed the basis for recommendations FDC has developed for policymakers and regulators to assist them in preparing for future extraordinary events by building the resilience of microfinance providers and their clients. The recommendations also provide guidance on how governments can use the Covid-19 crisis as an opportunity, as part of the recovery process, to support microfinance providers in becoming more effective in advancing financial inclusion at the base of the economy and being catalysts for broader economic growth.
These recommendations, including supporting case studies, are explained in detail in FDC’s recent publication: Enabling shared prosperity through inclusive finance: leaving no one behind in an age of disruption. This report was prepared for APEC’s Finance Ministers and other senior officials to support regional efforts to expand the reach of financial services to the underserved. A summary of the recommendations is as follows:
Recommendation #1. Enable microfinance providers to continue providing services which support the resilience of clients during times of crisis by:
Recognising microfinance providers as frontline suppliers of essential services, so that they can remain open and continue serving clients.
Increasing access to liquidity for microfinance providers, including collaboration with specialist finance and development agencies to provide blended finance facilities.
Enacting concessions or moratoria proportionately and consistently throughout the financial system to ensure stability across the entire financial system.
Recommendation #2. Enact reforms which accelerate recovery and lead to more sustainable and effective microfinance providers serving the base of the economy by:
Facilitating digital transformation by advancing digital financial infrastructure, open banking and digital identification and promoting digital literacy as a core skill.
Ensuring reforms targeting microfinance providers recognise the value of “high-touch” operating models critical for client relationships, building financial literacy and capacity and establishing trust in the financial system.
Prioritising digital identity initiatives enabling governments to provide direct fiscal assistance and microfinance providers to serve their clients more effectively and at lower cost.
Providing microfinance providers incentives and assistance to invest in digital transformation, and their programs of education and awareness building to build trust and demand for digital services among their customers.
Extending regulation and supervision to microfinance providers to ensure that appropriate client protection measures are standardised and in place for the future.
Promoting partnerships between communities, healthcare systems, local governments and frontline finance providers supporting communities at the base of the economy to build economic resilience for the future.
Maintaining stability including for microfinance providers facing insolvency, by enabling recapitalisations, mergers or other collaborative restructuring and temporary regulatory forbearance, based on asset quality standards.