Six esteemed analysts* draw on an extensive survey of microfinance enterprises, loan officers, regulators and microfinance institutions and identify six factors that will shape the structure of the sector, survival of microfinance providers, and services available to the hundreds of millions of people living at the base of the economy in Asia and elsewhere.
The authors note the challenges in serving households having a combination of low incomes, volatility and unpredictability, and strengths of traditional microfinance models that rely on group cohesion and social networks, but are constrained by exposure to local shocks, and limited ability to intermediate and scale. The microfinance sector avoided much of the disruption during the Asian Financial Crisis and the 2008 Financial Crisis due to its limited exposure to global capital markets and flexibility in adjusting to local demand, while recovery from significant disruptions to the basic business of microfinance – such as in the case of the Andhra Pradesh crisis or the Ebola epidemic – causing significant disruption in specific geographies, was possible because of ready access to national and global capital markets, development finance institutions, bilateral and multilateral aid agencies and philanthropic funders.
The COVID-19 pandemic is different from previous crises as it is disrupting both the client-facing and the capital-facing sides of microfinance simultaneously. MFIs are suffering from both a lack of repayments and a lack of access to capital and liquidity from funders. As a result, both the entire financial system and grass roots commerce are severely compromised. Many clients will be impacted, and a significant number of microfinance institutions (MFIs) globally will not survive, presenting both the necessity and the opportunity to consider policy and structural responses to underpin sustainable microfinance and microenterprise.
The six factors identified by the authors shaping the structure of the sector and impacting services to the hundreds of millions of people living at the base of the economy in Asia and elsewhere are summarised as follows.
#1. The industry must reconsider how microfinance is used by most of its customers (liquidity purposes) and mismatch with the rhetoric of business investment. Recognising that microfinance is primarily about managing liquidity has implications for investment banks and particularly for regulation and oversight.
#2 The assumption that non-deposit-taking institutions can be exempted from prudential regulation because customers would not be hurt by failure or insolvency is a fallacy. The potential for long-term suffering of most microfinance customers is a powerful argument for regulators and central bank authorities to quickly expand their efforts at stabilising the entire financial sector to include all forms of microfinance, including both immediate emergency liquidity facilities and recapitalisation, and recovery liquidity management products when the pandemic is under control.
#3 When a product plays such a large role in many poor households’ financial lives, it is appropriate for governments to ensure that those households are protected from exploitation by the providers of that product. Governments should consider taking consumer protection principles developed within the industry as voluntary guidelines and making them mandatory regulations.
#4 The microfinance business model may need to be significantly rethought. Realisation that microfinance is not risk-free may heighten the marginalisation of what may be the majority of the population in most emerging and developing countries as investors update their expected risk-adjusted returns and limit or withdraw access to capital for MFIs. It provides opportunity for innovative interventions by policy makers and the international development community.
#5 Much innovation in microfinance in the last decade has been focused on digital financial services and mobile money to lower operating costs and expand access to formal financial services. COVID-19 has illustrated the reliance and predominance on cash and how far there is to go to make digital financial services ubiquitous. The pace of digital transition at the base of the economy will be influenced by whether MFIs can source capital for investment in digital, adequacy of the supporting infrastructure, and there is a well-thought-out consumer and staff education path to scale.
#6 Two of the most important, but intangible assets built up by microfinance are at risk – consumer trust in the financial system, and the knowledge and infrastructure (organisational capital) developed by microfinance providers in successfully lending to low-income customers. There is a significant role for regulators and investors to play in ensuring that the industry does not deplete these valuable long-term assets.
The authors conclude with the observation that what emerges from the other side of COVID-19 will likely vary considerably from country to country and context to context, but if the current pandemic continues for long, whatever emerges will likely be substantially different from what we have seen over the last 40 years.
* COVID-19 and the Future of Microfinance: Evidence and Insights from Pakistan,
04 May 2020