The Critical Role Of Microfinance Institutions Amidst The COVID-19 Pandemic


The COVID-19 pandemic has created significant challenges across the globe but particularly for developing countries.  According to a World Bank estimate, 71 million people could be pushed into poverty as a result of COVID-19. It is the poor and near-poor in developing countries who are the most vulnerable to these impacts. Microfinance Institutions (MFIs) have been critical in providing financial services for these vulnerable people and like their clients, MFIs are negatively affected by the economic impacts of the crisis. The Economist reports that small businesses, who are the majority of clients for MFIs, are struggling to continue their businesses. For example, in South Africa, 80% of small businesses remain closed even after the government began to relax restrictions; in Bolivia, 70-80% of borrowers have closed their businesses, and in Uganda, 70% of borrowers report being unable to continue business activities. The micro and small enterprises that MFIs lend money to are unable to repay their loans which significantly reduces the cash flow for MFIs. Since most MFIs can only continue for a few months without payments, their business is in danger. As MFIs are not receiving payments from their clients, they face challenges repaying banks and their investors. As a result, the network of trust that is so vital to MFIs is threatened as investors are becoming more cautious about which MFIs they lend money to.

MFIs have extended financial services to a large population that was previously excluded from the formal banking systems. According to World Bank figures, in 2017, the unbanked population had decreased by 0.8 billion from 2011. MFIs have contributed to the fight against poverty and helped reduce inequality –a  progress that is at risk of being reversed by the COVID-19 pandemic. PROPARCO reports that 80% of MFIs’ clients in urban areas are women. Thus, MFIs have also been a key driver for women’s economic empowerment. As businesses shut down, and global poverty increases, MFIs will be a crucial actor in getting people back on their feet. If MFIs are unable to survive the pandemic, the steps made toward the social mobility of the poor and vulnerable will be reversed, and inequality will deepen. Increasing inequality and poverty have significant implications for world peace as they may make conflict more likely to happen.

Traditional microfinance institutions rely on face-to-face interactions, but the COVID-19 pandemic has interrupted this process significantly. As a result, MFIs face challenges meeting, communicating, and collecting loan repayments from their clients. Although these issues could partly be solved by going digital, it is unlikely that all of the poorer MFIs clients will have access to reliable technology to carry out these activities online. Even if this hurdle is overcome, the root of the issue is that MFIs are not built for an economic crisis like COVID-19. Most MFIs operate with little savings on the assumption that small loans will be repaid in a timely fashion and with a low default rate. With widespread business closure, such an assumption becomes more uncertain than ever. MFIs need additional capital to weather the storm so they can be a viable option for an inclusive economic recovery. Unfortunately, with the looming economic recession and a public health crisis, the financial situation of the world’s poorest populations is not a priority for the governments in developed countries who provide capital for MFIs.

The COVID-19 pandemic has exposed the weaknesses of many of our institutions, MFIs are no exception. But, MFIs can also be a tool to build back a better economic climate in a way that makes micro, small, and medium enterprises more resilient to economic shocks. Some MFIs has already adapted to the new challenges created by the pandemic by digitalizing many of their operations. According to The Economist, financial services will be digitalized over a period of six months due to pandemic instead of the previously estimated 10-15 years. In 2019, mobile money accounts surpassed one billion globally. In most places, these digital accounts are the ones that are most resilient to the pandemic. The digitalization movement eliminates much of the need for face-to-face interaction as loans and debt collections can be made on the phone.

A larger challenge that MFIs face during COVID-19 is that, even if the technology is available to facilitate digital transfers, many of their clients simply cannot afford to repay their loans. To address the problem, some MFIs are working towards diversifying their clients by targeting businesses in sectors that are less affected by COVID-19, such as the agriculture sector. A trio of microfinance investors, lenders, and advisors (Fondation Grameen Credit Agricole, ADA, and Inpulse) conducted a COVID-19 impact assessment on their MFIs members. When asked about mitigation strategies, 57% planned to reorient loans to clients in the agriculture sector, 37% expressed plans to launch a program for financial education, 27% expressed interest in shifting more focus to female clients, while 25% planned to increase their offerings of green financial products to mitigate any future climate crises. Thus, the COVID-19 crisis may provide an opportunity for MFIs and their clients to restructure their operations to be more inclusive, resilient to climate change, and other health or economic shocks.

While many small businesses have proven that they have the capacity to innovate and adapt to new challenges, without adequate financing, they do not have the resources to overcome the crisis. An MFI in India, Annapurna Finance, has implemented digital teleworking and has suspended repayments on loans for its clients. This was possible due to a $15 million credit line it received from PROPARCO, a development financial institution. With this loan, Annapurna Finance has been able to meet the many requests for emergency loans from its clients, helping them overcome the current liquidity problems and ensuring their survival. Therefore, an MFI’s ability to adapt hinges on how much slack it can provide to its clients.

MFIs have played a significant part in lifting people out of poverty and contributing to the financial inclusion of the most marginalized population. Through microloans and consultations, MFIs have allowed entrepreneurs to realize their potential and achieve financial independence. The clients of MFIs are typically micro, small, and medium-sized businesses and are thus the most vulnerable to the impacts of COVID-19 due to their lack of savings and prevalence in the hardest-hit sectors. Ensuring the survival of these businesses is critical to avoiding a reversal in the recent gains made in poverty reduction and women’s economic empowerment. To keep medium to small businesses afloat, MFIs must remain reliable sources of finance. During COVID-19, speeding up the digitalization of finance enables interactions to be done digitally and employees to work remotely, thus allowing MFIs to continue operations. However, MFIs must also have greater access to financing to allow room for their clients to diversify, innovate, and adapt to the crisis.

Alexandra Konn

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One thought on “The Critical Role Of Microfinance Institutions Amidst The COVID-19 Pandemic

  • Hugh

    It is true that MFIs have increased financial inclusion, in that more people now have access to credit. But this does not imply that such inclusion has necessarily benefited them. Academic evidence on whether microfinance helps the poor is inconclusive, and at best suggests the impact is marginal. Likewise, that 80% of MFI clients are women does not mean that they are all empowered. You cannot attribute benefit as an automatic consequence of access. Note that many MFIs charge astronomical interest rates, often above 100% APR – are those empowering?

    You lament the fact that micro-enterprises may collapse because they are unable to repay their loans – given the interest rates many microfinance loans incur this is quite possible, but perhaps it is the presence of such debt that pushes such enterprises into collapse? The economic shock of Covid would presumably be easier to confront without debt?

    Finally, this same website has discussed the issue of child labour, and listed a number of key industries where this practice occurs. Let me ask a simple question: is it a coincidence that countries such as Peru, Ecuador and in particular Bolivia or Bangladesh have such high levels of child labour and saturated microfinance sectors? Typical micro-enterprises rely on high volume, low margin trade – this is labour intensive. Where does this labour come from? Again, it is hard to prove which came first – microfinance or child labour, but surely it is possible that financing so many small micro-enterprises, that then compete against one another in such labour-intensive niches, might actually result in an increase in child labour? Do you know MFIs that control for this, or have policies against lending to clients engaged in child labour? To clarify – I am not saying that all micro-enterprises engage in child labour, and in some cases a microfinance loan may have the opposite effect – remove the need for child labour. But we cannot assume that the impact of microfinance is always positive, and thus when the industry faces a crisis, and potentially contracts, this is not necessarily always bad.

    Many of the large investment funds that provide the capital for the MFIs are proud to show-off on their websites about their excellent “social-returns”, or “triple-bottom-lines”. We have been told for decades that investing in microfinance is not only beneficial, but also profitable. Perhaps Covid means some of this profit must be ploughed back to rescue the very institutions that made these investors such fine returns over the years?