Microfinance institutions’ responsible approach to the economic effects of COVID-19
Last April, Africa's Pulse, an analysis published by the World Bank Group, estimated that economic growth in sub-Saharan Africa would fall from +2.4% to a level between -2.1% and -5.1%, which would constitute the first recession in the region in 25 years. This recession is expected to hit countries dependent on mining and oil exports, while countries without natural resources are expected to post slower but positive growth.
In permanent contact with its network of 80 partner microfinance institutions (MFIs) and social enterprises in 40 countries, the Grameen Crédit Agricole Foundation is continuing its work of collecting information, analysing and sharing its observations. The privileged testimonials of our partners enable us to continue our monitoring of the crisis and its consequences. In this last questionnaire we focused on two particular aspects: the operational adaptations of MFIs and the role of loan officers during this crisis.
The economic crisis has become a reality for the vast majority of microfinance institutions supported by the Grameen Crédit Agricole Foundation. Almost all of them have implemented massive maturity extension programmes to facilitate the economic recovery of their borrowers.
The loan officers of these institutions are the privileged point of contact between clients and microfinance institutions. They spend almost half of their working time studying requests for loan maturity extensions and implementing such extensions.
The institutions were quick to adopt programmes intended to reduce their costs while ensuring the social protection of their employees and safeguarding jobs. Only 12% of them have resorted to economic redundancies, which is relatively low compared to national averages. On the other hand, the institutions are postponing their recruitment programmes as well as a large part of their investments. They also seem to be seeking to direct their funding towards sectors that are now considered less risky. This is particularly the case in agriculture, in what is a recent phenomenon.
It remains to be confirmed and will be followed up closely in our next news items.By looking proactively for bulwarks against the crisis and by adopting responsible approaches, MFIs are on the right track: today's innovative solutions can be tomorrow's successes as well.
Institutions are henceforth focusing on risk management
Whereas the health crisis seems to be slowing down in the countries that have adopted the most effective measures, the plans for exiting from the lockdown point to a very gradual recovery in economic activity. Our latest results confirm what we have been observing for several weeks: a remarkable adaptability on the part of microfinance institutions in the face of an unprecedented crisis.
Nearly 90% of the institutions have set up a crisis committee, chaired by the Chief Executive Officer and bringing together the management committee, to steer the various decisions and deal with the effects of the crisis. This committee usually meets every week.
“[We created] a “Crisis Management Team” composed of the Executive Committee members and supported by the Chairperson of the Board whenever required. [We have] weekly meeting with the Board of Directors to update on the situation and validate the main decisions”– Partner in Myanmar
The effects of the crisis are now being felt by 81% of the partners surveyed, who report an increase in risks to their customer portfolio. The efforts of microfinance institutions are now focused mainly on responding to this challenge, to the detriment of other activities that are currently considered less essential (nearly one out of two were providing this type of service at the beginning of April, compared to one in three today). Intended to provide non-financial services (awareness and information campaigns, provision of equipment, etc.) this reduction in activity has fuelled strong growth in activities dedicated to credit restructuring.
“To support our clients during the coming months, proposition of suspension of principal and interests instalments to all customers that were not in PAR as of March 1st. To date, 75% of the customers called have accepted. The process will continue.” – Partner in Ivory Coast
Institutions are adapting on the financial and economic activity fronts
The table below shows the progression of the difficulties encountered and the mitigation measures implemented to address them.
On the financial front
Against this background, the volatility of currencies is weighing heavily on the treasuries of institutions: 64% of respondents outside the CFA Franc zone are thus faced with a strong devaluation of their local currency against the dollar. This devaluation has a direct impact on institutions that have taken on debt in that currency since the vast majority of them receive microcredit interest in local currency.
“The situation is becoming even worse with significant KGS devaluation over the last months, contributing to increase the hedging cost” – Partner in Kirgizstan
The information provided by our partners in this survey also confirms the quasi-mandatory measures taken by MFIs during the crisis: 67% of the MFIs surveyed have reduced or stopped microcredit disbursements. In the same proportion, institutions have started to restructure loans to small borrowers on a massive scale by granting maturity extensions of 3 months on average. These moratorium periods constitute a truly essential element of crisis management at all levels. Whether mandated by local regulators or proposed spontaneously by the MFIs, they enable borrowers to benefit from a reduction in charges before resuming their activities. Similarly, the many processes of maturity extensions for investors enable the MFIs to retain valuable liquidity in a period of uncertainty. The Grameen Crédit Agricole Foundation consequently granted numerous maturity extensions in April, in full and effective consultation with other lenders.
For all that, the crisis has not affected MFIs' proactivity, but is encouraging them to adapt. To do so, some are looking for more resilient sectors in the current economic crisis. For example, we have noted that 40% of institutions are considering turning to the agricultural sector -- a sector that has been rather neglected because it was considered riskier before the crisis. This point will be followed up in particular in the next questionnaires as this percentage seems to us to mark a notable change in attitude. This new direction is being considered by more than half of the MFIs whose agricultural loans do not exceed one third of their portfolio, but also by very rural and agricultural MFIs. It is still too early to say, but the current crisis could encourage institutions to discover traditionally neglected sectors.
"[We] move ahead with plans on Rural & Agriculture Finance" – Partner in Sierra Leone
On the economic activity front
As to economic activity, the difficulties in moving teams around are diminishing somewhat: 55% had difficulties in May, compared with nearly 80% in April. Conversely, group meetings are still banned, and such prohibitions are on the increase, which penalizes the relationship processes of the institutions, especially with clients who have no alternative to solidarity loans.
“Group meeting was weekly or bi-weekly for repayments and social network. Without group meeting you cannot enforce the repayment any more”. – Partner in Kenya
In social terms, only 12% of those surveyed have had to part with employees since the beginning of the crisis, which is quite low, however, compared to the national average growth in unemployment figures. Our partners seem to follow the first principle set up by SPTF (1) "Keep staff employed" according to which "today's employees will be tomorrow's assets". For a large number of our partners, parting with employees in critical times seems to be more of a loss than a slight short-term economic gain. On the other hand, expectations are already weighing on the growth and development projects of our partners since almost one institution in two has put these ongoing recruitment projects on hold. This uncertainty weighs also on organisational projects, with 41% of the MFIs surveyed having decided to postpone this type of internal project.
The protection of staff is always a point of vigilance with 90% of the MFIs that continue to provide them with significant resources and remind them of barrier gestures. Since the beginning of the crisis, our partners have taken quick decisions to reduce the weight of their fixed costs and limit the risk of exposure to the health crisis: mandatory paid holidays (52%), teleworking (62%), team rotation, reduced working hours (57%) and reduced branch opening hours (52%). The level of progress in internal digitization in some institutions has favoured these organizational changes. This is particularly the case for our partners in Europe and Central Asia, who benefit from numerous electronic and online tools.
“Most of us from the head office have been working distantly, thanks to our proper remote IT system which enables all the departments continue smooth working.” – Partner in Georgia
The current crisis, which, as we have seen, limits the "business as usual" capacities of MFIs, has led us to explore how to adapt the job of loan officer, which is at the heart of the microfinance business. Certain tasks remain the same, particularly for MFIs in the least affected countries: loan disbursement (43%), repayment monitoring (38%) or client file analysis (43%).
The restructuring of loans in progress is taking an increasingly important place in the daily life of loan officers (43%), with the encouragement to use mobile payments (36%) and the drafting of amendments relating to maturity extensions (31%).
Just as in the retail banking sector, where the client officer has clearly demonstrated its importance in times of crisis, the loan officers of microfinance institutions are the privileged link for clients. 81% of respondents say that the key role of loan officers is to maintain contact with clients and/or credit group leaders.
“[We] maintain contact with all individual clients, group leaders and Village Bank Presidents through digital and phone channels.” – Partner in Zambia
“Strengthening client interaction by (smart) phone or other digital devices and collecting through group leader where possible.” – International MFI network
This essential and massive approach is to be favoured all the more as it is recognized by the Social Performance Task Force (SPTF) in its crisis management principles as being essential in times of client fragility. It is also worth noting that 33% of the MFIs have initiated surveys of their clients to gain a better understanding of their needs and propose adapted offers and services. For nearly half of the MFIs (43%), the advisors also play the role of "health advisor" by reminding them of good hygiene measures, which is the case in West Africa and Europe in particular.
”One of the best investments you can make right now is to maintain close contact with your customers. Many can’t make payments, but they are valuable assets just the same.” – SPTF
(1) STPF is a non-profit association that engages with stakeholders from the inclusive finance sector to develop and promote standards and good practices in social performance management.