Covid-19 Effect on Microfinance and the Third-World Economies

Since March 2020, the Covid-19 pandemic has come down with a bang on many developing countries. In time, thousands of cases have been recorded in the Sub-Saharan region, South Asia, as well as Latin America. Interestingly, the typical response of most governments in countering the spread of the pandemic has been to engage in a nationwide lockdown.

This generally invites adverse economic consequences, especially on the poor.

Significantly, SMEs (micro and small enterprises) usually play a crucial role in the developing nation’s economies. They actually impact 66% of jobs, 50% of world GDP, and 90% of businesses. SMEs are especially crucial in influencing emerging markets. This is why experts are taking note that millions of such companies are getting affected by government-instituted economic lockdowns.

COVID- 19’s Devastating Effects on Micro-Business Enterprises

The urgent question is: What effect will this world-shattering pandemic have on national economies, financial institutions, and micro-business sectors in developing countries? Indeed, experts confide that the overall economic impact of Covid-19 is likely to be devastating.

With this in mind, what urgent steps must the authorities take to protect the microfinance industry amid the Covid-19 pandemic?

Let’s take a moment to explore some pertinent facts that might ultimately impact the wider microfinance sector in most developing countries.

Developing Countries Suffer Adverse Economic Consequences of Covid-19 Woes

The Covid-19 pandemic has already caused considerable shocks in the world’s economic structure. And the prices of natural resources have sharply declined due to dwindling demand. When it struck, Chinese factories shut down in droves. There has been a virtual cessation of the global garment sector. Everywhere, migrant workers are getting expelled, as many others lose their jobs and means of livelihood.

Moreover, there is a sharp drop in the flow of international payments. As investors increasingly favor safe assets, many countries are currently enduring the impact of capital flight. One of the more devastating effects of this situation is the dramatic crash in stock markets and the decline of the tourism and travel industry. In the wake of this, the world’s poorest people, who mostly live in developing countries, have borne the brunt of the vicious economic downturn.

Further, most Third-World Countries are implementing social-distancing measures to combat the Covid-19 infection rate. Regardless, such measures inevitably have devastating consequences on vulnerable peoples. They certainly hamper the ability of most people to earn a living and sustain livelihoods.

Lower Repayment Rates Risk are Destroying the Multibillion-Dollar Credit Industry

Some of the worst-hit sectors include the informal, non-agriculture, urban institutions which regularly provide the majority of poor people with microfinance borrowing opportunities.

Credit institutions generally serve about 140 million disadvantaged, low-income people. They offer much-needed savings and credit plans. As noted, a majority of these people live in Third-World countries. Remarkably, the 2018 credit portfolio value stood at a whopping 124 billion US dollars.

Generally, 80 percent of people who benefit from this MFI assistance are women. 65 percent of these reside in rural areas. They constitute the most vulnerable and most impoverished sections of society. Moreover, PAYGo or pay-as-you-go companies like Fintech are also invaluable for their role in helping the world’s poorest of the poor.

Significantly, microfinance economics usually means high repayment rates. But since most borrowers are currently struggling to survive, the general repayment rates are likely to fall by more than 85 percent.

This accelerated income shock could have an adverse impact on such repayment rates. Typically, when the prices drop, they usually drop rapidly. And many business models, especially high-tech industries, are likely to deal with more challenges, owing to social distancing requirements.

That is how critically Covid-19 is crushing the economies of developing nations’.

Investors Should Consider Rolling Up Outstanding Loans to Save SMEs

Covid-19 poses unprecedented microfinance market disruptions on a scale that could be described as historical. Without a doubt, the threat posed by this vicious pandemic cannot be wished away.

The financial sector needs to start attempting to ease the typical conditions imposed on borrowers who now cannot service their loans due to emerging economic constraints. This will, in turn, keep MIs insolvent and ready to recapitalize. This could offer borrowers a second opportunity as soon as this crisis dissipates.

Moreover, social investors need to consider instituting a temporary suspension and rolling up outstanding loan returns to MFI s. This will push out the terms of repayment and relax essential agreements. Probably, the measures may be pegged on capital adequacy ratios and net asset values.

Micro-Finance Lenders Must Operate Like Banks to Get Government Support

In line with this, most central banks are already planning on how to offer considerable liquidity support to local financial sectors by lowering the reserve requirement ratios.

Also, any micro-finance lenders that continue working as if they are a non- bank financial outfit risk missing out on the much- needed relief, considering the dynamics of the broader push to rejuvenate the financial sector.

The failure to include micro-finance lenders in government instituted relief measures would starve them of desperately-needed assistance. This is a crucial lifeline that impacts their continued operation.

How to Support MFIs and Insulate the Poor in the Wake of Covid-19

Going forward, we must take urgent measures to save MFIs and insulate the poor against the devastating effects of the Covid-19 pandemic. For starters, it’s vital for the development of financial agencies, bilateral and multilateral institutions to study the trajectories taken by past financial crises.

This will help them devise a viable strategy for a rescue package to redeem MFI’s. They can draw from lessons learned in designing facilities for financial support and mergers. Moreover, they can consider stepping up donor capital and taking advantage of a blended model of financial consultancy.

On their part, MFI’s will have to take the bull by the horns and make crucial decisions on viable methods of supporting customers. They can do so by restructuring the current loans, offering liquidity to customers, and suspending repayments.

Governments and Microfinance Institutions Must Work Together

Nevertheless, MFIs must accept the fact that some governments may go ahead and make unilateral decisions that are binding for lenders. For instance, governmental authorities may impose payment holidays regardless of the impact this could have on lending institutions.

But what steps can be taken now to save MFIs and the entire micro-finance sector from imminent collapse? How can we guarantee the industry continues to contribute meaningfully to third-world nations’ economic recovery?

In the end, both governments and the entire micro-finance sector have a role to play in employing solutions and working as a team. This would undoubtedly save collapsing economies and insulate millions of poor people from the devastating effects of the Covid-19 pandemic.