Finding a Lifeline for the Poor and the Financial Institutions that Serve Them
The following post was originally published on LinkedIn on May 12, 2020. It was written by Sam Bickersteth and Deborah Foy are respectively Chief Executive and Senior Advisor of Opportunity International UK.
The COVID-19 crisis has already hit the poor hard, and will hit them harder. Microfinance Institutions are close to affected groups and provide an essential lifeline - but are themselves under threat as deposits fall and the poor struggle with repayments. Supporting the financial institutions and social models which define the sector needs to be a priority for Governments and donors. We offer a three point plan: digitisation; financial support; and, above all, a platform so that the voices can be heard, of the poor, and those who work most closely with them.
The impact of COVID-19 on the clients of microfinance institutions
Around the world, MFIs serve an estimated 140 million active clients, with a gross loan portfolio of $US124 billion. These clients are among the poorest and most vulnerable in society, particularly women (80%) and those living in rural areas (65%). Highlighting the scale of the current crisis facing the sector, we estimate that 75% of Opportunity International’s seven million loan clients are currently unable to work because of government restrictions, lockdowns, and sheltering. Their livelihoods, their ability to feed their families, their ability to repay loans - are all threatened by the economic impacts of the COVID-19 pandemic.
For this group and the millions of other microfinance clients around the world, the consequences of the COVID-19 pandemic have been especially harsh. They face new risks and uncertainties, and require specific responses from national governments and the international community.
Informal workers in urban areas: The hardest hit
Unprotected workers in the urban informal economy – especially women – constitute the majority of Opportunity International’s client base. The street is their workplace and their livelihood. They operate as small scale traders, food processors, street vendors, boda boda drivers and artisans. Most depend on their ability to make it to town centres every day to sell their wares or their services. Their incomes are low and irregular; most have limited access to health services and social protection. Many of them live hand-to-mouth, struggling to put away any savings for a rainy day. For this group, we’re seeing multiple impacts on COVID-19 on their lives and on their livelihoods. Women in particular make up the majority of the informal workforce and are disproportionally affected because of their additional care and domestic responsibilities.
In Uganda, informal workers in the urban areas are being hit the hardest by a severe economic meltdown resulting from the stringent and far-reaching lockdown measures introduced on the last day of March. Income generating activities came to a virtual standstill and coping mechanisms of low income households are being severely strained. Businesses stopped trading overnight; casual employment options all but disappeared. In Ghana, where 88 % of the workforce is employed in the informal sector, the impact has also been severe. Some of the most badly affected have been informal food traders, a group providing vital income for farmers as well as the majority of food to Ghana’s urban poor. Unable to travel to the cities, the knock-on effects in terms of both income and nutrition are immense. And across both Uganda and Ghana, we are seeing women disproportionally affected because of their additional care and domestic responsibilities.
As well as the impact on income generation, those living and working in the informal sector also rely heavily on cash transactions, despite the impressive penetration of digital financial services in recent years. Adhering to the World Health Organisation’s advice to use contactless payments instead of cash to reduce the risk of Covid-19 transmission is simply not an option for many. The need to stand in line to pay a bill, or to pay for goods and services, puts this group at greater risk of infection.
Refugees: Facing a double jeopardy due to COVID-19 and a cut in food rations
Uganda hosts more than 1.4 million refugees from countries such as South Sudan, Democratic Republic of Congo, Rwanda, Burundi, Somalia and Kenya. Opportunity International is part of an industry-wide effort to promote financial inclusion and create employment opportunities for Uganda’s refugee population. We have been interviewing respondents in Nakivale and Kiryandongo refugee camps every two weeks since last September. The COVID-19 crisis has caused the income levels of the refugees to plummet. Total employment income just two weeks after the lockdown began fell by more than 60% compared to income levels immediately before the lockdown was announced. The hardest hit were those running micro-enterprises or relying on casual labour.
Sadly, it is not only the impact of the COVID-19 restrictions that is affecting the welfare of refugees across Uganda. Those living in the settlements are facing what is now being referred to as a “double jeopardy” situation caused by the 30% cut in World Food Programme food rations in April. For those relying on the food handouts as their only coping mechanism, the combined impacts of the ration cut and the COVID-19 pandemic have increased levels of vulnerability and insecurity, driving many into chronic poverty.
Rural households: Feeling the ripple effects of economic disruption
COVID-19 is not only a health and economic crisis but also a food crisis as supply chains, trade, labour movements and inputs are all disrupted.
In rural Ghana, Opportunity International’s clients mostly work in the informal sector in agriculture, fishing and fish processing, and in agro-based processing. Casual workers earn daily wages by performing activities such as land clearing, weeding, planting and harvesting. Our partner organisations are reporting an unprecedented collapse of commodity prices due to the COVID-19 pandemic. Prices for cocoa and crude oil have crashed. Travel restrictions have disrupted farmers’ access to inputs such as seeds and fertilisers, and also restricted access to markets. Farm cycle and business disruption is widespread, causing food pileups in some areas and shortages in others. Some of our field staff are reporting that uncertainty and fear caused by COVID-19 are having an impact on planting decisions.
Opportunity International agricultural programmes across sub Saharan Africa are continuing to operate as best they can during this critical growing season. Farm and agribusiness borrowing and access to working capital is important as the cropping season gets underway. Our partners are providing additional working capital to farmers, rescheduling loans if needed, and focusing on supporting agricultural marketing and aggregation activities. They are also expanding the capabilities of our digital finance services platform, delivering farmer training through videos and maximising the use of interactive voice messages.
Schools: Widespread closures impacting both learning outcomes and local employment
Around 90% of the 14,000 schools supported by Opportunity International’s Education Finance programme are currently closed. These schools would normally be educating 3.8 million children. Many were receiving a nutritious meal at their schools and, with very limited access to internet, few will be receiving any form of structured learning in their homes. Some may not return to school at all as parents lose their income.
However, it is not only learning outcomes that will be impacted by the crisis. The education entrepreneurs supported by Opportunity International play a vital role in community development. Our data shows that that a single school improvement loan creates four new jobs in the school (teachers and other workers), two new community jobs, and two new short term jobs such as in construction or for school bus drivers. The school closures are thus undermining livelihoods and may lead to permanent loss of work if school businesses fail.
Our Education Finance team is innovating in the midst of the pandemic in order to help schools and financial institutions. A new Crisis Response Toolkit is being used to drive discussions and collaboration on our platforms, and cascade information through WhatsApp, SMS and one-on-one phone calls to engage as many school leaders as possible. Our team of global EduFinance Technical Advisors are holding consultation calls with financial institution partners to better understand their current risk mitigation plans, and offer any support needed.
Key COVID-19 challenges facing MFIs: Rising levels loan default and liquidity crises
The four client groups we have highlighted – informal workers in the urban areas, the rural poor, refugees and education entrepreneurs – are all facing a complex array of issues and challenges because of COVID-19. These in turn impact the financial institutions that serve them. And whilst the pandemic is causing increasing loan default and concerns about liquidity for financial institutions everywhere, the challenges facing microfinance institutions serving low income households are especially severe.
First, the microfinance industry is largely based on a model of high touch, last mile connectivity with low-income households. This model requires employees to undertake extensive travel, have direct and frequent interactions with clients for sourcing and collections, and - until recently - to handle cash. The core model used by Opportunity International and others in our sector is the establishment of Trust Groups. Here, groups of savers and borrowers meet together and develop strong, trusting bonds with each other and with a relationship officer from the microfinance institution. All of this has become difficult to operate with COVID-19, given the requirement for social distancing and cancellation of physical meetings.
Second, the fundamental economics of microfinance require high repayment rates given the large numbers of clients and small margins. According to industry leader CGAP, a fall in repayment rates from 95% to 85% would render many MFIs insolvent in less than a year. Members of Opportunity International’s network of partner MFIs across sub Saharan Africa are already experiencing repayment challenges because of COVID-19.
In Uganda, our local partner Opportunity Bank of Uganda (OBUL) experienced a significant spike in loan defaults in April. The majority of the non-performing loans were in the micro segment - clients who are among the poorest and most vulnerable segments of society. Loan disbursement all but came to a standstill by the end of April, with new loans disbursed during the month just a fraction of the monthly average prior to COVID-19. Just over 11% of the loan book in value terms was restructured during the course of just one month.
In Ghana, the impact of a partial lockdown by the government on the loan book has been less severe. However, new disbursements in April dropped significantly compared to March. Loan defaults levels increased significantly; our partners experienced a three percentage point increase in PAR30 levels - the most commonly used indicator of portfolio quality - through the month of April. Data for May is already showing an increasing trend. Clients across multiple sectors of the economy are facing huge challenges to repay loans. As the crisis intensifies, there is a risk that clients will resort to selling business assets to support loan repayment, a situation which would ultimately lead to the partial or full collapse of their business, and loss of the employment and income which it generated.
Yet it is not only lending activity that has been affected by the pandemic. Clients are withdrawing savings to meet their basic needs. At Sinapi Aba Savings and Loans (SASL), Ghana, average daily deposit withdrawals increased by almost 60% in the month of April compared to deposit withdrawals in March. Levels of new deposits are also declining because of the slowdown in sales by clients as a result of general low economic activities. SASL reported a significant drop in deposits during the month of April, at just 25% of typically monthly levels. Although this has seen recovery in the past two weeks, deposits are still significantly below monthly averages for this time of year.
For regulated microfinance institutions, maintaining sufficient liquidity is vitally important. They must at all costs ensure their ability to cover withdrawals. Opportunity International’s partners are stepping up their focus on asset and liability management in order to ensure sufficient cash or equivalents are maintained to meet short term liabilities. Currently, they are able to weather the storm and continue to have healthy loan deposit ratios. However, if the impacts of the crisis deepen, liquidity will become more of a concern.
Supporting microfinance institutions: How should the international community respond?
Microfinance institutions are critical actors in provision of wealth creation, employment and safety nets for the poor. They have high reach to where poor people live and work and should be amongst the first institutions receiving support during the COVID-19 crisis. The collapse of microfinance institutions designed to serve the poor can only deepen poverty and inequality.
Governments and donors need urgently to address the following:
- Listen to the voices, experiences and evidence from the informal sector, SMEs and the institutions that support them. International organisations, donors and national governments must make a deliberate effort to learn from these vulnerable sectors and microfinance institutions, and not only engage with corporates, commercial banks and those parts of the private sector better placed to articulate their concerns.
- Governments and donors together with telecommunications networks, banks, MFIs and regulators should support all means to drive financial transactions to digital channels. There has already been a 28% increase in mobile transactions across the Opportunity International network and greater use of Interactive Voice Response (a.k.a. cell phone voice messages). Besides mobile money supporting withdrawals and repayments, we also need systems to enable digital registration of new clients. By encouraging clients to move to mobile money (for example by eliminating transaction fees), we not only reduce disease transference from cash and in-person interactions, but open up new ways to enhance access to financial and other information services over the longer term.
- Microfinance lenders that operate as non-bank financial institutions may miss out on relief packages being prepared by central banks or international institutions. Although these institutions may not represent a systemic risk to the financial sector, the failure to include them in government-supported relief measures will work against much that has been done to address financial inclusion, chronic poverty and inequality in recent years. The IFC has made a welcome $US 10 billion available at zero interest rates for the poorest members and the African Development Bank has allocated the private sector $US 1.35 billion from their $US 10 billion COVID19 Response Facility. But will steps by multilateral and bilateral donors reach the financial institutions that serve the poor and most vulnerable?
The International Labour Organisation has warned almost 1.6 billion workers in the informal economy, nearly half of the global workforce, face an immediate danger of losing their livelihoods due to the economic impacts of COVID-19. Without support, they will face a high risk of falling into poverty and will experience greater challenges in regaining their livelihoods during the recovery period. Microfinance institutions can be the lifeline for many of the 1.6 billion people whose livelihoods are at risk. Now more than ever, the institutions that promote financial inclusion of the poor and vulnerable will be key to getting economies going again and maintaining the global targets agreed in the SDGs.