MICROFINANCE PAPER WRAP UP: “Impact of COVID-19 Pandemic on the Microfinance Sector in Europe: Field Analysis and Policy Recommendations;” by Kinga Dabrowska, Pitor Korynski, Justyna Pytkowska

Based on data collected from 22 European microfinance institutions and industry associations, the authors describe the effects of the COVID-19 pandemic in terms of: (1) economic impacts; (2) impacts on microfinance institutions (MFIs); (3) responses by MFIs, governments and investors; (4) challenges to MFIs’ financial recovery; and (5) government policies that may assist in the recovery of MFIs and their clients.

Starting in March 2020, as the pandemic unfolded in Europe, smaller businesses – and hence MFIs – were disproportionately affected by the economic shock. Travel and other restrictions imposed by governments made in-person meetings difficult or impossible. This reduced the ability of MFIs to disburse loans and collect loan repayments, requiring them to modify internal systems in order to work efficiently under novel conditions.

Among microenterprise borrowers, those in the service sector suffered more severe negative impacts, while those in agriculture were affected to a lesser degree. The majority of clients reported drops in sales, and many turned to government assistance. However, the authors found that, in general, MFIs in Europe “are emerging from the pandemic in good shape.” Those rebounding most strongly fit into one or more of the following categories: (1) institutions that were larger and more established before the pandemic; (2) having higher levels of liquidity pre-pandemic; (3) having digital tools in place; (4) having less exposure to the hardest hit sectors, such as the service sector; and (5) operating in countries whose governments provided smaller businesses with more pandemic-related support.

The strategies that MFIs used to respond to the pandemic include: (1) adjusting internal operations, for example by allowing staff to work from home; (2) reducing lending both as a strategy and because fewer clients requested loans; (3) cutting non-lending expenses; (4) granting emergency loans and repayment moratoria, generally on a case-by-case basis to those requesting assistance; (5) focusing on online services; and (6) reevaluating the process for assessing borrower risk. Regulators in many jurisdictions also took measures affecting the lending process, such as enforcing temporary repayment holidays and passing regulations that allowed “clients to maintain their credit score” despite pandemic-related repayment delays. Many governments postponed tax payments, provided salary support for employees and provided unemployment benefits for those who lost work. While some microfinance investors cut lending to MFIs, others issued fresh loans, rescheduled debt, cut reporting requirements and provided technical assistance to MFIs.

The authors lists a number of recommendations for microfinance associations, microfinance investors, regulators and other governmental bodies – including the European Commission and EU agencies – to help lenders and borrowers adjust to the pandemic. They suggest microfinance associations educate MFIs about the situation, offer “operational support,” and conduct research on the challenges and opportunities of the pandemic. Microfinance investors can help by: (1) maintaining fair pricing; (2) “adjust[ing] the financial indicators and benchmark[s] to account” for the deteriorating portfolio performance many MFIs are experiencing; and (3) refraining from “reneging on the existing funding contracts.” National governments can support MFIs by “expanding the existing credit guarantees” and offering direct financial support. Regulators that have not already done so can allow “MFIs to be a part of the national payment system to facilitate online transactions between MFIs and their clients.” Lastly, the EU can: (1) encourage national governments to support entrepreneurs and MFIs; (2) support MFIs with funding and technical assistance; and (3) “create a lender of last resort” for microlenders.

This is a summary of a paper by Kinga Dabrowska, Pitor Korynski and Justyna Pytkowska; published by the Microfinance Centre; September 2020; 20 pages; available at http://mfc.org.pl/wp-content/uploads/2020/10/Impact-of-COVID19-on-MF-sector.pdf

By Nathan Kiplagat, Research Associate

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