COVID-19 and Bangladesh’s MFI sector
by Shamira mostafa and Onindita islam
The economic impact of the COVID-19 pandemic is now evident in all sectors in Bangladesh. In March 2020, the pandemic spread to Bangladesh. It is part of the worldwide pandemic of coronavirus disease (COVID-19) caused by severe acute respiratory syndrome. Infections remained low until the end of March but saw a steep rise in April. As of 24th August 2020, there have been a total of over 297,500 confirmed cases in the country, with over 4,010 deaths.
The government has enforced national lockdown in the country from March 26th to June 30th. This lockdown and social distancing measures enforced by the government also included closure of operations of MFIs, banks and other financial institutions. However, since the first week of June, most financial sector organisations started operations, but not in full capacity. Financial stability took a back seat to matters of health and safety, but has proved to be just as damaging.
This shock has resulted in increased complexities, both direct and indirect, across the micro and small enterprises (MSE) sector, which accounts for 25% of the country’s GDP. Thousands in the sector have lost their businesses, and with that, their only source of income (World Bank). The future of this industry is at stake, in spite of the economic and policy measures designed to protect it.
This is projected to only get worse.
The Asian Development Bank, along with other donors, predict a contraction of Bangladesh’s Gross Domestic Product (GDP) by 1.1%. This will result in a loss of $3.02 billion of the $300 billion-plus economy, and 900,000 jobs (ADB).
How can microfinance institutes (MFIs) help this situation?
MFIS ARE A RELIABLE SOURCE OF LIQUID FINANCE FOR LOW INCOME ENTERPRISES AND GROUPS
There are 756 registered MFIs regulated by the MRA that serve 30 million clients with has a credit portfolio of BDT 880 billion and savings of BDT 490 billion and employs nearly 200, 000 members of staff. The client base comprises mostly of micro entrepreneurs. As these businesses lost orders and revenues and are required to lay staff off, these MFI portfolios will be significantly affected.
The Ministry of Finance had issued a new cap on interest rates for both deposits and loans at 6% and 9% respectively for banks. This applies for bank lending to MFIs as well. This has resulted in the decline of private sector credit growth.
MFIS PROVIDE NON-FINANCIAL SUPPORT WHICH IS CRUCIAL IN TIMES OF CRISES
The customer-centric, social model of MFIs mean that they provide more than just financial services. MFIs act as:
relief in emergencies
mediators in settling disputes
negotiators with local elites and state institutions
trusted source of guidance on livelihoods and income generating activities
trusted source of information on health and well-being
COVID-19 has presented these MFIs with Murphy’s Law: everything that can go wrong, has [and will] go wrong.
MFI branches have shut down
Collection, disbursement, and savings have gone down
Delinquencies have increased
MFIs and SMEs have suffered from lost revenues
Wholesale lenders have reduced credit
Wholesale prices have risen
What are the two issues that affect MFIs the most?
LIQUIDITY CRISIS
Initial results from a CGAP Global Pulse Survey had suggested that liquidity was not an urgent concern from MFIs. The study surveyed 180 MFI (28 from Asia), and also indicated that the increase in the global portfolio at risk over a span of 30 days is less than initially feared.
According to CGPA, this might be due to a number of reasons:
Liquidity support already being provided by Government and funders
Reduced lending
Reductions in operational expenditures
Interestingly, this does not seem to vary significantly across regions.
SOLVENCY CRISIS
The CGAP shows an increase of Portfolio at Risk (PAR)30. Disruptions to these figures may be caused by:
increased cost of funds
reduced credit lines
sudden loss of income of borrower
delay in the frequency of collections
slip in repayment from 95% to 80%
use up of capital funds for operational expenses
While this might lead to justifiable concerns, as of July 20, it appears less likely to result in an industry-wide solvency crisis. If the numbers continue to rise, solvency will become a greater concern. Any one disruption can render many MFIs insolvent in less than a year.
These circumstances will demand prompt measures to be taken to help the sector stabilize. Nathan Associates London in collaboration with ThinkAhead consulting have proposed multiple recommendations to help MFIs and their clients recover in 2 years. The recommendations are also useful in preparing for other crisis situations (Hussain 2020). They include:
Rapidly assess and revise cash flow forecasts and liquidity model assumptions, and provide support to revise business plans where necessary
Negotiate agreements with banks to act as a ‘spare tyre’ with temporary liquidity support to kick-start resumption of microfinance operations
Negotiate with regulators agreement to remove artificial and market distorting ceilings on price of foreign currency loans adjusted for currency and country risk
Explore with existing wholesale banks, together with interested investors and donors, potential for a large-scale blended securitization, under the leadership of a leading MIV or DFI, of:
wholesale microfinance assets managed by domestic commercial banks, and
remittance streams (to secure better rates)
A detailed microfinance sector survey exploring some of these recommendations is coming up next month. Keep an eye on our online platforms for further information on the MFI sector and the COVID-19 crisis.