Center for Financial Inclusion, Jan 7, 2021
In 2010, when the world was going through the largest economic crisis in three generations, the microfinance sector found – in most cases for the first time – that it’s not immune. The sector’s many stakeholders, very few of whom had previously experienced a major crisis, had to learn on the fly. Seeing this knowledge gap – and also recognizing an opportunity – CFI launched Weathering the Storm, a first-of-a-kind research project to capture the experience of MFIs dealing with crisis.
With the onset of COVID-19 came a scramble for direction on how to respond, and, amid the hubbub, the first Weathering the Storm made the rounds on social media as one of the reference materials for this new crisis. Many of its lessons — admonition to MFIs to “keep leverage low and liquidity high,” focus on prioritizing client and staff confidence, emphasis on maintaining transparency with creditors — proved as true in April 2020 as they did a decade ago. Indeed, its discussion of creditor responsibilities helped inform the rapid and well-organized response by social investors.
Even so, it wasn’t a perfect fit. Much of the original Weathering the Storm focused on institutions whose crises were due more to internal mismanagement than to external threats — a situation that is largely reversed today. And most of that study focused on avoiding a crisis rather than surviving one – hardly appropriate advice to institutions facing a pandemic. Recognizing these differences, CFI — this time in partnership with e-MFP — launched Weathering the Storm II to seek out cases that are more relevant to today’s situation.
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covid-finclusion, Apr 28, 2020
Liquidity has been foremost on the minds of just about everyone in the financial inclusion sector. Several essays on this site have delved into the topic. The first article in our liquidity series outlined three drivers for illiquidity: deposit withdrawals, operating costs, and maturing debt, and argues that maturing debt presents the greatest risk. But what does the data say? Here we will dig into that, and investigate just how severe the different elements of the liquidity crunch are to different categories of MFI around the world.
We don’t have access to sector-wide data reflecting the situation right now. Nobody does. But we can get a good view of what may be happening from historical data collected by MIX Market over many years. Let’s start with the most basic question. Assume an MFI is operating under complete shutdown, with no repayments, no new disbursements, and no other inflow or outflow of funds – it’s operating entirely from cash reserves. How many months would it be able to survive before the money runs out?
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covid-finclusion, Apr 20, 2020
In our first piece in this series – Keeping the Patient Alive – Adapting Crisis Rubrics for a Covid World, we introduced the analogy of the emergency room doctors trying to treat a critically ill patient – a financial services provider (FSP), its staff and clients in lockdown or socially distancing, unable to travel and with incomes collapsing, health expenditures increasing, and some sick or dying. Repayments are close to impossible, and new loan applications are flat. But operational expenses continue, and it’s a race against the clock.
In short, this patient is critical. To continue the analogy, ensuring the reciprocal trust and confidence of staff and clients and investors is like treating a patient’s organs, with interventions from pharmacology to surgery to transplant. We’ll get to that, though. For now, the challenges need triage. The patient can’t breathe, so she cannot oxygenate and circulate her blood. This, to come back to our institution, is the critical need for liquidity.
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covid-finclusion, Apr 14, 2020
In 2010, the Centre for Financial Inclusion (CFI) published a paper by Daniel Rozas called Weathering the Storm, reviewing 10 MFIs that faced existential crisis, some having survived and others not. The paper was written in the aftermath of the 2007-08 global financial crisis and its subsequent ripples across many microfinance markets.
Today the sector is facing a crisis both broader and deeper than anything that’s come before. It is not alarmist to say that the threat – to clients, their business, financial service providers and the whole ecosystem that supports them – is existential.
In recent weeks, there has been a cacophony of responses as different stakeholders try to get a grip on what’s happening and what comes next. We’re mindful not to add to the noise without adding value. The value, we think, is in extracting just the applicable lessons from previous crises, matching them to the complex array of challenges being faced today, and doing so within the framework of an illustrated guide that takes that CFI paper as its starting point. So to this end, the European Microfinance Platform (e-MFP), CFI and the Social Performance Task Force (SPTF) are launching a collaborative blog series that will try to help practitioners, investors and other stakeholders weather this storm.
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next billion, 14 April 2020
The COVID-19 pandemic has generated a real sense of crisis in inclusive finance, surpassing even the reaction to the 2008 financial crash a decade ago. And particularly among investors, the topic of highest concern is the looming crisis in liquidity for financial institutions.
For microfinance institutions (MFIs) in many countries, the combined effects of the pandemic and its economic impact will lead to high levels of non-performing loans (NPLs), as clients struggle to make their scheduled payments. During past crises, the typical impact on MFIs has been a period of retrenchment. Much of this is likely to be repeated: With slowing trade and economic activity, fewer loans will be made and portfolios will shrink. The combined effect of credit losses from the NPLs and a shrinking portfolio will put serious pressure on equity capital, quite possibly threatening MFIs with outright insolvency, and ultimately, losses to investors.
But a financial institution can simultaneously be insolvent and still liquid, and in a crisis, preserving MFIs’ liquidity must take precedence over maintaining their solvency. To understand why, it’s important to explore the two concepts, and how they’re likely to impact MFIs and their investors as the current crisis progresses.
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Phnom Penh Post, 21 March 2017
On March 13, the National Bank of Cambodia announced a major new policy. Starting April 1, all microfinance institution operating in Cambodia will be required to lend at interest rates no higher than 18 percent per year. This is a deeply misguided regulation that will undo over a decade’s worth of successful financial policies.
At the dawn of this century, Cambodia’s financial sector was largely nonexistent. There were no ATMs, few bank branches, and equally few customers. In rural areas, there were no banks at all, and moneylenders held a monopoly on lending.
How times have changed!
Today’s village household has far greater control over its finances and is deeply connected to Cambodia’s growing economy. A farmer can borrow from a microfinance lender to buy seeds and fertiliser and set aside savings to help pay for his kids’ school fees. He can finance a solar panel to charge the phone that lets the family stay in touch with older children in the city, who themselves can send money home to the parents cheaply and reliably. None of this even requires the three-hour trip to town – a loan officer from a microfinance institution visits the village each week, while the village shopkeeper doubles as a microfinance agent who can send and receive payments. This picture is repeated in house after house, village after village, from the outskirts of Phnom Penh to the remotest corners of Cambodia. Today, in rural areas alone, half a million clients hold savings at microfinance institutions, and over a million borrow from them.
The new regulation puts all that under threat. more →
Microfinance Focus, 10 December 2012; microDinero (Spanish), 12 December 2012
Over the past 18 months, one of the microfinance sector’s largest and most prominent funds, Blue Orchard’s Dexia Micro-Credit Fund (recently renamed Blue Orchard Microfinance Fund), saw a major outflow of investor capital, with some $268 million or nearly 50% of the fund’s peak value having been redeemed. The scale of these outflows is unprecedented in the sector. For years, investment capital largely flowed one way: in. The exit doors were there, but rarely used. That is no longer the case. The pioneer of the microfinance investment industry has now crossed another milestone in the industry’s development.
Like Dexia, many microfinance funds (commonly referred to as Microfinance Investment Vehicles or MIVs) are subject to unscheduled redemptions. For those funds, their investors, as well as others in the sector, BlueOrchard’s experience holds important lessons, and it is those lessons that this article hopes to convey. more →
MicrofinanceFocus, 28 March 2012
Last month, the headlines of the world’s papers read déjà vu. “Suicides in India linked to microfinance debt.” “SKS Microfinance implicated in farmer suicides.” The headlines may have differed, but the article was one and the same, penned by Erika Kinetz of the Associated Press. SKS was appalled, calling the report “libelous” and “scurrilous.”
For what it’s worth, the damage has been minimal. SKS stock slid 4.25% on the day of the article, but recovered within a few days of trading. The slide shows little distinction from its already volatile trading pattern (Figure 1). Of course bad news can also cause lenders and investors to take a second look, or simply slow things down. One MFI manager told me of exactly this very reaction on the part of an Indian bank in the immediate days after the AP article. But the story got relatively little press in India, and no follow-up of significance. By now it’s reasonable to say that the microfinance sector in India can breathe a sigh of relief. Seeing bad news get swept back under the carpet can be quite satisfying, even if the stink remains. more →
MicrofinanceFocus, 27 December 2011
On October 14, 2010, the Andhra Pradesh government issued an Ordinance that effectively shut down the microfinance market in the state. That shutdown continues to this day, with collections at negligible levels. It’s clear that the AP microfinance market is dead and will not recover for years.
Important as AP has been to India microfinance, it is not everything. Despite the year-long crisis, repayment rates in other states remain strong. And though AP-oriented MFIs have been seriously or even terminally wounded, others have remained unscathed.
Despite this, in the intervening period funding for MFIs – largely dependent on a handful of Indian state and commercial banks – has persisted in a state of severe liquidity deficit. more →
Co-authored with Karuna Krishnaswamy; MicrofinanceFocus, 25 January 2011
Hyderabad has gone missing. And it seems nobody has noticed the absence. While academics and the press were scouring the villages of Andhra Pradesh in search of over-indebted borrowers and debt-induced suicides, and while politicians in the villages and government halls were busy protecting their beloved SHGs (and the vote banks they provide), Hyderabad up and vanished, leaving apparently no trace of its prior existence.
Naturally, we are referring not to the physical city, but to its microfinance market, as well as those of other cities in Andhra Pradesh. Make no mistake – microfinance lending in urban AP has been widespread, outpacing even that of the countryside. And yet, there seems to be little recognition of its existence and how it has been affected by the current crisis. more →
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