MFIs, COVID-19 & Digitalisation: How The Pandemic Affects The Microlending Industry
The COVID-19 pandemic has affected everything and everyone. The microfinance industry is no exception.
The thinking here is quite simple – with global economies coming to a halt due to lockdowns and safety measures, there is no liquidity and borrowers can’t repay lenders.
For the first time in history, we are witnessing a global crisis that it’s affecting both global capital markets and local economies down to the poorest neighbourhoods. Unlike prior global economic meltdowns like 2007/08 for example, the term global is more literal this time.
A survey by the Grameen Credit Agricole Foundation showed that:
- 59% (33 MFIs) of the surveyed MFIs mentioned that their activity was still not affected by the epidemic at the time
- 48% (27) of surveyed MFIs felt their clients are impacted by the coronavirus at the time of the survey, and 68% (38) of them think they will be in the near future.
The problems are obvious but what’s not obvious, are the solutions.
Is Microfinance Better Served By Going Digital?
Yes and no. The benefits of digitalisation are indisputable but this is not a case of not wanting to go digital but rather a question of whether you’re able to.
The entire premise of microfinance is built on the fact that it offers its services to a very particular part of the population. Microfinance borrowers are usually not the most tech-savvy. Actually, most of them are either illiterate or simply do not have access to the digital world.
That leaves MFIs in a precarious position. The pandemic has undoubtedly been the biggest driving force for digitisation in modern history. Businesses of all sizes and industries were essentially forced to adopt an online presence. For MFIs, things are not as simple. unfortunately.
Even if they are willing to bridge the gap with borrowers, that is a huge undertaking. Firstly, they will need to educate their target audience on the benefits of going digital and then educate them on how to actually use the digital version of their services.
Then you have the issue of trust. People have a tendency to not trust something new, something they are not 100% sure they understand or know how to use. MFIs would need the time to build that rapport and relationship with their clients.
Last but not least comes the big hurdle of technology. Online lending and what the microlending company of the future will look like are things we have previously analyzed on our blog not because we could foresee the pandemic, but simply because we could see the obvious signs in the industry.
COVID-19 just sped up the process of realizing that microlending and microfinance were in need of a digital revamp. Microfinancing companies are suddenly realizing that investing in technology is the only way they can navigate these tremulous waters.
When we talked about being on the cusp of an economic crisis earlier last year, a worldwide pandemic is not exactly what we had in mind but our head was definitely in the right place. The environment was such that one way or another, the bubble was about to burst.
Pandemic or no pandemic, microlending and technology are an inevitable marriage and it just remains to be seen how companies will react to it. The pandemic has created a situation where people are in dire need of the microlending services but can’t really access it or use it properly.
Regulation & Policy: Microlending Left Out Once Again
The pandemic was another glaring example of how microlending is not considered a part of the banking or finance system.
In most countries, regulators and central banks took quick steps to address the problems and ensure the stability of the traditionally regulated banking system, with MFIs being left out of these programmes such as access to a liquidity safeguard or borrowing windows.
The big role and significance of microcredit in modern society can’t be understated or denied. It’s about time that the industry is seen as a branch, as an extension of traditional banking services and not an outcast or a competitor.
Thankfully, there are some positive signs coming out of the pandemic.
The Consultative Group to Assist the Poor (CGAP) put together a framework for regulatory response, identifying these six key areas:
- Enable MFPs to operate safely
- Provide relief to microfinance clients
- Make additional liquidity available to MFPs
- Defer noncritical supervisory processes
- Restructure or liquidate troubled MFPs
- Think ahead to the challenges of the recovery, balancing urgent rescue against longer-term values such as legal certainty, risk-based regulation, and sustainability
These proposals are encouraging signs for what is to come for the industry. Hopefully, they propel the necessary changes in order for microlending to get the recognition it deserves.
The pandemic definitely shook up the microlending industry to its core. It’s a time that will either make or break an industry that has been on the rise for quite some time. Technology seems to the one component that will be the difference-maker.
Stay tuned as we will keep an eye on the developments and keep you updated.