Achieving financing inclusion has been earmarked as one of the key pillars needed to achieve the Sustainable Development Goals (SDGs).
This is important in view of that fact that access to finance can be used effectively to improve the economic livelihoods of poor and low-income population. Developing countries including Ghana have developed and implemented policies aimed at achieving financial inclusion. Financial inclusion has its foundation or principles based on microfinance methodology which is mostly delivered by Microfinance Institutions (MFIs).
Microfinance over the past years has clearly proven that financial access to the poor and low-income earners can be a sustainable enterprise and it can also help contribute to improving the livelihoods of poor clients in a sustainable way. These and other experiences have strengthened the call to use finance as a tool for poverty reduction.
The COVID-19 pandemic which was initially thought of as a medical problem has turned out to have economic implications that has negatively disrupted most economies around the globe with developing economies being hardest hit.
Impact of COVID-19 on MFI
This development has also affected the operations of Financial Institutions (FIs), especially microfinance institutions. Generally, money transfer services to poor households was negatively affected. There is also a reduction in loans extended by FIs to clients since most clients have their business disrupted because of lockdowns.
The financial sector is projecting that there will be an increase in Non-Performing Loans (NPLs) with a projected reduction in profitability. For instance, the profitability of the Ghanaian banking sector which grew by 36.4% during the first quarter of 2019, grew by 15.5% in June 2020 (Daily Graphic,2020). This same trend can be seen in the microfinance institutions.
These are institutions are more specialized in dealing with low income clients within the informal sector of the economy which are heavily affected as a result of the pandemic. These observations are confirmed in the results of an exercise on the effect of the COVID-19 pandemic on NBFIs which was compiled by CDC Consult for GHAMFIN (2020). The report indicates that overall savings declined by 5 % between March and April 20. Similarly, total outstanding loans dropped by 7% and about 58% of the institutions had rescheduled loans to their customers in view of the COVID -19 challenges.
Post COVID will set a new challenge for financial inclusion and generally for financial service delivery. The pandemic and it challenges have compelled financial institutions including MFIs to implement systems that will help them to protect their loans books and maintain the needed profitability.
Considering the fact that finance is an important tool for reviving businesses that have been disrupted by the pandemic, the inability of the MFIs to provide loans to reboot micro businesses can worsen the plight of most poor household especially on the back of World Bank’s projection that the COVID-19 pandemic and the associated economic crises could push between 71 and 100 million people into extreme poverty. The fact therefore is that developing economies like Ghana are more likely to see an increase in the number of poor people if the right systems are not put in place to solve or prevent this.
The big question that must engage the attention of sector players including governments should be, how can financial institutions and financial systems reorganize their operations to help revamp businesses and the economies of households to prevent economic hardships especially for SMEs which have been largely affected.
These are some recommendations for financial institutions delivery microfinance. These recommendation are based on observing the operations of some MFIs in Ghana during this pandemic.
Financial institutions must review their systems and operations.
The whole agenda for financial inclusion has been to banked the unbanked and provide financial and non-financial products and services to an affordable cost. The overall aim is to use the relationships with the financial institutions to provide clients with the opportunity to improve their livelihoods by taking quality financial decisions.
With the onset of the pandemic most clients have lost their savings due to the lockdowns and economic hardship accompanying the lockdowns. The primary need of most clients is about how to economically survive since most of them have lost their source of livelihoods which is solely dependent their micro businesses. To support the livelihoods of the micro clients in sustainable manner will require the provision of credits to clients for investing in their enterprises. This can be accompanied with financial literacy and the provision of business management support.
To revive the informal businesses affected by Covid-19, Financial Institutions (FIs)cannot only depend on the historical performance of their clients. Officials of FIs must approach post COVID financing with balancing past knowledge with innovative approaches that will provide complex range of financial services; from insurance, sanitation, assets financing, business support, etc. to ensure a balance of profitability and impact
There is the need for FIs to effectively develop systems that will enable them broaden their scope of service. For instance, MFIs must consider developing products in the agricultural sector. This is because agriculture presents a great deal of opportunity to consider as a means to revamp the informal sector considering the fact that Agriculture employs majority of the low income and poor clients and for the fact that Covid-19 has further open up the market for agricultural products. Food from all cases is one of the most essential products in this pandemic since the demand for food by for households was able to push up prices of some foodstuffs.
Post COVID financing to enterprises can’t be the usual way so FIs must start reviewing their own business models to make sure they understand and take on effectively the opportunities and challenges ahead. FI must develop lending instruments that are simple and fast to disburse, rather than keeping to systems or products that requires time to set up, approve, and implement.
Seek and share Market Information
Information has been critical in the management of the COVID-19. Financial Institutions delivery microfinance should not limit information sharing on the management of COVID-19 to their staff. They must share information on the COVID -19 including information regarding how the markets for micro business is changing due to the COVID-19. This is important since the pandemic has affected most businesses which most of the clients are involved. Clients will need information on what to invest in to ensure improved sales as well as effective utilization of the loans they contract. They also need to know where there will be markets for their produces. Clients must be aware of the complexities of engaging in certain kind of businesses due to the intensity of the COVID-19 on that business. Some businesses will take time to revive while some like food and other essentials are faster to revive.
MFIs must understand the market and support their clients to take decisions that will enable them take advantage of the opportunities in the market brought about by the pandemic.
Adopt ‘self-appraisals’ by Clients
For clients that are seeking to have their businesses refinanced so as to reboot their micro enterprises, there is the need for the MFIs to engage them adequately. They must be informed on the current risk that businesses are facing. This is to help the clients take a second look at their loan request so they can ascertain if they really need the loan and if they do, how much in their own estimate and with all the information available will they need so as to avoid client over indebtedness while trying to reboot the micro economy.
Practically, most clients who are fully aware of the general happenings are inclined to take quality decision about their loans so as to avoid over indebtedness. Generally, from observations and interactions most clients themselves are shying away from loans because of the effects of the pandemic. This is seen in a general reduction in loan disbursements since the start of this pandemic. MFIs must encourage them to come forward for loans because they need the loans to revive their businesses which they must be helped with is to ensure that they take the right amount of loans for the right purpose to support their ability to repay the loans.
Deploy group loans
The group loan methodology can be useful for loans management in this pandemic. Instead of using large loan groups, depend more on small groups. The group methodology provides a form of guarantee for the group members in the absence of traditional collaterals. It is important to note that the pandemic may have further affected collateral systems for poor households because some of them may have sold the little available assets to support their households. For most of these client’s social collaterals are the remaining collaterals that they still can depend on to access loans.
In view of the rising risk default arising out of the pandemic, it will be important for MFIs to also look at a way to improve on the efficiency of the group methodology. MFIs can introduce a new level of ‘guarantee’ to provide additional supervision for the loan provided to groups within their catchment areas. MFIs can ask the groups to come with an opinion leader in the community or market to co-sign the offer letter with the group leaders.
The responsibility of the opinion leader is to bring his influence on bear to ensure repayment. Additionally, getting opinion members in the community to be part of the loan arrangement can help to make the groups more responsible since loan monitoring will come from both the bank and the opinion leader. Remember there is high risk of default so as much as possible ensure that there are systems in place to improve the performance of the loan.
Most businesses that have been affected and this has also affected the consumption abilities of the business holders. Clients who take loan to revive their businesses will still be depending on the weak business to support their consumption patten. This reality is likely to negatively affect the cash outflow of clients and therefore can negatively affect the repayment of loans if they are not well structured. MFIs must therefore factor these things into structuring the loans to help record a high loan repayment.
This they can do by extending repayment beyond the normal 12 weeks to lessen the effect of repayment on the clients. Remember that the facility that has been contracted is to help revive the client’s business and as well support consumption. When the facility is well extended, the weekly or monthly repayment will be reduced to somehow fit into the clients cashflow in a way to support loan repayment.
Financial support – Covid-19
Apart from the review of systems, innovation and the recommendation put forth, FI institutions need the financial muscles to be able to first of all invest in their systems and also to invest in their clients by the provision of loans to these clients. Most FIs are responding to the pandemic by holding on to making loans to their clients or have increased their loan assessment criteria raising the already high bar for accessing credit to their low-income clients.
Additionally, deposits mobilization is expected to fall until clients are able to rebuild their businesses. This therefore means that on-lending funds for most MFIs will challenged meaning that these MFIs will or may need additional borrowing or funds to be able to meet he expected loan demands by customers to reboot their operations.
Access to finance is one of the critical elements of financial inclusion. While the pandemic disrupts economic activities, the role of credits for rebooting micro economic activities cannot be down played. MFIs has a critical role in supporting clients especially in the informal sector to revive their business operations. These FIs can provide the needed financial and non-financial services which are two important ingredients needed by the small business owners for the management of their businesses. MFIs and all key stakeholders must map out new processes to address the challenges brought about by the covid-19. Business must survive to provide business opportunities to MFIs and MFIs must be repositioned to ensure that businesses are revived and become sustainable.