Microfinance services amid COVID-19 pandemic

The COVID-19 pandemic has given a second chance to all to revise their business model and way of thinking. Microfinance is no exception

By Navindra Liyanaarachchi 

Microfinance and MSMEs

Access to finance is key requirement of businesses. Out of them Micro, Small and Medium scale Enterprises (MSMEs) run their businesses mainly borrowed monies from banks and other financial institutions. 

Microfinance Institutions (MFIs) play important part in providing financial services to these MSMEs where the sector regard as backbone of the local economy. It is roughly estimated that 70% of Sri Lanka’s economy depends on MSMEs and large portion of the population rely on it for their employments and allied livelihoods.

This unprecedented global pandemic severely affects service delivery particularly in the Financial Services sector where MFIs face significant constraints due to their unique operational model and technological limitations. MFIs play a major role in financial inclusion of local economy. Microfinance itself is for people who are unable to access formal financial institutions such as banks and Non-Bank Financial Institutions (NBFIs). 

It is obvious that the current pandemic has considerably restricted the services to MSMEs, causing “double impact” in reviving their businesses. There is also a severe impact to MFIs as well, due to lowering recoveries, restricting disbursement and lesser access to capital funding.

MFIs regulation and current issues

Microfinance Act enacted back in 2016 regulates MFIs. Only few MFIs registered under the Central Bank of Sri Lanka (CBSL) as regulated MFIs. Further NGO-MFIs regulated under NGO Secretariat. Credit Unions (Co-operatives) regulated by Department of Co-operative Development. 

Due to various regulatory structures, MFI regulation is a complex and complicated process. There is no single point of regulating the sector. In most of the cases, credit unions are opted out from the sector but it is important to highlight that there are eight million co-operative members in the country most of them are members of credit unions such as thrift and credit co-operative societies and rural banks. The situation even further complicated due to cooperative subject being devolved into a provincial subject by the 13th Constitutional Amendment.

A large number of MFI companies operate as private or non-listed public companies excluding regulated environment. Therefore, these MFIs are not authorised to mobilise public deposits. In fact, some MFIs use alternative mechanisms to avoid regulatory barriers and mobilise funds from the public as their source of funding which is much easier to access than commercial loans or other funding sources.

Due to the pandemic, restricted interest income of these MFIs is causing problems in smooth operation. As a result, increasing Non-Performing Loans (NPLs) causing profitability of MFIs and depleted cash flows results in lay-offs. It is important to highlight that a significant number of employees rely on these MFIs. 

On the other hand, there are public funds also mobilised as “compulsory deposits/security deposits” from the borrowers. There is a probability of public fund swindles popping up. This leads to further increasing NPLs where borrowers try to avoid repayment even when they are capable of repayment.

Avoiding future catastrophe

It is necessary to maintain healthy and resilient financial sector for any country. It is important to act quickly to avoid collapsing MFIs amid COVID-19. Measures the sector applies now will largely support the sustainability of the MFI business whether it is regulated or not. Further, measures could be adopted focusing towards regulated microfinance environment.

Consolidation of regulatory framework: Current vague regulatory system need to be strengthened. CBSL, NGO Secretariat and Department of Co-operative Development should have a platform that gives clear directions with legal power to act upon non-compliant practitioners.

Public awareness: Public awareness is key in terms of financial literacy of the people about MFIs. Public forums should be organised using social media and other electronic media where people are more towards digital platforms.

Fin-tech solutions: Financial technology is the key across the financial services industry. Banks and NBFIs are more capable of adopting fin-tech solutions with adequate capital and technical expertise. It is very important to have proper systems and procedures through technologies, which will increase service delivery and enable better understanding of the financial position of MFIs. It will reduce the operational cost and will lead to achieving financial self-sufficiency for MFIs.

Availability of funds: MFIs need long-term capital funds as bulk funds to serve marginalised and needy MSMEs. MFIs participatory approaches are convenient to customers and credit plus services are an important part of their business model. If the Government and internal agencies provide low cost funding to MFIs, it could strengthen operations and enable them to provide value added services to their customers.

Safeguarding and improving the MFI business model

Microfinance business are regarded by some as a business of loan sharks. We need to realise the bitter truth that the sector itself should work towards improving its image. There are many MFIs serving quality service to their customers and there is a large portion of MSMEs that rely on MFI services, particularly in the rural context.

Therefore, it is necessary for regulators and practitioners to collaboratively work towards healthy microfinance services. The COVID-19 pandemic has given a second chance to all to revise their business model and way of thinking. Microfinance is no exception.

(The writer is a professional in the microfinance and development sector who has served as CEO/Director level in the sector.)