Persistent Credit Risk : a Threat to the Solvency of Microfinance Institutions ? | Article

MFC is one of the signatory organizations of the pledge, Report on COVID-19 and Lessons Learned. Our collaborating partners publish articles on the current developments.

ADA, Inpulse and the Grameen Crédit Agricole Foundation joined forces in 2020 to monitor and analyse the effects of the COVID-19 crisis on their partner microfinance institutions around the world. This monitoring was carried out periodically throughout 2020 in order to gain a better vision of the development of the crisis at the international level. We are extending this work this year on a quarterly basis. The conclusions set out in this article follow the first quarter of 2021. With this regular analysis, we hope to contribute, at our level, to the charting of strategies and solutions adapted to the needs of our partners, as well as to the dissemination and exchange of information by and between the different stakeholders in the sector.

In a nutshell

The results presented in the following pages come from the sixth survey (1) of the joint ADA, Inpulse and Grameen Crédit Agricole Foundation series. The responses from our partner microfinance institutions were collected in the second half of April 2021. The 87 institutions that responded are located in 47 countries in Eastern Europe and Central Asia (EECA-25%), Sub-Saharan Africa (SSA-29%), Latin America and the Caribbean (LAC-25%), South and Southeast Asia (SSEA-13%) and the Middle East and North Africa (MENA-8%) (2).

Whereas the general improvement in the local contexts relating to COVID-19 enables microfinance institutions to conduct their activities better, our latest survey shows that MFIs nevertheless had a lot of difficulties in reaching their development goals in the first quarter of 2021. The reasons cited have mainly to do with the difficulties encountered by the customers of the MFIs. Such customers are reluctant to commit to new loans, and if they do, it is for smaller amounts than in the past. At the same time, their risk profile has deteriorated due to the crisis and the MFIs will find it more difficult to finance them.

This general trend of increasing risk has led to a decline in the quality of the portfolio of the MFIs. In 2020, it has ultimately been reflected in the profit and loss accounts of institutions with an increase in provisioning expenses. This is likely to be the case again this year, with additional reserves but also loan write-offs.
In fact, the operations of the MFIs have been reduced or slowed down, generally with a decrease in the level of their equity capital. In point of fact, one in two MFIs, irrespective of size, indicates a need for capital in 2021. Two trends emerge: the MFIs are counting on their current shareholders to cover the losses linked to the crisis. Conversely, international investors are expected to support their development as of this year. The answers provided by our partners therefore underscore the need for recapitalization this year, which will involve all the players in the sector.

Read the whole article at Grameen Credit Agricole Foundation website