COVID-19 continues to cause disruptions to not only the microfinance sector but local economy as a whole. Specifically to the microfinance sector, client businesses have already been affected by disruptions to supply chains and markets for goods/services arising from border closures, restriction of movement and closure of non-essential businesses.
As clients seek to cope with the pandemic, most have turned to using the capital of their businesses to meet short-term consumption needs. This has eroded the capital of their businesses and has led them to experience repayment challenges while others may completely go out of business.
For most clients served by MFIs, access to financial services has been restricted during the period of the pandemic due to the low level of digitization of the institutions that serve this client segment since such initiatives are often expensive and high risk for microfinance institutions.
These developments will result in many adverse impacts for the MFIs that may lead to business continuity problems.
- Safety and health of the employees, customers and their families
- Loss of productivity due to limited mobility and remote working of the employees
- Operational challenges due to restriction on traveling, curfews, and lock downs
- Loss of business by the clients as well as income losses for customers leading to repayment problems / higher PAR
- Fraud by clients / staff due to lack of controls
- Liquidity and solvency problems
- Breach of covenants / regulatory requirements.
ADA recently published guidelines for Microfinance Institutions (MFIs)/Financial Service Providers (FSPs) when preparing their own Business Continuity Plan in the Covid-19 pandemic crisis.
Given the fact that the virus spreads at an exponential speed it is important to act immediately and not to wait, because it takes time to take measures and it takes time before the effect of the measures can be seen. The following are recommended:
Setting Up a Crisis Management Committee
It is important to install a committee that manages the crisis situation and that focuses on the business continuity of the institution. Appoint a crisis manager for the overall coordination of the crisis and a communications manager in order to coordinate and streamline the internal and external communication
Analysis of Critical Activities
Not all activities are equally important. MFIs could make an analysis of critical activities (ACA) including critical resources. Identify critical members of management and staff across the organization to execute these activities and the necessary resources including IT and make connections available: laptops to work from home. Non noncritical activities should be stopped or postponed.
Analysis of Non-Financials and Financials
The COVID-19 outbreak is an external risk, there are very limited possibilities to take preventive measures.
Daily monitoring of the situation is therefore key.
• Credit risk – transaction risk: Although the PAR is much known as indicator for credit risk, it is a lagging indicator; it takes a while before changes are visible in the quality of the loan portfolio.
• Credit risk – portfolio risk: Make an analysis of the more vulnerable parts of the loan portfolio. Geographic: e.g. urban area might face a higher risk of spreading the virus than rural areas. Type of business: restaurants, bars, markets; business that is dependent on import. This type of business is more vulnerable due to the disruptions in the value chain
Maintaining a sufficient level of liquidity is THE key factor for business continuity. It is important to manage the liquidity before it is too late.