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Repercussions of COVID-19 on microfinance

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Microfinance refers to financial services provided to unemployed or low-income individuals or those groups who have no access to financial services. Microfinance mainly targets poor households or underprivileged women in order to empower them in society. The idea of microfinance evolved around mid-1970s, when renowned economist and Nobel prize-winner Mohammad Yuns and his graduate students at Chittagong University in Bangladesh began providing small loans to underprivileged villagers. It attracted worldwide attention and began to be implemented across the globe. At the moment more than 3700 microfinance institutions provide financial services to 206 million clients in more than 147 countries.
The mission of MFIs is to improve the lives of poverty-stricken clients specially woman in households and communities. Indeed, financial services are very important in reducing poverty and stabilizing economy. In Pakistan, impoverished households are facing liquidity constrained as majority of them live below or near the poverty line. Thus, such households find microfinance more attractive to finance their microenterprise because they get high returns by making investments. It is widely acknowledged that small businesses can play a key role in accomplishing sustainable growth in developing countries. This is, especially, true in Pakistan where 90% of companies are Small Medium Enterprises (SMEs), most of them operate in informal sectors. According to SMEDA, there are four types of microfinance institutions in Pakistan and these include Microfinance institutions, Rural Support Program (RSP), Non-Governmental Organizations (NGOs) and Commercial Financial Institution (CFI). Their main aim is to provide social benefits rather than profit.
In Pakistan microfinance sector serves 7.3 million low income households who live below or close to poverty line and half of the borrowers are women, with low income or assets blow some threshold level. Furthermore, these participants have no or very limited access to formal financial sectors because they have nothing to offers as a guarantee to commercial banks.
Undeniably, microfinance are facing many challenges and COVID-19 has accelerated the challenges for both the microfinance companies/organizations and the clients who need it most during the pandemic. In fact, COVID-19 could deprive millions of household from capital and access to other financial services and it requires prompt action from regulator, investors and other private and public institutions. Undoubtedly, without any action by the stakeholders, microfinance institutions could be damaged and will have adverse repercussions for all stakeholders.
According to a study business sales are declining and business owners are facing 90% decline in income owing to pandemic. However, women are being affected more by COVID-19 with 100% fall in income during lockdowns. About 90% of borrowers reported that they are facing food shortage and their primary concern is to get food. Unfortunately, majority of borrowers reported that they are unable to repay the loans they have already taken.
Furthermore, COVID-19 has prevented borrowers and microfinance companies to work closely together to earn income in the time of pandemic in the country. It is not only the clients who are experiencing challenges but also the MFIs and it is feared that if no repayments are made than microfinance institutions will collapse in near future.
Recently, World Health Organization along with developed nations and domestic stakeholders suggested for restoring lockdown in the countries where COVID-19 was spreading fast. This could further damage the microenterprises and the microfinance institutions in Pakistan. However, MFIs are expected to experience more unfavorable consequences because of COVID-19 in near future. As the Pakistani Minister for Health has claimed that COVID-19, most probably, will reach its peak in July, thus it is likely that microfinance institutions will encounter the challenges in near future as well.
As remedial measures, government and investors should consider introducing better risk sharing investments and the government should include small and medium enterprises loans under the Ehsaas program. They should provide them with cash to cope with current crisis. Moreover, regulators and donors should provide access to cash to the poor and state bank needs to play key role in helping MFIs and borrower. National and international financial organizations have come out to help poor countries in dealing with the crisis but ultimately it is the responsibility of stakeholders who to have to play key role in cop in with the challenges faced by Pakistan