Via The Economist

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IN NORMAL TIMES, says Samir Shah, of Dvara Trust, a private firm based in Chennai in southern India that helps bring financial services to the rural poor, default rates on the small loans it promotes are about 5%. But these days, more than 90% of borrowers are unable to repay the loans even if they want to and have the money. Traditional microfinance is a personal business. Repayment is in cash to an agent who visits. Like so much of the world, India has been in lockdown, and no exception is made for debt-collectors. But the banks and investors from whom Dvara’s lenders get their funds do expect to be repaid. The lenders are in a bind. Most of these microfinance institutions (MFIs) have a cushion of a couple of months’ cash. When that is exhausted, their future will be in jeopardy.

A similar story can be heard around the world, with potentially devastating implications for the small businesses on which so many of the world’s poor will rely for employment when economies unfreeze. FINCA Impact Finance, a Washington, DC-based network of microfinance lenders in 20 countries, conducted a survey in one of them, Uganda, and found that 70% of the customers surveyed were unable to carry on their businesses and 70% had no emergency savings. Trevor Gosling, of Lulalend, a lender in South Africa, which imposed one of the world’s strictest lockdowns, says that more than 85% of small businesses have been unable to operate there. Even under the slightly more relaxed regime that began on May 1st, 80% will have to stay closed. In Bolivia, Banco Solidario, a commercial bank dedicated to small-business lending, says that 70-80% of borrowers have stopped operations. The microfinance arm of BRAC, a vast Bangladeshi NGO, says that in all seven countries in Africa and Asia where it works it has suspended lending, collections and charging interest.

“The financial engine for half the world’s jobs is about to seize up,” argues Michael Schlein of Accion, a Massachusetts-based financial-inclusion non-profit group, in a blog post. The World Bank estimates that small concerns (or “MSMEs”—micro, small and medium-sized enterprises) represent about 90% of businesses and more than 50% of employment worldwide. Many of these, especially the “micro” ones, are excluded from conventional sources of finance in the formal banking system. Recent years have seen a big growth in institutions designed to serve this large unbanked segment—charitable and for-profit MFIs, which have around 140m customers globally; “fintechs”, using digital technology to reach the poor; and a wide range of other “non-bank financial companies”.

They have made great progress. The most recent edition of an index of financial inclusion published by the World Bank, for 2017, estimated that the number of the “unbanked” worldwide had fallen to 1.7bn, down from 2bn in 2014 and 2.5bn in 2011. Now, says Mr Schlein, “decades of progress on reducing poverty and increasing financial inclusion—all of that is at risk.”

Many MFIs have had no money coming in for weeks. Investors and lenders are understandably wary of them. Qasif Shahid, of Finja, a fintech based in Lahore, Pakistan, says that the venture capitalists to whom his industry looks for equity funding are waiting to see which firms survive the downturn, hoping that valuations will fall to bargain levels. Meanwhile the lenders’ customers are often unable to pay them back. Many have granted their borrowers holidays on payments of principal and interest. Some have done this at their own initiative. Grassland Finance, an Accion-affiliated microfinance lender in China, for example, did so early in China’s lockdown, back in January. Of Lulalend’s customers, some 60% have restructured their debts.

Sometimes, as with Dvara’s microfinance lenders in India, the holiday is enforced by circumstances, and sometimes encouraged by regulators. Dozens of countries’ central banks—including those of Angola, Bolivia, Egypt, Jordan and Sri Lanka—have granted discretionary or mandatory moratoriums to borrowers affected by the lockdowns, enabling lenders to defer payments, and often freezing borrowers’ credit ratings at pre-lockdown levels.

The Reserve Bank of India’s (RBI) moratorium, announced in a circular on March 27th, covered a three-month period from March 1st. The RBI has also injected liquidity into the system. But Dvara’s Mr Shah says the money is not reaching the firms that lend to India’s poorest. Rather, it has “ended up going to the cash-rich”. The transmission mechanism is the banking system, and banks remain cautious about committing capital to the poor. Many have balance-sheets overladen anyway with non-performing loans. On April 30th the Supreme Court intervened, to instruct the RBI to ensure that the relief promised in its circular really is extended to borrowers. Mr Shah points out the irony: in a financial system moth-eaten by bad debts, India’s poor have hitherto proved themselves very good risks—witness the microfinance lenders’ very low default rates.

Few doubt, however, that those rates are going to rise. A recent telephone survey by Dvara of 600,000 microfinance borrowers found that 56% would repay their loans if they could. In present circumstances that sounds quite a lot. But it implies a default rate that would, if sustained, be terminal for many lenders.

One way in which it could be reduced is by a greater use of mobile-money accounts to service loans on a phone. Last year the number of such accounts worldwide passed 1bn. Mr Shah sees as one silver lining in this crisis that more Indian borrowers are willing to use one. Mr Shahid of Finja in Pakistan, which operates entirely digitally, has seen a big increase in one of its core businesses—providing supply-chain finance to the myriad of small local shops that have been a vital lifeline in so many countries during the lockdown. The only lenders left, he says, are the digital ones. The digitisation of finance, expected over the next 10-15 years, “will now take place over six months.”

Mobile money can solve a lot of problems. But it cannot conjure an oasis of creditworthy borrowers and liquid lenders out of a pandemic desert. Around the world there are fears that poor borrowers are going to find themselves in an ever worse predicament for three reasons. The first and biggest is that the loss of livelihoods is going to worsen poverty. An estimate by economists at the World Bank has concluded that the pandemic is likely to cause the first increase in global poverty since the Asian financial crisis in 1997-98. The share of the world’s population living on less than $1.90 per day is projected to increase from 8.2% in 2019 to 8.6% in 2020, or from 632m people to 665m.

The second is that the gap in the financial system that has been filled by non-bank lenders might widen again, as some of them go out of business. Shameran Abed, boss of BRAC’s microfinance arm, takes heart from its experience in Liberia and Sierra Leone after the Ebola crisis forced it to stop operations for seven months in 2014-15. Remarkably, it got most of its money back. “Our clients prove to us time and again that they are extremely resilient,” he says. “That is something we should bank on.”

But third, the progress towards financial inclusion may also be reversed. Some of those brought into the financial system in recent years may find themselves cast out again. In India and many other countries, credit ratings are frozen. But, when lockdowns are lifted, some borrowers will inevitably face downgrades. Ioann Fainsilber, of Pintek, a lender in Indonesia, says it avoids reporting defaulters to the country’s credit bureaus unless it concludes they are trying it on—using the pandemic as an excuse. A common fear is that the central-bank-backed payment holidays will pollute the lending culture, and slacken payment discipline.

But with governments everywhere preoccupied with public-health risks, and with rich countries staring aghast at the prospect of deep and perhaps protracted recessions, the financial interests of the world’s poorest are not receiving enough attention. “Fires are burning all around the world,” says Andrée Simon, FINCA Impact Finance’s chief executive. “It’s a moment to think about the impact of extreme poverty and extreme inequality. These bills always come due.”

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