Abstract
The COVID-19 pandemic threatens lives and livelihoods, and, with that, has created immediate challenges for institutions that serve affected communities. We focus on implications for local microfinance institutions in Pakistan, a country with a mature microfinance sector, serving a large number of households. The institutions serve populations poorly-served by traditional commercial banks, helping customers invest in microenterprises, save, and maintain liquidity. We report results from ‘rapid response’ phone surveys of about 1,000 microenterprise owners, a survey of about 200 microfinance loan officers, and interviews with regulators and senior representatives of microfinance institutions. We ran these surveys starting about a week after the country went into lockdown to prevent the spread of the novel coronavirus. We find that, on average, week-on-week sales and household income both fell by about 90%. Households’ primary immediate concern in early April became how to secure food. As a result, 70% of the sample of current microfinance borrowers reported that they could not repay their loans; loan officers anticipated a repayment rate of just 34% in April 2020. We build from the results to argue that COVID-19 represents a crisis for microfinance in low-income communities. It is also a chance to consider the future of microfinance, and we suggest insights for policy reform.
Highlights
The novel coronavirus presents a grave threat to human health
We show how the challenges faced by households translate into challenges faced by the institutions that serve them, drawing on interviews with regulators, with the senior staff of microfinance institutions, and with loan officers
About 75% of funds for non-bank financial companies’ (NBFCs) come from debt, provided mainly from the apex funding agency, the Pakistan Microfinance Investment Company (PMIC); owing to strict guarantee requirements and currency risks, local commercial banks loans and international loans comprise a relatively small proportion of total debt in the sector (Pakistan Microfinance Network, 2019, 2020; Basharat and Sheikh, 2019)
Summary
The number of active borrowers more than doubled from 2014 to 2019, increasing from 2.8 million in 2014 to 7.3 million in 2019;11 over the same time period, the gross loan portfolio increased by 400%, from $400 million in 2014 to $2 billion in 2019 (Pakistan Microfinance Network, 2019, 2020). MFBs serve 49% of active borrowers, and are responsible for about 70% of the gross loan portfolio; about 80% of the total outreach of the sector can be attributed to a combination of eight MFBs and two NBFCs. MFBs’ primary source of funding is public deposits, with borrowing constituting less than 10% (borrowing is mostly from local banks and development finance institutions). About 75% of funds for NBFCs come from debt, provided mainly from the apex funding agency, the Pakistan Microfinance Investment Company (PMIC); owing to strict guarantee requirements and currency risks, local commercial banks loans and international loans comprise a relatively small proportion of total debt in the sector (Pakistan Microfinance Network, 2019, 2020; Basharat and Sheikh, 2019).
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