COVID-19 has been a global pandemic for several months now, with no end in sight, and the virus is wreaking havoc on economic and health systems. Small, open economies such as those in English-speaking Caribbean have been the hardest hit, disproportionately relative to the small number of confirmed cases -- just over 1000 cases and less than 50 deaths as of May 25th. How can the microfinance sector in the Caribbean navigate this crisis and seize the opportunity to promote the further development of the industry?
COVID19 comes in the wake of a series of hurricanes decimating the economies of several countries in the region, most recently in the Bahamas. The Inter-American Development Bank predicts an extremely bleak period ahead for the Caribbean, and certain reversal of the progress made by countries such as Jamaica in terms of external debt reduction and GDP growth.
As is the case elsewhere, Caribbean countries are working on two fronts to confront the crisis in real time, with no playbook. First, working to contain the virus, with stay-at-home orders, curfews and closing national borders, while at the same time working to save the economy. The decision of Caribbean governments to suddenly close national borders at the end of March has had a devastating impact on micro and small businesses, particularly those either directly or indirectly linked to the tourism industry, which accounts for 30% to 40% of GDP in some countries. Other businesses have been negatively affected by falling oil prices (Trinidad, Guyana) and abruptly interrupted supply chains. Both the scope and speed of the economic decline is unprecedented. In response, countries have unveiled various economic stimulus packages – including tax payment deferrals, low interest loans and grants -- to keep businesses afloat, and help maintain employment -- coupled in some cases with specific assistance to vulnerable populations.
Microfinance institutions (MFIs) in the Caribbean have been blindsided as well in this pandemic, more so because they are the ones who serve micro and small businesses. Not only were they unprepared for working remotely, but they were also caught off guard by the massive impact on liquidity and portfolio quality due to sudden loss of livelihoods of so many clients. In this economic emergency, microfinance institutions are already assessing client needs and providing loan payment deferrals on a case-by-case basis. Governments in the region have not provided relief for the sector so far, except in Jamaica, where the Development Bank of Jamaica, as an apex lender, has provided a 6-month moratorium on loan principal to the microfinance institutions in its portfolio. Some pay-day microfinance lenders say they are facing bankruptcy and are now willing to drastically reduce their rates to single digits in exchange for access to “cheap” Government funds.
Whereas many in the sector have been slow to embrace industry international best practices, such as stringent and proactive loan provisioning under IFRS9 rules, there is now the stark realization that it can no longer be business as usual. I made precisely this point in a previous blog, stressing the fact that the microfinance institutions in the region needed to adopt new business models in order to be competitive. COVID19 and its impact has made the need to pivot to new approaches to the microfinance business even more relevant and urgent.
As challenging as things are now, hurricane season begins in a few weeks and with that a potentially new set of risks. Therefore, as tempting as it might be to focus only on immediate and short-term emergency needs, it is equally critical now to consider how to build resilience both for survival and to better serve clients over the long-term. What is key is to be much better prepared for the next crisis, which will come – It is only a matter of time. Here is a suggested approach.
First, Assess the Situation
Microfinance institutions should conduct a detailed assessment, taking a systematic approach to analyzing issues such as liquidity, portfolio quality, current operations, workforce, customer service and a “deep dive” into both present and future risks facing them. This will require feedback from key stakeholders, starting with clients, and “what if” scenario planning. The Social Performance Task Force, the ILO, and OikoCredit, have already developed free tools to conduct these analyses.
If this assessment is done in a structured way, this can be an important first step in embedding risk management and business continuity as critical functions in the MFI organizational structure. This is not now the norm in Caribbean microfinance, and while an international best practice, it is an ongoing challenge for MFIs in other parts of the world as well.
Second, Articulate and Develop A Plan
While no institution can ever be fully prepared to face a crisis, COVID19 has highlighted some extreme vulnerabilities in the way MFIs do business and the need to have both business continuity and risk mitigation plans in place, to face whatever the “new normal” will be. There is information readily available to provide guidance in this regard. In formulating plans, based on the detailed assessments above, the following actions should be taken into account:
Assign a risk manager/risk team to lead the effort going forward;
Take a client-centric approach, which will increase the bottom line over the long-term;
Mainstream the use of technology as an enabler – “going digital” as a key ingredient in business continuity, enabling seamless remote work and operational efficiency – this is critical, as COVID has shown;
Promote a digital culture – including staff, board of directors and clients, and mainstream digital financial education;
Develop a robust customer management system to communicate with clients on an ongoing basis (especially important in a crisis) – which will help to maintain customer loyalty and ultimately improve the bottom line;
Design training programs – for management, staff and the board - to promote the importance of risk management in all departments;
Identify a variety of resources available to support resilience-building activities that need to be undertaken – these include funding, possible collaborations, as well as local, regional and international partnerships, and low-cost options such as knowledge exchanges;
Foster and encourage creative solutions and “outside the box” thinking throughout the organization, to not only increase efficiency, and reduce costs, but to adjust to the new reality.
The final step is to develop and implement the activities identified as necessary to improve preparedness for the next crisis, and to help to navigate the current one. It is clear that for foreseeable future, it will be a challenging time for the Caribbean microfinance sector. It will be slow going in terms of rebuilding, improving liquidity and PAR levels, in a situation of uncertainty. Smaller, weaker institutions could go out of business. Nevertheless, MFIs that see opportunities, even in this current environment, and take a longer-term view, can “build back better” and emerge from this crisis and its aftermath, in a stronger position.
Local and regional networks (e.g. the Jamaica Microfinancing Association (JaMFA), the Jamaica Association for Microfinancing (JamFIN), the Caribbean Microfinance Alliance (CMFA), the Caribbean Confederation of Credit Unions (CCCU)and credit union leagues in each country, can and must play a key role in assisting MFIs in this effort. Organizations such as these are vital actors in the microfinance eco-system in the region. They can support their members by facilitating activities such as low-cost group training, as well as access to best practices, software solutions, digital financial education, and linkages to external networks and organizations for knowledge-sharing and collaboration.
Ultimately, all these stakeholders in the eco-system should be working together for the strengthening and growth of the microfinance sector in the region. COVID-19 has now provided this opportunity.