As the covid-19 lockdowns take their toll on the Pakistani economy, microfinance in the country has recorded a 90% decline in weekly microenterprise sales on average. The same amount of reduction has been registered in the average weekly household income.
A research study on covid-19 and the future of microfinance in Pakistan has revealed that local microfinance clients are unable to run their businesses during lockdowns and expect a sharp decline in their earnings.
While talking to MIT Technology Review, one of the authors of the study, Farah Said, outlines that many of microenterprise clients are most worried whether they will be able to put food on the table or not due to a decrease in income, and reduction in their purchasing power.
One of her co-authors, Jonathan Morduch says that some of the respondents of their study had experienced a 100% decline in their income. “There are cascades of effects that go from microenterprise owners to microfinance institutions and so on,” he adds.
According to recent estimates, over 7.1 million families in Pakistan are recipients of microfinance loans with an overall portfolio of Rs. 392 billion. Microfinance is also one of the most vulnerable sectors of society. Around 80% of Pakistan’s urban workforce is employed by micro and small enterprises that rely on either informal credit or credit through microfinance institutions (MFIs).
There are two types of microfinance institutions in Pakistan: deposit-taking institutions regulated by the State Bank of Pakistan (SBP), commonly referred to as microfinance banks (MFB), and the institutions which cannot take deposits and are regulated by Securities and Exchange Commission of Pakistan (SECP), commonly referred to as Non-Banking Microfinance Companies (NBMFCs). Both these institutions share a 50-50 share in the microfinance market in Pakistan.
Deferred loan payments
The government lifted nationwide lockdowns on May 9. The State Bank of Pakistan (SBP) and SECP issued guidelines announcing a relaxation for the citizens. The circulars reported the restructuring or deferred repayment of loans for the principal amount of small and domestic loans and subsidized payroll loans for a period of one year. This provided protection to the MFBs and facilitation to their clients.
While this was a glad tiding for the small and medium business owners, it means that the Non-Banking Microfinance Companies (NBMFCs) are left to their own device. Most of these institutions are dependent on the repayment of their loans to give out more loans, pay their investors, or pay back loans they have borrowed from commercial banks or other organizations.
With the coronavirus pandemic, many borrowers are unable to earn enough money to pay back their loans, which causes a liquidity crunch. According to the study on the microfinance sector, loan officers fear that their repayment rates are likely to fall from about 98% to about 35%. This, in turn, raises concerns for the commercial institutions about lending to microfinance organizations as a higher liability is involved and creates a crisis for the NBMFIs.
“The microfinance banks are in a better position because they are deposit funded so they have access to deposits and liquidity is not so much of a problem for them,” M. Mudassar Aqil, the CEO of Telenor Microfinance Bank, tells MIT Technology Review Pakistan.
According to Farah Said, the lack of liquidity in the NBMFCs could mean that they would not be able to survive in the post-pandemic world. After the lockdown has been lifted, many microenterprise owners might need more loans due to lack of demand in their business, but will find that the usual institutions are no longer able to give them any loans.
Lack of support
Experts highlight a lack of support to the microfinance sector by the government and call for action to be taken. Aqil claims that the recovery of the economy depends on life support from the government which has not arrived.
According to him, no relief has been provided by the government, for the micro and small enterprises, other than this regulatory relaxation which is more of an accounting concession, “not real money in anyone’s pocket.” Said highlights that the microfinance sector employs millions of people and the lack of support is concerning. “It is not being catered to in any of the social assistance programs,” she explains.
The Benazir Income Support Program (BISP) targets people with a poverty score of less than 16.17, whereas MFIs usually target people with poverty scores of 35 and above. Even with Ehsaas Programmes, the people being facilitated have a poverty score of up to 20. The microfinance borrowers do not qualify for these programs and cannot get any other benefits provided by the government as they are self-employed.
In the journey to a post-pandemic thriving economy, public health, and economic policies have crucial roles to play. There will be increased risk involved in giving out new loans as well.
“The psychology of the small borrower is a big factor,” Aqil underlines, adding that “there is a misconception among the low-income entrepreneurs and borrowers that there is such a big calamity in the country and the government has stepped in, so we don’t have to pay back our loans. The government is telling them that you don’t even have to pay electricity bills and nobody can come and harass you for this, that, or the other thing”.
Aqil says that all of these regulations apply to old loans but the MFIs are reluctant to give new loans as well because they fear that the borrowers will treat them the same way.
Said emphasizes that even as lockdowns end and businesses resume, they might not be able to have the same system of supply and demand. They might not have as many customers and the supply of materials may be impacted, the cost of production will increase, and the employees will have to be called back from their villages. These businesses are being squeezed from both sides, she maintains, as the cost of raw material is higher and the income of the customers has reduced, adversely impacting the demand.
“It is essential to ensure that microfinance institutions are provided for and have sufficient resources, because these are the organizations that serve millions of people in poor communities across Pakistan,” says Murdoch.
Experts recommend that policies that would effectively solve the liquidity crisis are the need of the hour. According to Aqil, two steps of action are required. The first is liquidity which is needed by everyone. “A lot of these people can, in fact, get back on their feet when economic activity resumes but a lot of them will have cash flow problems because the entire cycle will be disrupted,” he says.
The MFIs need liquidity so they can lend to the borrowers and the borrowers need liquidity so they can run their businesses. The other thing required is the risk guarantee to cover the loan loss risk by the small borrower. This will free up the MFIs to underwrite the loans that need to be given. It is feared that if everyone becomes conservative these businesses will not be able to build up and run themselves.
Said commends the efforts of the government in allowing deferred payments and restructuring of loans but explains that a lot more is required in order to get the microfinance sector up and running after the lockdowns. She says that the effects of the pandemic will be fairly long-lasting and the economy cannot be expected to go back to normal within months.
Said also talks about the need to change the criteria to give out microfinance loans. She says that the same criteria as before could not be used to assess the riskiness of the business, because the situation in the entire economy had become inherently risky. For businesses, shifting strategies like offering deliveries and payment through digital platforms could be considered, although they come with their own set of problems.
Said indicates that some of the policies being put to work for SMEs should be extended to the microenterprises as well. “The entire liability of a loan should not fall on the MFI, and perhaps the State Bank and the government could share the risk,” she adds.