Persistent credit risk : a threat to the solvency of microfinance institutions ?

07 June 2021 Covid-19 crisis
6th round of survey

ADA, Inpulse and the Grameen Crédit Agricole Foundation have joined forces to monitor and analyse the effects of the Covid-19 crisis on their partner microfinance institutions around the world on a quarterly basis. This April 2021 survey was conducted by ADA and the Grameen Crédit Agricole Foundation, with Inpulse joining the initiative every other month.

This monitoring is carried out every quarter since 2021, in order to have a better vision of the evolution of the situation. Through this regular and in-depth analysis, we hope to contribute, at our level, to the construction of strategies and solutions tailored to the needs of our partners, as well as to the diffusion and exchange of information between the different players in the sector.

Following the fifth round of surveys in December which gathered the views of 74 MFIs around the world, ADA and the Grameen Crédit Agricole Foundation present the results of a sixth joint round of surveys.

Responses were collected in the second half of April 2021 from 87 microfinance institutions (MFIs) located in 47 countries in Eastern Europe and Central Asia (EECA-25%), Sub-Saharan Africa (SSA-29%), Latin America and the Caribbean (LAC-25%), South and Southeast Asia (SSEA-13%) and the Middle East and North Africa (MENA-8%).

Whereas the general improvement in the local contexts relating to COVID-19 enables microfinance institutions to conduct their activities better, our latest survey shows that MFIs nevertheless had a lot of difficulties in reaching their development goals in the first quarter of 2021. The reasons cited have mainly to do with the difficulties encountered by the customers of the MFIs. Such customers are reluctant to commit to new loans, and if they do, it is for smaller amounts than in the past. At the same time, their risk profile has deteriorated due to the crisis and the MFIs will find it more difficult to finance them

This general trend of increasing risk has led to a decline in the quality of the portfolio of the MFIs. In 2020, it has ultimately been reflected in the profit and loss accounts of institutions with an increase in provisioning expenses. This is likely to be the case again this year, with additional reserves but also loan write-offs.

In fact, the operations of the MFIs have been reduced or slowed down, generally with a decrease in the level of their equity capital. In point of fact, one in two MFIs, irrespective of size, indicates a need for capital in 2021. Two trends emerge: the MFIs are counting on their current shareholders to cover the losses linked to the crisis. Conversely, international investors are expected to support their development as of this year.