Earlier this year, as all of us were coming to grips with COVID-19, 14 leading microfinance organizations came together to form the Microfinance Coalition to represent the voice of microfinance providers globally and take collective action. This group first introduced itself in May by way of a call to action blog series, published here and on FinDev Gateway, that targeted key stakeholders on issues essential to micro, small and medium enterprises and the financial institutions that serve them, and there have already been some positive responses in the two months since.
After an introductory post, the first call to action was released with a focus on the investor community. Shortly thereafter, this call was answered by the group of nine microfinance investment vehicles (MIVs) (which has now expanded to ten) that had previously issued a Memorandum of Understanding as a part of their own response to COVID-19. This group began to engage with the Microfinance Coalition to identify opportunities for collaboration, and although this engagement is still in its early stages, tangible benefits are already starting to emerge.
Broadly speaking, these benefits fall into the following three categories:
- Fostering increased transparency and trust
- Identifying specific issues on which to collaborate
- Amplifying our voice in engaging with other stakeholders
Increased Transparency and Trust
It’s important to recognize that while we’re all in this together, the situation is evolving rapidly, and visibility is limited. This can lead to misunderstandings and misperceptions that only serve to heighten the sense of risk. To counter this, open dialogue and information sharing are key, and that’s precisely what this engagement has allowed for. For example, a few members of the Coalition raised concerns about whether MFIs that proactively ask for handshake agreements or inquire about flexibility with covenants might compromise their ability to obtain new loans. The MIVs responded that to the contrary, MFIs that are transparent actually make it easier for the MIVs to work with them.
Another concern was whether sharing projections that include middle- or worst-case scenarios might backfire, and the MIVs maintained that information and thoughtful analysis provide much more assurance than the lack thereof.
Thanks to this dialogue, what has emerged is a venue for exchange that will help to facilitate an even more informed and coordinated response than would have been possible otherwise.
Collaborating on Specific Issues
Our initial conversations have already surfaced a number of items on which to collaborate, including the treatment of covenants, potential ways to de-risk lending, dealing with foreign exchange risk, and managing the legal costs for any restructurings that may become necessary. However, not surprisingly, one of the items that has gotten the most immediate attention is the need for a harmonized approach to the sharing of information, especially forward-looking information.
Given all the data collection efforts that are already afoot, there’s a clear recognition that the reporting burden must be kept to a minimum, and that any additional information sharing must be uniquely additive. Hence, there is a preference for projections or a package of forward-looking metrics that can be anonymized and aggregated to shed light on the potential impact that COVID-19 might have on overall MFI portfolio quality, profitability and capital adequacy on a country-by-country basis. Among other things, such information could help to anticipate solvency challenges across markets as the crisis continues to unfold.
Projections or a package of forward-looking metrics that can be anonymized and aggregated are preferred.
These data-related discussions led to a recent session during which CGAP presented the findings of its first two waves of its Global Pulse Survey of Microfinance Institutions to the Coalition and MIVs, which served the dual purpose of providing reactions to CGAP on the survey and helping to inform the approach to be taken by the Coalition and MIVs on these forward-looking indicators. This engagement with CGAP is set to continue, which will help the Coalition and MIVs further define which metrics to ultimately share with each other.
Engaging with Other Stakeholders
The third benefit is the ability to leverage this platform of cooperation with the MIVs to connect with other stakeholders who are also working on their own responses. As noted above, one issue that the Coalition and MIVs would like to address is how to deal with foreign exchange risk. Hedging costs have increased, and if loans that MFIs seek to reschedule are converted into hard currency loans, that brings additional exposure to the MFIs and, by extension, to their clients.
The poor are the ones who are most vulnerable to this pandemic, so it behooves us to find solutions that don’t let such risks flow through to them. The Coalition and MIVs believe that this is an area where other players, such as development finance institutions and TCX (a fund that helps to manage currency risk), could be instrumental. We aim to initiate conversations with them on potential mechanisms that could be put in place to address this issue.
Looking ahead, it seems clear that we are only in the very early stages of this pandemic. We need to be taking a much longer view to our cooperation. Rather than thinking of the effects of COVID-19 as coming in waves, it may be more appropriate to see them as a sea change that we need to adapt to for the long haul.
COVID-19’s effects might be a sea change as opposed to coming in waves.
We’re grateful for the engagement we have seen to date, and we are optimistic about what we can accomplish together. As mentioned in our call to action blog series, there are other stakeholders, such as donors and policymakers, that also have crucial roles to play, and CFI is looking forward to helping build bridges to overcome the new sets of challenges that this pandemic has put before us.
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