African microfinance portfolios have contracted and credit risk has risen significantly, so recovery will likely be challenging. The CGAP and Symbiotics surveys (CGAP, 2021) indicate that lending volumes contracted significantly at the start of the crisis (Figure 3). Figure 3 presents the growth trajectory of microfinance disbursements for the Symbiotics portfolio, contrasting pre-crisis data for 2019 with data at the onset of the pandemic in March 2020, and with March 2021. Although the volumes disbursed began to rise in 2020, they still have not recovered their 2019 value in real terms.
Figure 3: Nominal growth in average monthly disbursements relative to March 2019
Figure 4: Mean credit risk ratio
Source: Symbiotics. Source: Analysis by CGAP and MicroFinanza Rating (MFR)
(CGAP, 2021d).
Note: Defined as the mean value of (portfolio at risk 39 days or more + loans less than 30 days overdue but restructured + loan write-offs ) / mean gross outstanding portfolio).
The relatively gradual recovery in disbursements partly reflects institutions’ wariness of heightened portfolio risks. Figure 4 compares the mean credit risk ratio observed in 2019 with the situation in the fourth quarter of 2020 based on data from CGAP and MicroFinance Rating (MFR). The deterioration in portfolio quality has been more severe in sub-Saharan Africa than in other world regions. Taking into account the region’s muted and uncertain macroeconomic prospects, further deterioration is probable. If a significant proportion of borrowers default, this will ultimately put pressure on capital adequacy. The need to preserve and restore capital buffers will make it difficult for microfinance institutions to relaunch lending, which could have a deep impact on recovery prospects, particularly for the most vulnerable. Low-income households and micro, small and medium-sized enterprises (MSMEs) in Africa, including the very poor, hard-to-reach populations, generally rely on microfinance institutions as their sole source of external finance.
Prospects vary between different types of microfinance provider, with the smallest institutions (also known as Tier 2 and 3 institutions) most vulnerable. Figure 4 indicates that although risk has risen in all the categories examined, the increase has been most marked among small to medium-sized microfinance providers. CGAP analysis indicates that the biggest risks lie with Tier 2 and 3 microfinance institutions, mainly comprising small to medium-sized institutions, which are generally slightly less mature and less profitable, as well as startup microfinance institutions and small non-governmental organisations. Serving poorer populations that have been severely affected by the pandemic, this vulnerable group of financial institutions is likely to require greater
-20%
Sub-Saharan Africa and Middle East and North Africa
Total Small Medium Large Latin America and the Caribbean Sub-Saharan Africa Middle East and North Africa Europe and Central Asia South and Southeast Asia
Size Region
2019 Q4 2020
support to recover from the crisis. There is likely to be consolidation across these institutions, as some may not be capitalised strongly enough to deal with the impact of the pandemic. By contrast, larger institutions tended to have better risk management and business continuity plans in place pre-crisis; many had strong equity cushions that have allowed them to weather the storm. These institutions will be better placed to recover, and to drive recovery with continued lending. However, institutions with pre-existing structural weaknesses will struggle to make it through the crisis and restart lending.
Tier 1 microfinance institutions seem to be recovering faster in Africa than in other regions, but the full impact of the pandemic will take time to materialise. Symbiotics recently surveyed over 40 microfinance institutions in Africa, with data as of March 2021 summarised in the latest CGAP and Symbiotics report (CGAP and Symbiotics, 2021c). Growth in portfolio size and number of borrowers is shown in Figures 5 and 6, respectively. Overall, larger (Tier 1) microfinance institutions seem to be recovering more strongly than similar microfinance institutions in other regions in terms of number of borrowers, disbursements and profitability. However, from an asset quality perspective, both portfolio at risk and the moratorium ratio are higher than in some other regions, which could set back the recovery. On the other hand, this portfolio displayed higher risk prior to the crisis than the portfolio in the other regions due to the size and nature of the microfinance institutions.
Figure 5: Portfolio growth, up to 31 March 2021 Figure 6: Growth in number of borrowers, up to 31 March 2021
Source: Symbiotics. Source: Symbiotics.
There is an opportunity to learn from the pandemic experience to improve both preparedness for future crises and services for clients. Once the situation stabilises, microfinance institutions will hopefully use the lessons of the pandemic to strengthen their underwriting; improve their distribution channels, especially digital services;
and be more client-centric to help accelerate the breadth and depth of financial inclusion. Strengthening the use of formal savings products could improve development outcomes and help people better manage economic emergencies. The challenge for formal financial service providers is to offer fair, affordable and transparent products that satisfy customer needs.
Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-212 Mar-21
Sub-Saharan Africa and Middle East and North Africa
Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-212 Mar-21
Sub-Saharan Africa and Middle East and North Africa
Asia
Eastern Europe & Central Asia Latin America
All MFIs in Symbiotics portfolio
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1
1 European Investment Bank.
The author would like to thank Sabrina Katz from the Global Private Capital Association for helpful comments and the provision of data.
Thanks also to Claudio Cali, Enrico Canu, Marius Chirila, Matthieu Ducorroy and Nina Fenton, for comments on earlier drafts.
The views expressed here are those of the author and do not necessarily reflect those of the European Investment Bank. All remaining errors are the responsibility of the author.