Blossom O’Meally-Nelson | Microfinance Can Aid COVID Recovery

drbomnIt is estimated that the microfinance sector, or MFIs, accounts for approximately $20 billion of loans in circulation.

The key financing role played by these loan providers over the last three decades has been grossly understated.

Some regard the sector as a haven for ‘loan sharks’ and operations that abuse their customers by charging inordinately high interest rates and by carrying out draconian collections practices. This negative perception is so entrenched that the preamble to the draft Micro Credit Act reflected this bias.

This is an unfair and uninformed assessment which is based largely on isolated incidents. The fact is the majority of MFIs pursue best practices and attract multiple repeat customers.

Microfinance institutions are an important part of the growing financial space in Jamaica and the public has come to recognise that the sector boasts strong companies that have established themselves as sound financial institutions pursuing best practices according to international standards.

Two of the larger MFIs are listed on the Jamaica Stock Exchange.

Microfinancing is a highly competitive business and managing a microfinance company is no walk in the park, it demands constant attention and close and continuous scrutiny of loan performance. These companies do not take deposits, and unlike commercial banks they do not have the cushion of income derived from investing depositors’ money. They face constantly a high exposure to loan loss.

 

Cumulatively, they comprise a large body of information about the operations of the MSME sector and have developed specific methodologies for loan adjudication, disbursement and recovery. This body of knowledge garnered through years of practice is what enables microfinance companies to operate successfully even in the most difficult of economic times.

That estimated $20 billion in circulation is an important part of keeping the Jamaican economy afloat. That money goes directly to the personal level, allowing parents to give their children an education, pay for medical expenses, buy much-needed commodities and supplement low incomes. Perhaps most important, micro loans provide much- needed working capital for hundreds of micro and small businesses that don’t have access to commercial bank loans.

MITIGATING RISK
The spread of COVID-19 and its sudden shock to the Jamaican economy presents an unprecedented challenge to these lending institutions as the risks to their portfolios grow daily, and although there is still demand for loans these are largely high risk as the prospects for the future are unclear.

The Jamaica Association for Microfinancing, JAMFIN, developed and circulated a set of operational guidelines designed to help lenders weather the current storm by taking practical steps that protect both themselves and borrowers, recognising that tightening collections efforts should not be the only response.

These guidelines recommend that MFIs analyse their portfolios to identify the sectors that are most at risk, for example, agriculture, tourism, manufacturing and transportation. They must also analyse the demand for additional loans and the capacity of the would-be borrowers to repay these loans. Micro businesses such as small shops and vendors also pose high risk.

Payday loans, which up until now account for a significant portion of some portfolios that, once relatively secure, are also at risk as layoffs and job cuts take root.

At this time a continuous review of the portfolio is necessary, as is effective cash management. All MFIs should revise their budget and determine ways in which they can cut expenses while maintaining some capacity to keep their operations going.

There is the need to pay greater attention to initiating business counselling support for high-risk sectors, and on this point the Government should provide funding support for increased business development services to MSMEs across the country.

Larger more established microfinance companies are showing the capacity to implement sound contingency measures in the face of the growing uncertainties as to when the economy will begin to see some positive movement.

A number of them have closed branches in order to concentrate their business at the head office. Smaller operators, however, face great danger of reduced liquidity due to lower collections.

THE GOVERNMENT MUST ACT
Microfinancing needs are part of the recommendations put forward to the Government by the PSOJ/JMMB Access to Finance Initiative for support of the financial sector. These include requiring wholesale agencies such as the DBJ and EXIM Bank to consider a moratorium on loans to MFIs. It is also recommended that the Government should consider providing a special low-interest – 2 per cent to 3 per cent – line of credit of approximately $8 billion to finance the recovery phase.

While provisions have been made for commercial banks there has been no response with respect to MFIs.

The fact that the Government has not yet finalised and enacted the microcredit law is now an impediment to the sector as it is a deterrent to microfinance companies receiving much-needed support, and on top of everything else the lack of regulation increases their exposure to de-risking by commercial banks as the Government’s failure to improve the country’s compliance standing internationally is now again an issue that throws the entire financial sector into a risk spiral.

The most important thing at this time is for the Government to maintain open dialogue with all those who operate within the financial space and to play its part in helping lenders to remain liquid and to provide the best solutions for their customers.

Microfinance companies are resilient and agile and are ready to carry out their commitment to taking the country through this dark period into a time of recovery and, ultimately, growth.

Blossom O’Meally-Nelson is chairman of the Jamaica Association for Microfinancing.

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