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Microfinance risk and the future - by Adam Lindquist
microfinance risk and the future
by Adam Lindquist
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I spoke with Desara Sina, Head of the Risk Management for Albania-based Fondi Besa jsc, about how microfinance has been impacted by recent worldwide events and where it will go in the future.
Adam Can you share how COVID impacted your organization and/or how you feel it impacted microfinance in general?
Desara
COVID-19 is already the key word of our daily life that came as a sudden threat to life and lifestyle all over the world. The exponential spread of the number of people infected with COVID-19 correlates with the economic downturn, which came as a result of measures taken by the government to keep under control the striking power of this virus and save health systems. The effects of the closure for months caused colossal financial difficulties. As a result, the economy went into recession. For many businesses, the anti-COVID measures proved fatal, while for many others it brought them to the brink of bankruptcy. This risk for an unconsolidated economy like Albania’s is that it had major consequences. Small businesses and the self-employed, who were shut down due to quarantine, illness, or insecurity to provide services to clients, found themselves without income. On the other hand, utility costs, taxes, and other liabilities are comforted in their balance sheets in difficulty and here for hundreds of thousands of individuals and families. In this context, the microfinance sector, having a wide reach in the country’s economy as a leader in financing small business, farmers, and the basic needs of the Albanian family, accounting for about 68% of the total number of loan applications instead, would necessarily be impacted by the situation. In the context of the COVID-19 pandemic, although the government’s plan to postpone customers’ liabilities to the financial system sounded hopeful at first; in fact, these liabilities would simply accumulate to be paid later. But this process also posed a risk to the microfinance sector. Unlike the banking sector, which not only has sufficient liquidity due to the collection of customer deposits but also due to the supply of liquidity from the Bank of Albania, microfinance institutions do not have these opportunities. The funds used by microfinance to lend to their clients are internal equity funds, financing instruments (such as bonds or other securities), and the lines of financing they receive from larger financial institutions, such as second level, or regional development ones.
The Besa Fund, since the beginning of this pandemic, took immediate measures, building the appropriate scenarios to face any kind of challenge that tomorrow could bring. The main elements at the core of the strategies for managing this unprecedented situation were: saving lives, business continuity, and maintaining uninterrupted contacts with customers and their service through alternative channels making maximum use of technology. The main risk during the lockdown and the government’s decision to postpone payments brought a significant threat to all non-bank institutions that would be brought by the liquidity stalemate. This decision was not accompanied by any support from the government, for support of institutions affected by non-collection of credit. Immediately the Besa Fund built stress tests related to liquidity, and fortunately its solid financial situation managed to cope with the situation even in the worst scenario (when no loan would be repaid) and at no point to stop lending.
Keeping up with the challenges of the time and the current situation enabled the rapid construction of new processes in the way of management, increasing communication with customers in accordance with all the mitigation measures offered, while staying vigilant to responding to potential risks that could materialize at any time.
We can say that the Besa Fund successfully overcame the difficult period of the total lockdown of the country and handled the requests of any client that was affected by the situation. However, businesses today, especially those involved in the tourism, services, and transportation sectors still live under the pressure of the negative effects of the global pandemic caused by COVID-19.
Adam
What risks do you foresee coming for microfinace in the coming year? In the next 3 years?
Desara The pandemic, although it seems to be ending, economically is still among us. The recession in non-consolidated economies will take longer to overcome. Government decision-making policies must pay special attention to the small and medium-sized business sectors to rebuild everything, to give a hand to those who have stopped, and to give optimism to those who today dare not think about business. The security of doing business is an important element to succeed.
In my opinion, even in the upcoming year there will be the challenge to face the high level of npl caused by COVID-19 and to try to seek stability that existed before the outbreak of the pandemic.
In the next three years, the potential risk will be the second wave of COVID virulence, which would find microfinance still unhealed from the first one. But, hopefully this will not happen. As a risk manager, all scenarios should be taken into consideration in order to achieve the optimal management to avoid the materialization of any risk that might have consequences for the sector.
Adam
What positive change have you seen in microfinance in the past 3 years?
What innovations are in the future that you think will change the microfinance industry?
Other thoughts that our readers would benefit from learning or knowing?
Desara Being well-extended in the country’s economy, we hope that microfinance keeps growing by completing its mission to be near small and medium-sized businesses, farmers, and near tourism, where banking systems cannot perform lending. This would be realized in a country where the pandemic is being well managed, thus giving important contribution to the recovery of the country’s economy. The pandemic taught us that digitalization is an important element. The use of technology, digital channels, was an optimal solution at the time when social distance was an obligation. I believe that even in this field, in the next three years to come, there will be valuable improvements. Digitalization, practicality, transparency, presentation, and education of the clientele about the credit and microfinance sector. According to a survey conducted by the Albanian Microfinance Association, 41% of respondents have salaries from the private sector as their main income. 46% of respondents admit that they have enough money for food but have difficulty buying clothes and household appliances such as refrigerators and televisions. 64% of respondents admit that they are not able to save money from their salaries, while in rural areas this figure goes to 71%. When survey participants were asked about how long they could live on their savings if they lost their job, about 48% of them admitted to having no savings. Particularly for respondents who live in rural areas, 57% of them admitted that they have no savings. Only 3% of them said they could afford living expenses for only one year in case they lose their job. Access to finance and getting a loan from a microfinance institution is the only opportunity for thousands of Albanian families to buy a household appliance that reduces electricity consumption and bills, the only opportunity for thousands of farmers to cover the costs of planting or breeding in the beginning of the season, the only opportunity for thousands of entrepreneurs to invest in expanding their small business. The microfinance industry has greatly grown in recent years, although seen from a broader perspective it only accounts for 3.1% of all banking system assets, and only 5% of the volume of all loans granted in 2019, compared to banks. But if in comparison the value is insignificant, the number of about 250,000 disbursed financing during 2019 clearly puts the microfinance sector in a leading position in individual and small business financing in the country compared to the banking sector. Besides, out of three loan applications in the country, two of them belong to microfinance institutions and one to banking institutions. Given the profound effect that microfinance has on the mobilization of the domestic economy, the effect of the pandemic crisis must be studied in detail. Likewise, the measures taken so far need to be reconsidered, which would bring other serious financial consequences.
