By now, every one of us has experienced the adverse effect of covid 19 on our business, day-to-day life, and education. Microfinance companies, too, have faced hardship from the crisis. The Covid-19 has taught us many lessons, especially for businesses, and exposed their fragileness in the market. Microfinance institutions mainly target the urban poor to provide them with financial aid for the business. During the lockdown, almost half the small businesses present worldwide were forced to shut down.
One of the major setbacks to the MFIs is the closing of the micro/small businesses, resulting in the loss of clients. Companies were forced to close due to the quarantine requirements and lack of customers to run the business. The ones who used to sell the necessary products were asked to have preventive measures during the lockdown. Restaurants, hairdressers, and vendors were the most affected micro/small businesses, all of which are the primary client for MFIs.
The portfolio performance of MFIs deteriorated at different rates due to many reasons, including difficulties in disbursements, inability to collect on time, moratorium laws, and not conducting face-to-face meetings.
Impact on the Business Performance
Overall, there were significantly fewer microfinance institutes that did not experience a decrease in sales and borrowers. Only a small percentage of Microfinance institutes reported an increase in their sales. To survive in the market, most of the MFIs took the help of the economic assistance laid down by governments. There was a setback to the employees working in the office as well.
It was noticed that one-third of the MFIs had to reduce the salary of the employees to keep them employed.
Top four challenges
1) Product offers - Due to the lack of clients and borrowers, many MFIs had to change their product offers and introduce interest-free periods for the first three months of the loan. Some of them even introduced new methods specially modified for the crisis.
2) Working with clients - With the lockdown, the most dramatic problem that the MFIs faced was the interaction with the clients. It became difficult for the MFIs to communicate with the clients in a remote area and sign in the new ones.
3) Cost Reduction - To compensate for the loss in the crisis. The MFIs had to decrease their cost on the principal amount. This led to further problems, including lower salary levels, professional development, furloughing, and postponement of investments.
4) Internal Operations - Internal Operations of the office were also severely affected due to this crisis. Among these problems, the most affected MFIs were the ones that were less established and smaller. MFI's had a weaker liquidity position and could not negotiate additional funding in a short time.
A better Future
Despite all the challenges, there are some positive outcomes from the MFIs as well. Due to the need of the hour, many MFIs incorporated digital transformation in their business that enabled them to operate in the new environment and become more competitive. These MFIs also pushed themselves to launch new products. These products have brought in higher reliability and flexibility in the MFIs.
Many microfinance institutions hope that the conditions would prove to be better with the upliftment of the lockdown. One of the reasons behind this thought is that businesses have started to open up for regular trade with the vaccine rollout. More micro-entrepreneurs are expected to mushroom in coming quarters. These new breed of micro-entrepreneurs are good potential clients to the Microfinance institutions. Another reason for the good hopes is the continued government assistance during the transitionary period.
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