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Promoting Financial Inclusion during COVID-19 Pandemic: The Role of Microfinance Institutions (MFIs)

COVID-19 is in no hurry to travel to developing countries, but if it catches up, the impact of the pandemic will be even more devastating due to the inadequacy of the healthcare system and the macroeconomic situation of countries in general.

It is already possible to project what the consequences may be for small and medium-sized businesses, the financial sector and the economy in general, and prepare stress tests and response plans in advance.

MFIs provide their financial services primarily to the poor, vulnerable segments of the population. It is necessary to understand the threat posed by the pandemic to the microfinance industry and MFI clients and to be ready for a response.

Let’s look at who the borrowers of the MFIs are, the profile of the main segment. These are mainly microentrepreneurs (more than 40% work in the informal sector, that is, they are not registered), small farmers, families of labor migrants who take small loans to meet consumer needs between remittances, more than 75% of borrowers are in rural areas, more than 35% -women. It is this category, as shown by countries where the virus is currently raging, will be the first to feel the impact of the pandemic. The situation of labor migrants in Russia has worsened due to the introduction of restrictive measures and the suspension of work in enterprises in almost all sectors. This means that migrants will not be able to send remittances to their families, or not to the extent that they will be responsible for obligations.

Accordingly, a decrease in the level of repayment is expected, because the main contingent of MFO borrowers will be insolvent. A decrease in the level of repayment of clients for MFOs will mean that liquidity risk will increase, as a measure of MFOs will restrain the issuance of new loans in order to accumulate funds to pay off previously attracted obligations, and will intensify work on delinquencies.

If earlier in the period of crises, MFOs resolved issues of non-repayment through frequent visits to clients, development of individual strategies for overcoming the crisis through refinancing and restructuring, now this may not work.


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