|Adjusting microfinance business plans for the impact of the Covid-19 pandemic|
There is no doubt that the corona virus pandemic has had dramatic impact on business. With lockdowns having been the preferred strategy by authorities around the world for containing the pandemic and keeping it from spreading, in effect this has led to unimagined bottlenecks for businesses such as supply chain disruptions, social distancing. The result of these measures has been that the flow of cash into businesses has been drastically affected.
For financial services businesses like microfinance institutions, that provide loans to micro, small and medium size enterprises, this has meant that the performance of their loan assets has been affected as borrowers’ indebtedness to MFIs has deteriorated due to non-payment of loans in accordance with loan schedules agreed at the beginning. However, this is somewhat different because it is not directly the fault of borrowers but due to an extreme event. This has created a chain reaction that has led to MFIs experiencing challenges paying their suppliers, employee salaries, funders, etc. This has not only affected MFIs but other types of business too, sparking fears of recessions, globally. This is why a number of governments around the world have responded with rescue programmes such as stimulus funds to help support businesses during the covid-19 period.
The above scenario would require that businesses revisit their plans as made earlier in the year, namely; budgets, strategic plans, operational plans, etc and make adjustments to reflect the changed reality under which they are operating due to the Covid-19 pandemic.
Microfin, the renowned microfinance planning tool has published a brief paper entitled “Adjusting Microfin for the cashflow impact of the corona virus” (www.mfiresources.org). This is meant to help MFIs and other FSPs to be able to quickly remodel their businesses’ Covid-19 induced reality, take stock and take certain strategic and operational decisions. The tool makes it possible for adjustments to be made and thereby to project new scenarios.
Microfin has identified areas of the business that would require adjustments as follows:
Cashflows from borrowers Cashflows from borrowers to MFIs have been constrained due to borrowers’ repayment capacity being compromised. But since these difficulties experienced by borrowers are not the fault of borrowers, MFIs may have to consider the following: forbearance, refinancing, and potentially write offs. A consequence of this is worsening portfolio quality, loan loss reserve and loan provision ratios increasing due to increases in doubtful loans, which ultimately leads to more write offs.
The other side of this is that cashflow difficulties will result in MFIs experiencing challenges in servicing suppliers, servicing financiers, employee payroll, etc.
Cashflows to borrowers If borrowers are having difficulties repaying loans, it may also be that lending to borrowers would require closer examination within the context of the impact of the Covid-19 pandemic on borrowers’ capacity to service loans. This could mean adjustments to loan sizes or putting a freeze on lending, especially to new prospects with whom MFIs have no experience.
Appropriate adjustments can be made in microfin to reflect the new reality on projected cashflows from borrowers and projected cashflows to borrowers.
Cashflows from investors MFIs obtain capital from a variety of sources including investors in equity or debt instruments. Therefore, investors play two roles, they either provide capital or recover their investments into MFIs when they mature. During the Covid-19 pandemic investors could be anxious about recovering their investment holdings in MFIs.In order to manage these relationships effectively MFIs will need to manage their investor communications in a manner that builds investor confidence, e.g. being made at an appropriate frequency, upholding transparency, accuracy and truthfulness in reporting. Maintaining good investor relationships is of utmost importance to any business because it will most likely require additional financing during the pandemic to cover for financial challenges experienced. Existing investors would be one potentially good source of financing and hence the need to manage relations with them well.
Equally, stimulus packages that have been created by central banks such as the targeted medium-term refinancing facility (TMTRF) or the ZMW10.0 Billion facility in the case of Zambia, have been availed to financial institutions for their refinancing needs so that they can support economic activity during the pandemic.
In the event that a new financing/refinancing package is obtained by an MFI, an adjustment can be made in microfin to reflect this.
Cashflows to investors Investors will hold either debt or equity in an MFI. In both cases they expect to receive cashflows from dividends, capital growth, interest, and repayments of principle, from their investee MFIs. In the advent of Covid-19 pandemic communication to investors is very important. This would help them make informed decisions.
Adjustments can be made in microfin to reflect decisions made between the MFIs and their investors.
Cashflows from savers Deposit taking MFIs mobilize deposits from their saving customers. However, during the Covid-19 pandemic experience has been that savers have been saving less as they attended to the impact of the pandemic on their finances.
Adjustments can be made in microfin to reflect this reality.
Cashflows to savers Due to the Covid-19 pandemic which has impacted peoples’ incomes streams, savers have tended to draw down on their savings. The reason is that they require cash to smooth consumption and attend to other financial needs. This has resulted in a sudden rise in withdrawals. MFIs must facilitate this and avoid runs on institutions by customers, which could have devastating effects.
Adjustments can be made in microfin to reflect changes in savings portfolios due to increased withdrawals.
Cashflows to employees This is the only cashflow that is only one-sided as opposed to the three covered earlier. This is because it reflects remuneration to employees in exchange for their services. In a time of crisis such as the Covid-19 pandemic MFIs need to preserve their cash holdings, therefore they need to critically analyse what payments can be made to employees. Strategies on management of staff costs may vary from MFI to MFI. Others might consider making difficult decisions like laying off staff to manage costs, while others might decide to retain staff in order to manage relations with borrowers. In some cases, certain categories of employees like senior management might take a pay cut, or suspend salaries for a while. These are decisions that institutions would consider to enable them go through the pandemic.
Adjustments to staff numbers and costs can be made in microfin to reflect decisions taken by the institution. Different scenarios can be tried and pick one that may be more appropriate.
Microfin is an important planning tool for MFIs and can also be used as a good management tool. This has been demonstrated in the earlier passages. The effects of Covid-19 on MFI operations can be captured in microfin with the corresponding results determined. The tool can be adjusted to reflect changes in the environment so that expected outcomes are realistic in the context of the environmental circumstances. Microfin is freely available on the internet and has been used by many a start-up MFI. As demonstrated above the tool continues to be useful and MFIs can still use it for their planning. It is designed specifically for microfinance.
BackgroundAgriculture is and continues to be the most common occupation of rural communities in Zambia, it is their source of livelihood. It is usually practiced