Blossom O’Meally-Nelson | Microfinance Can Help COVID Recovery | Business
OP-ED CONTRIBUTION: COVID & THE ECONOMY
The microfinance sector, or MFIs, is estimated to account for around $ 20 billion in outstanding loans.
The key financing role played by these lenders over the past three decades has been largely underestimated.
Some see the industry as a haven for “loan sharks” and operations that abuse their clients by charging excessively high interest rates and enforcing draconian collection practices. This negative perception is so entrenched that the preamble to the micro credit bill reflected this bias.
This is an unfair and ill-informed assessment that is largely based on isolated incidents. The point is that the majority of MFIs apply best practices and attract many loyal customers.
Microfinance institutions are an important part of the growing financial space in Jamaica and the public has come to recognize that the sector has strong companies that have established themselves as strong financial institutions pursuing best practices by international standards.
Two of the largest MFIs are listed on the Jamaican Stock Exchange.
Microfinance is a highly competitive business and running a microfinance company is not a breeze, it requires constant attention and continuous scrutiny of loan performance. These companies do not take deposits and, unlike commercial banks, they do not have the income buffer from investing depositors’ money. They are constantly faced with high exposure to loan losses.
Cumulatively, they include a great deal of information on MSME sector operations and have developed specific methodologies for loan granting, disbursement and recovery. This body of knowledge accumulated over years of practice is what enables microfinance companies to operate successfully, even in the most difficult economic times.
This estimated $ 20 billion in circulation is an important part of keeping the Jamaican economy afloat. This money goes directly to the personal level, allowing parents to educate their children, pay for medical expenses, buy essentials and supplement low incomes. Perhaps more importantly, microloans provide much needed working capital to hundreds of micro and small businesses that do not have access to commercial bank loans.
Mitigate the risk
The spread of COVID-19 and its sudden shock to the Jamaican economy presents an unprecedented challenge for these lending institutions as the risks to their portfolios increase daily, and although there is still a demand for loans, these are largely high risk because the future prospects are unclear.
The Jamaican Microfinance Association, JAMFIN, has developed and disseminated a set of operational guidelines designed to help lenders weather the current storm by taking practical steps that protect themselves and borrowers, recognizing that the increased efforts recovery shouldn’t be the only answer.
These guidelines recommend that MFIs analyze their portfolios to identify the sectors most at risk, for example agriculture, tourism, manufacturing and transport. They should also analyze the demand for additional loans and the ability of potential borrowers to repay those loans. Micro businesses such as small stores and vendors are also at high risk.
Payday loans, which until now have been a big part of some once relatively secure portfolios are also threatened by layoffs and job cuts.
At this point, ongoing portfolio review is required, as is effective cash management. All MFIs should revise their budgets and determine ways to reduce their expenses while retaining some capacity to continue their operations.
There is a need to pay more attention to setting up business advisory support for high risk sectors, and on this point the government should provide financial support to increase business development services to MSMEs across the country.
Larger, more established microfinance companies are showing the ability to implement sound emergency measures in the face of growing uncertainties about when the economy will begin to see positive movement.
A number of them have closed branches in order to concentrate their activity at the head office. Small traders, however, face a great danger of reduced liquidity due to lower collections.
The government must act
Microfinance needs are one of the recommendations made to the government by the PSOJ / JMMB Access to Funding Initiative to support the financial sector. This includes requiring wholesale agencies such as DBJ and EXIM Bank to consider a moratorium on loans to MFIs. It is also recommended that the government consider providing a special low-interest line of credit – 2% to 3% – of around $ 8 billion to finance the recovery phase.
While arrangements have been made for commercial banks, no response has been received regarding MFIs.
The fact that the government has not yet finalized and enacted the microcredit law is now an obstacle for the sector as it deters microfinance companies from receiving much needed support, and on top of everything else, the lack of Regulation increases their exposure to de-risks for commercial banks, as the government’s failure to improve the country’s international compliance is now again a problem that throws the entire financial sector into a risk spiral.
What is most important right now is for the government to maintain an open dialogue with everyone operating in the financial space and to play its role in helping lenders stay liquid and provide the best solutions to their clients.
Microfinance companies are resilient and nimble and are ready to deliver on their commitment to bring the country through this dark period into a period of recovery and, ultimately, growth.
Blossom O’Meally-Nelson is president of the Jamaica Association for Microfinancing.