There is no debate that a pandemic has damaged the world economy. The only possible issue of debate is the extent of the damage and where the impact will end. Undoubtedly, the damage is still unfolding and may even be self-reinforcing. As companies shut down and bankruptcies trend across the world, following the pandemic, the financial system is going through one of its deepest convulsive experiences since the 2008 Global Financial Crisis. In remediation, considerable focus has been placed on the corporate sector, by governments, with a view to restoring its productive health. The Nigerian microfinance sector has been fairly well organized and effective in supporting the war against poverty. We must not allow this to change.
There has been coordinated efforts of public institutions, especially public banks, to support the banking industry in most jurisdictions, in order to ensure that it is stable and capable of delivering its services to the economy. These efforts, which reflect the critical role of the banking system in the economy, have manifested in prudential guidelines and rules that offer significant doses of forbearance to deposit money banks, and some accommodation to their customers. In all of this happening in different parts of the world, including Nigeria, it does appear however, that the microfinance sector is not receiving the same kind of attention. It may be useful here to look at some specific areas, policy action may be used to support that very important segment of the banking industry.
Public officers carrying physical cash palliative and handing it out indiscriminately, where MFBs exist, robs the banks of survival opportunity. It is a classic case of the government creating useful institutions, pulling the rug under their feet and leaving them orphans.
MFBs are very important but they are not considered to be Systemically Important as defined by central banks, in the sense having a very deep impact on the economy if they fail. In regard to systemic importance, deposit money banks definitely have a far-reaching impact on the economy, relative to microfinance banks (MFBs). Although there may be some very big MFBs whose failure may have significant negative impact on the system, it will be nothing compared to what would happen if a major bank fails. By their balance sheet size, MFBs often fail to meet the level of assets and liabilities that would make them systemically important. To that extent, it is understandable why governments mostly focus on protecting the deposit money banking sector at times like these. However, it would be a major policy error not to take serious steps to protect the microfinance sector of the financial system, which has the most direct impact on the most vulnerable members of the society.
History has shown that operators in the informal sector, the domain of microfinance institutions, are the most seriously affected during major crises. This should not be a discovery if we consider that the MSMEs, who dominate the informal sector, form the bulk of clients serviced by the microfinance industry. Accordingly, whenever these institutions are in serious crisis their benefactors, the MFBs, would surely be in trouble too. Therefore, policy action aimed at economic restoration must give relatively equal attention to microfinance banks. Besides, microfinance has grown beyond the provision of credit and capacity building support to the active poor and now extends to some critical human services that link it to other sectors in a more symbiotic fashion; for example; insurance and healthcare. These sectors must be part of any meaningful recovery envisaged post-COVID-19. Therefore, not properly providing for the MFBs to recover means the exclusion of these related sectors, which are critical to recovery. So, a disruption of the microfinance sector may have more than an isolated impact on the economy.
Some people have wondered why microfinance banks, which are fairly well represented in all the local governments, couldn’t have been used to distribute the financial palliatives, which were so disgracefully mangled in nepotism and lack of transparency by the Ministry charged with it. In a country where financial inclusion and cashless economy is in the front burner, with agent banks, mobile money and electronic wallets, a public officer pulls out cash from the banks and races into villages to distribute on the basis of evidently unknown criteria. Such should have been the opportunity to engage microfinance banks. It would have helped them not only to reach more clients but to renew contacts with existing ones.
Public officers carrying physical cash palliative and handing it out indiscriminately, where MFBs exist, robs the banks of survival opportunity. It is a classic case of the government creating useful institutions, pulling the rug under their feet and leaving them orphans.
Still, there are a number of things, which the government, and indeed policymakers, could do to ensure that the microfinance industry does not become a drag in the effort to restore economic growth in the country. First, it’s important to realise that the lockdown is hitting hard at high-touch customer interaction businesses, including microfinancing. Their ability to interact with clients, which is the hallmark of effective microfinancing, has been seriously impaired by the lockdown. That calls for policy action to reduce the effect. This reality has cash flow and repayment implications that could instigate loan delinquency.
One good way to protect the microfinance sector is to protect the micro and small enterprises they serve, because failure to do so will reflect in loan defaults that could damage the operators. Putting money in the hands of these clients will restore their cash flow and prevent or at least reduce missed repayments. Besides, it will reduce the pressure on MFB clients to deplete their savings. This will put the MFBs under pressure and this may lead to a run, when these savings cannot be accessed at the MFBs. We must prevent a run on the microfinance banks because that will worsen the impact of the pandemic beyond comprehension.
