Micro-financial services amid Covid19 Pandemic

Microfinance and MSMEs

Access to finance is key requirement of businesses. Out of them Micro, Small & Medium scaled Enterprises (MSMEs) run their businesses mainly borrowed monies from banks and other financial institutions. Microfinance Institutions (MFIs) play important part in providing financial services to these MSMEs where the sector regard as backbone of the local economy. It is roughly estimated that 70 % of Sri Lanka’s economy depends on MSMEs and large portion of the population rely on it for their employments and allied livelihoods.

At this unprecedented global pandemic severely affects the service delivery particularly in Financial Services sector where MFIs face significant constraints due to their unique operational model and technological limitations. MFIs play a major role in financial inclusion of local economy. Microfinance itself is for people who are unable to access formal financial institutions such as banks and Non-Bank Financial Institutions (NBFIs). It is obvious that current pandemic has considerably restricted the services to MSMEs causing “double impact” in reviving their businesses. Impact also causing severely to MFIs as well, due to lowering recoveries, restricting disbursement and lesser access to capital funding.

MFIs Regulation and Current Issues

Microfinance Act enacted back in 2016 regulates MFIs. Only few MFIs registered under the Central Bank of Sri Lanka (CBSL) as regulated MFIs. Further NGO-MFIs regulated under NGO Secretariat. Credit Unions (Co-operatives) regulated by Department of Co-operative Development. Due to these various regulatory structures, MFIs regulation is complex and complicated process. There is no single point of regulating the sector. Most of the cases, Credit Unions are opted out from the sector but it is important to highlight that there are eight million Co-operative members in the country most of them are members of credit unions such as Thrift and Credit Co-operative Societies and Rural Banks. Situation even further complicated due to Cooperative subject was devolved in to provincial subject from 13th constitutional amendment.

Large number of MFI companies operate as private or non-listed public companies excluding regulated environment. Therefore, these MFIs are not authorized to mobilize public deposits. In fact, some MFIs use alternative mechanisms to avoid regulatory barriers and mobilize funds from public as their source of funding which is much easier to access than commercial loans or other funding sources.

Due to pandemic, restricted interest income of these MFIs causing problems in smooth operation. As a result, increasing Non-Performing Loans (NPLs) causing profitability of MFIs and depleted cash flows results in lay-offs. It is important to highlight that significant number of employees rely on these MFIs. On the other hand, there are public funds also mobilized as “compulsory deposits/security deposits” from the borrowers. There is a probability of popping up another public fund swindles. This leads further increasing NPLs where borrowers try to avoid repayment even at the repayment is quite capable to them.

Avoiding future catastrophe

It is necessary to maintain healthy and resilient financial sector for any country. It is important to act quickly to avoid collapsing MFIs amid Covid19. Measures the sector apply now will largely support the sustainability of the MFI business whether it is regulated or not. Further, measures could be adopted focusing towards regulated microfinance environment.

Consolidation of regulatory framework

Current vague regulatory system needs to be strengthened. CBSL, NGO Secretariat and Department of Co-operative Development should have platform that give clear directions with legal power to act upon non-compliant practitioners.

Public awareness

Public awareness is key on financial literacy of the people on MFIs. Public forums should be organized using social media and other electronic media where people are more towards digital platforms.

Fin-Tech solutions

Financial Technology is the key across the financial services industry. Banks and NBFIs are more capable of adopting fin-tech solutions with adequate capital and technical expertise. It is very important that having proper system and procedures through technologies will increase service delivery and better understanding the financial position of MFIs. It will reduce the operational cost and will lead to achieving financial self-sufficiency for MFIs.

Availability of funds

It is necessary that MFIs need long-term capital funds as bulk funds to serve for marginalized and needy MSMEs. MFIs participatory approaches are convenient to customers and Credit Plus services are important part of their business model. If the government and internal agencies provide low-cost funding to MFIs could strengthen its operation and would be able to provide value added services to their customers.

Safe-guarding and improving the MFI business Model

Microfinance business regard by some as a business of loan sharks. We need to realize the bitter truth that, sector itself should work towards to improve the image. There are many MFIs serving quality service to their customers and there are large portion of MSMEs rely on MFIs services particularly in rural context.

Therefore, it is necessary to act regulators and practitioners to collaboratively work towards for healthy microfinance services. Covid19 Pandemic has given second chance all to revise their business model and way of thinking. Microfinance is no exception.

Navindra Liyanaarachchi

Member of CPM Sri Lanka

Chief Executive Officer

Sanasa Federation Ltd.

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