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Illiquid Contagion

When “Stay at Home” Means “Starve at Home”
March 28, 2020
Digital Banking Provides Lifeline in Pandemic
April 8, 2020

Half of the financial service organizations responding to our survey in the past week have said that their operations have been suspended due to government lockdowns in their countries.  These lockdowns, necessary for protecting public health, have also drained cash from informal sector workers and the financial providers that support them.  As the crisis extends from weeks to months, financial inclusion providers will run out of cash to pay their workers.

Plunging Income Levels

Stuart Rutherford has been tracking the daily money transactions of 60 low income households in central Bangladesh for five years.  His data show a dramatic drop in income following the lockdown imposed by the government on March 26. 

This had an immediate impact on food purchases, which tick up on the day before the lockdown, then plunge.

BFA Global shows similar evidence from the “dipstick” survey they took in seven countries (Great Britain, India, Kenya, Mexico, Nigeria, USA and South Africa) on March 27. These surveys show:

  • A drop in income – “Low-income and lower-middle-income families are experiencing a decrease in income, and much more of a significant decrease in Kenya, Mexico, and South Africa.
  • due to physical distancing – “Worldwide, low-income and lower-middle-income workers are especially hard hit by social and physical distancing measures.”


The survey that DSK Rao and I developed for providers of microfinance and promoters of savings groups and self-help groups shows how quickly events have changed during the coronavirus crisis.  During the first few days the survey was out, less than 20% of those responding said they had suspended their operations.  In the last week, that number has increased to more than 50%.

March 18-22

March 23-31

Forty-one financial service providers have responded to our survey, covering 28 million clients. 

Comparing the numbers we have collected for total microfinance clients around the world with countries that have implemented some form of “stay at home” measure, we estimate that at least 70% of all microfinance borrowers in the world live in countries under lockdown.

Evaporating Liquidity

Borrowers staying at home receive no income from their business.  They deplete what little savings they have stocking up on food.  They stop paying back on their loans (and in some countries, governments have implemented a moratorium on loan repayments ranging from one to six months).

Financial service providers receive no loan repayments or interest income.  At the same time, depositors withdraw all their savings.  Average terms on microfinance loans range from four months to one year, which means a month of no payments can equal between eight to 25% of the loan book.  Lenders will quickly move through their loan loss reserves and start eating into equity.  They will also run out of cash to pay their staff, their other expenses, and their creditors.

In their responses to our survey, financial inclusion leaders warned of this liquidity crunch: 

  • “If we remain closed for the next three months, we will have a liquidity problem.”
  • “We have a drastic reduction in operations, lack of liquidity and financial losses.”
  • “Please help the industry in advocating the government to extend financial and non-financial support, as liquidity will be a real concern.”

Early Warning

The financial meltdown caused by this pandemic is operating differently from any other.  Usually the entire economy collapses down to the informal sector.  Even when every other business gets shut down by economic strain, street vendors keep operating.  But now the street vendors must stay home, with no income.  There is no money flowing into the bottom of the economy.

In this crisis, microfinance providers are serving as an early warning mechanism for the entire financial system.  They serve those who get affected first and most severely by any economic shutdown.  Their liquidity is drying up before any other bank or financial institution.  But they are only the first of many to follow.

As governments respond to the financial wreckage wrought by the coronavirus, they will need to build from the bottom up.   They should respond first to those financial institutions working with those who earn the least, because these are the people hardest hit by the stay at home orders.

The Peruvian Example

Edward Guerts, Deputy Chair of the Board of Banco D-MIRO, posted this on LinkedIn on Tuesday:

Good news from Peru: The country decided to save its micro & SME (finance?) sector. 
The Central Bank of Peru will inject 30 BN soles to back up outstanding micro and sme loans with new ones in order to maintain them eligible for lending. This will mainly benefit micro and small enterprises and hopefully also specialized micro finance institutions, like Cajas Municipales, EDPYMES, MiBanco and the like. Since micro and SME borrowers are most affected by the lock up measures of the government, the financial institutions catering to them, would soon be facing a serious liquidity drain. While their borrowers cannot repay their loans, their depositors increasingly need to withdraw savings in order to make ends meet. The 30 BN soles will be made available through a repo like mechanism, guaranteed by the state. It will allow entities to make loans (or refinance?) with a 3 year tenor. The amount represents more than half of the total assets of the financial institutions specialized in micro and SME finance, including MiBanco. As the access to this facility will be limited for Medium Enterprises, I do not expect crowding out by mainstream banks. Peru is showing its muscles! This injection would represent 4% of GDP. On Wednesday details will be made public.

In 2019, Peru ranked second in the Global Microscope Rankings for Financial Inclusion put out by the Economist Intelligence Unit and the Center for Financial Inclusion.  Over the years, it has consistently ranked at or near the top.  This quick action by the Central Bank in response to the coronavirus crisis shows their recognition of the important role that financial inclusion will play in rebuilding the economy.

Rebuilding from the Bottom Up

Governments around the world have issued stay at home orders to save lives.  But these same orders have destroyed livelihoods, especially for those with the smallest incomes.  When the all clear sounds, these people will have consumed all their savings and traded assets to feed their families.  At that time governments will want financial inclusion providers to be injecting capital, helping families resume their income-generating activities.

For that to happen, governments and Central Banks will need to be taking the following actions right now to sustain these financial first responders. 

  1. Work with financial inclusion providers to connect with the hardest hit communities – Microfinance providers and the promoters of self-help groups and savings groups are hard at work now supporting their clients through this crisis (see my posts on VisionFund Mexico, BRAC, CARD and Fundacion Paraguaya).  They can become an important outlet for government communication and services.
  2. Support operating costs – With no income, financial inclusion providers will soon run out of cash to pay their staff.  Governments and donors should provide operating grants to help them keep running for the next two or three months.
  3. Refinance portfolios – Clients will need new loans to restart their businesses.  Financial inclusion providers will need additional capital to provide those loans.  Central Banks should follow the example of Peru and provide these refinancing facilities.

With these steps, governments can catalyze the resilience of people living on the margins to lead our recovery.

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