Continuing with the theme of emerging difficulties in the microfinance sector (read: “A regulatory challenge,” published October 06, 2020), there is a need for forward-looking regulatory interventions in the wake of first coronavirus wave and a potential second wave, to arrest long-term damage to sector’s fundamentals. The relief announced earlier this year may have worked back then; now a fresh approach is in order.
A recent report by the World Bank’s CGAP Institute – titled “Microfinance and Covid-19: Principles for Regulatory Response” – provides some food for thought. Looking at several countries including Pakistan, the study identifies several principles that regulator can use in times of a pandemic. For instance, the microfinance regulator ought to have a pro-poor focus in its crisis response. The response should have clear timeline and scope. It must weigh the costs and benefits of relief measures on sector’s soundness.
In Pakistan’s context, the crisis response ought to focus more on non-banking microfinance companies (which are regulated by the SECP). During the lockdowns beginning March-2020, these institutions had to close down for a period as they were not deemed as “essential services” – business continuity may come into question again in case of another lockdown. Microfinance Banks were able to operate, for they were part of banking system. These banks could also count on a whole lot of support from their regulator, the SBP.
How relief measures are designed is another area where regulators need to work. The loan deferment relief, offered by both SBP and SECP, was “opt-in” by nature, that is the borrowers had to apply themselves to avail this relief. While this helped avoid a universal loan deferment, the side effect was that a majority of borrowers, as per a Pakistan Microfinance Network survey this May, were unaware that such a relief measure even existed, likely due to lack of proper communication by microfinance providers.
In the end, who gets the relief is a tricky question! The CGAP study rightly points the need to avoid moral hazard by extending relief to habitual delinquents or willful defaulters. But what can ensure that the poorer borrowers are still protected? While the study did not provide answers in this regard, it appears that highly targeted and timed relief measures are in order for the sector, which requires a data-driven approach. Besides, improved digitization is urgently required to get a real-time picture for future crises and support.
Pakistan’s microfinance regulators will be better off preparing now for next Covid wave and its intensified challenges. Pakistan is not the only country with a fragmented microfinance regulatory regime, but it is something that hampers coherent crisis response. Given the sector’s challenges on “liquidity” front, the study recommends the tried-and-tested solutions such as credit guarantee schemes. In addition, it suggests regulators to create “leading indicators” to monitor the sector’s financial health and consumer protection during crises. Microfinance has come a long way in Pakistan; another crisis can set it back by many years.