Insights from the investment team: a cautious return to normality for the microfinance sector

25/06/2020 Blog, Covid-19

On a recent webinar, Sébastien Juhen, Lead Portfolio Manager for the BlueOrchard Microfinance Fund (BOMF), Matthew Sparkes, Chief Risk Officer and General Counsel, and Normunds Mizis, Chief Credit Officer, shared an update on the current situation for microfinance investing and their cautious optimism on the current situation with the Covid-19 pandemic.

The last few months have been challenging for economies around the world, however, the resilience of the microfinance sector and a number of developing markets has been noteworthy. From our perspective in the field, many institutions have fared somewhat better than we had anticipated at the beginning of the crisis. There are a number of reasons for this – in many cases we saw countries coming out of lockdown in May and June with comprehensive plans for resuming normal activities. On the economic side, in many emerging markets, the situation seems to be evolving in a slightly better manner than initially assumed.

Particularly in South East Asia, where countries like Vietnam and Cambodia have reported relatively low levels of disruption despite their proximity to China, and they have done a good job of managing the situation within the constraints of their own healthcare systems. Latin America has faced more issues and consequently, lockdowns have needed to continue, which will likely have an ongoing effect for these economies. However, as countries start to open up again, we hope that micro, small and medium-sized enterprises (MSMEs) and microfinance institutions (MFIs) will be able to reboot their operations.

For many of the countries that we invest in, this is starting to come to fruition with the first wave passing and more normal economic activity beginning to resume. As a result, the curve has flattened with regard to rescheduling requests from MFIs which have slowed to a near halt in May. At present, we expect that approximately 12% of 2020 repayments to BOMF will be rescheduled into 2021. We are also receiving a significant number of requests for new financing or additional financing from existing investees. We are beginning to re-open the investment pipeline on a cautious basis to help meet this expanding demand which we believe further highlights the resilience of the market.

While a second wave is still possible, we anticipate that healthcare systems should be better prepared to respond to this, and governments have learned lessons on how to manage the situation from an administrative perspective. This should mean that ideally and practically speaking, the economic impact of a second wave would be less significant.

As the situation looks to be improving and countries are coming out of lockdown, we are looking at where we can provide support to smaller businesses by resuming lending to some of the most resilient institutions. After a couple of weeks of not lending, we are resuming our lending activity with caution, for example, we have recently approved a loan to a longstanding client in Paraguay, who we have been working with for more than a decade. It is one of the biggest institutions in the country and is in a position to support companies as they come out of economic lockdown and begin to resume more normal levels of activity. From an impact and credit risk perspective, in countries where economic recovery is taking place and where there are established, resilient institutions, it is a good time to be lending again.