Insights from the investment team: Resilience and road to recovery

25/03/2021 Blog, Covid-19

On the last webinars, Sébastien Juhen, Lead Portfolio Manager for the BlueOrchard Microfinance Fund (BOMF), and Matthew Sparkes, Chief Risk Officer and General Counsel, shared an update on the current situation for microfinance investing. We also had the pleasure to welcome Njeri Kirumbi, Deputy Regional Director Africa in Private Debt, and Kaspars Delins, Head of Origination and Structuring. Njeri shared her insights from the field, focusing on the digital transformation of the African region whilst Kaspars focused on the microfinance sector’s digital transformation in Central and Eastern Europe (CEE) and Central Asia.

A look at the markets

Going into 2021, we have seen a continuation of 2020 with markets and investees showing signs of resilience and progress in the first months of 2021. In markets such as India, for example, investees have resumed normal business, making payments, disbursing loans, and working hard on making up ground on what was lost during a period of lockdowns and restrictions due to the Covid-19 pandemic.
Looking at Latin America, which has been dealing with the Covid-19 pandemic for almost exactly one year, a positive GDP growth rate is expected for 2021. Chile has been setting an example with regards to vaccination efforts, hitting the one million mark beginning of February. Both, the expected GDP growth and the vaccination campaigns, can be seen as a positive note for the long-term growth and stability once the economy recovers fully from the pandemic. In addition, the approval of a 3-year Extended Fund Facility of USD 1.78bn for Costa Rica by the IMF represents an encouraging sign for the future recovery of the country as well as the Latin American region.
With regards to the African continent, investees have shown strong resilience. Thus far, there have been no rescheduling requests from investees. In particular, the agriculture sector saw a positive performance without any notable disruption during the Covid-19 pandemic.
In Eastern Europe and Central Asia, countries with shorter lockdowns seem to have fared better on sustaining businesses. Similarly to the African region, with the start of the agro season, loan demand has been picking up in several countries.

Digital transformation in Africa

Internet growth rates in Africa are higher than in Asia, Latin America, and the Middle East, making the digital transformation in the financial sector across Africa a viable alternative to traditional banking. The Covid-19 pandemic has further contributed to this development. The digital ecosystem is dominated by payment solution providers and mobile money applications, expanding financial services to underserved parts of the population and becoming a supporting factor for microfinance. 70% percent of the continent’s financial technology is based in 4 countries (Egypt, Kenya, Nigeria, and South Africa) with countries like Ghana, Uganda, Cameroon, and Rwanda catching up rapidly. Digital innovations have been transforming lives across the continent not only in the financial sector but also in areas such as edutech and digital farming.

Digital transformation in the microfinance sector

Digitization plays a major role in the microfinance sector in CEE and Central Asia. More and more institutions have been launching mobile applications to facilitate the loan origination process. In Bosnia and Herzegovina, for example, the usage of online loan application has increased from 4% to 14% over the last 3 years. Digitization has been a key driver to facilitate sustainable growth by providing clients easy access to deposit and loan products, and automating back-office operation flows. Furthermore, digitization has been reducing the use of paper, the need for branch visits, and improving transparency. With the widespread use of digitization, institutions across CEE and Central Asia were actually well prepared and equipped to address social distancing challenges posed by the Covid-19 pandemic. However, challenges remain with regards to, for example, regulatory shortcomings to fully digitalise loan underwriting and issuing processes. Often digital signatures are not available and credit bureau data access still requires in-person authorisation.

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