Updated: Jul 23, 2020
By Peter Zetterli, CGAP
This post is also published on CGAP's blog here
Earlier in the COVID-19 crisis, Daniel Rozas wrote a widely circulated blog post analyzing the liquidity situation of microfinance institutions (MFIs) using MIX Market data from 2016 and 2018. Thanks to the CGAP Global Pulse Survey of Microfinance Institutions, we are now able to refresh his analysis with current data - and the results are striking. While the data show that MFIs have largely averted a liquidity crisis, this depends on investor willingness to refinance (or extend) maturing debts. Moreover, for many MFIs liquidity has been sustained by massive slowdowns in lending that accompanied moratoria on repayments, but should this be extended beyond the initial months, it would effectively push the liquidity crunch onto the low-income communities they are supposed to serve and put the sustainability of the MFIs themselves into question.
Are MFIs facing a dangerous liquidity crunch?
In an environment with a declining inflow of cash due to shutdown economies and moratoria on loan repayments, how many months are MFIs able to survive before their money runs out? This question has been at the forefront of discussions for months, as funders and policy makers try to anticipate the problems that MFIs will face due to COVID-19 and develop suitable responses. A great deal of attention has been spent on the need for liquidity facilities to keep MFIs afloat through the crisis.
With the CGAP pulse survey data, we can start to answer this question by comparing MFIs’ cash on hand (including liquid assets) with upcoming expenses. Aside from loan disbursements, there are three main types of cash outflow worth paying attention to: operational expenditures required to run an MFI, withdrawals by depositors and loan repayments by the MFI to its funders.
The simplest analysis is to compare cash on hand with operational expenditures (opex) to see how many months a given MFI can continue operating at normal levels before it runs out of money. The results of this analysis are shown in the figure below, which compares Rozas's original analysis on pre-crisis data to our new analysis using current data (as of end April 2020).
The findings may come as a surprise: The liquidity situation among MFIs as of end April does not appear worse than before the crisis. More than half (56 percent) of MFIs would have no trouble covering a full year's worth of operations with the cash and liquid assets they have on hand. This is 10 percentage points more than in the analysis of pre-crisis data from MIX Market. Another 30 percent would be able to cover at least six months of operations, slightly less than the 35 percent found in pre-crisis data.
To be sure, a number of MFIs are facing liquidity risks: 14 percent of MFIs have cash cover for less than three months of opex, and half of those have cash reserves that will last them a mere month or less. But both figures are actually smaller than in the pre-crisis analysis, indicating that fewer MFIs are exposed to major liquidity risk today than under more normal market conditions.
This raises the question: Which MFIs are most exposed to these liquidity shortfalls? Are there patterns that can help shape our understanding of how liquidity risks are developing across the sector?
Looking at the same measure of liquidity across regions shows some notable differences. About 22 percent of MFIs in Latin America and the Caribbean and 14 percent in Sub-Saharan Africa have fewer liquid assets than the operational costs expected in the next three months.
In both regions, this is largely driven by opex levels that are substantially higher than that of other regions. Among MFIs in Sub-Saharan Africa, this is partly counter-balanced by the highest cash-to-asset ratio of any region. Since this is not the case in Latin America, we see a greater share of liquidity constrained MFIs there.
Meanwhile, at least a third of MFIs in every region have enough cash to cover over a year of sustained operational costs. In three regions, this goes for over 60 percent of MFIs in our sample.
Studying the MFIs by size also gives useful insight. Not surprisingly, the largest institutions have the largest cash cushions, and very few of them are in the most difficult categories: 7 percent of MFIs with over $100 million in total assets have fewer liquid assets than their quarterly opex. About 73 percent can carry on for a year or more without any additional liquidity.
Small MFIs are more constrained: 18 percent do not have enough cash on hand to cover a quarter of opex. The same goes for 10 percent of medium-sized MFIs. However, more than half of MFIs in either category have enough liquidity to operate at pre-crisis levels for a year or more.
There are two important caveats to this analysis. First, the opex reported are for the first quarter of 2020; many MFIs likely have taken measures since then to trim operational costs, which will alleviate the cash pressure and lengthen the duration of reserves. In a few weeks, we will have opex data also for the second quarter. Second, this analysis does not yet include deposit withdrawals or debt repayments to funders, both of which will strain cash buffers and shorten the duration of reserves.
To partly address the second point, we can include upcoming debt payments due to funders. This changes the picture substantially. Over a quarter (26 percent) of MFIs don’t have enough liquidity to cover their costs and debt repayments for the next three months. Nearly one in five (19 percent) MFIs report less liquidity than their costs and debt repayments for a single month or less.
What does this mean for the sector and low-income clients?
The first takeaway is that there is no evidence to support a widespread liquidity crisis across MFIs — at least not yet. The fact that many MFIs have likely made operational changes to reduce operational costs will further alleviate pressures on cash reserves. That said, cash levels are worryingly low among a subset of MFIs in Latin America and Sub-Saharan Africa, and the situation is worth monitoring closely. In the latest wave of the CGAP pulse survey, 29 percent of MFIs said they anticipate liquidity issues in the next three months.
The second takeaway is that a significant portion of the sector remains exposed to refinancing risk. One in four MFIs will potentially face liquidity problems if they don’t secure refinancing from funders on their debt. Hence the onus is on the funder community to sustain financing for their investees, lest they create a liquidity crisis where otherwise there would not be one.
Finally, it is not at all clear what this means for the well-being of MFIs and their clients. Liquidity is only a necessary means to an end: namely, the long-term sustainability that enables MFIs to reliably serve their clients. If MFIs choose to reduce disbursements in a bid to preserve cash, they will be shoring up their own liquidity by denying it to the low-income communities they are intended to serve. And by curtailing the core business, maximizing liquidity for its own sake could end up shrinking and eroding the institutions.
In early findings from the survey, we can see this drawdown in lending clearly. Three in four MFIs have reduced disbursements due to COVID-19, and to a very significant degree: two-thirds of them have slashed lending by more than half compared to normal levels. No wonder cash reserves are building up. At the same time, 69 percent of MFIs are implementing moratoria on repayments. Liquidity levels will depend on the balance between these two factors.
Ultimately, however, the crucial factor will be how soon moratoria will end and what repayment rates will look like once they do. So far, MFIs have by and large been able to shore up cash and remain liquid. But if customers start defaulting on those deferred payments, lenders could see significant strain not just on liquidity, but on solvency. And aside from repayments, what will be the state of demand for credit: Will there be a quick rebound like the one shown recently by Stuart Rutherford’s Hrishipara Diaries? Or will loan demand languish amid continually stagnant economies?
Peter Zetterli is a senior financial sector specialist at CGAP. The CGAP Global Pulse Survey of Microfinance Institutions is a global effort that depends on the participation of MFIs around the world. To learn more and participate in the survey, please visit www.cgap.org/pulse.
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