COVID-19 and the Future of Microfinance: Evidence and Insights from Pakistan

Abstract

The COVID-19 pandemic threatens lives and livelihoods, and, with that, has created immediate challenges for institutions that serve affected communities. We focus on implications for local microfinance institutions in Pakistan, a country with a mature microfinance sector, serving a large number of households. The institutions serve populations poorly-served by traditional commercial banks, helping customers invest in microenterprises, save, and maintain liquidity. We report results from 'rapid response' phone surveys of about 1,000 microenterprise owners, a survey of about 200 microfinance loan officers, and interviews with regulators and senior representatives of microfinance institutions. We ran these surveys starting about a week after the country went into lockdown to prevent the spread of the novel coronavirus. We find that, on average, week-on-week sales and household income both fell by about 90%. Households' primary immediate concern in early April became how to secure food. As a result, 70% of the sample of current microfinance borrowers reported that they could not repay their loans; loan officers anticipated a repayment rate of just 34% in April 2020. We build from the results to argue that COVID-19 represents a crisis for microfinance in low-income communities. It is also a chance to consider the future of microfinance, and we suggest insights for policy reform.

Managing the COVID-19 pandemic in poor urban neighborhoods: The case of Accra and Johannesburg

“…Various studies have pointed out the severe, direct economic impacts of lockdowns of public life on the global poor ( Aushian and Abuya, 2020 , BRAC, 2020 , HSRC, 2020 , Kesar et al, 2020 , Le Nestour et al, 2020 , Malik et al, 2020 , Rahman and Matin, 2020 , Sumner et al, 2020 ). However, few studies in low-income settings analyze the impact of lockdowns on other dimensions of well-being, such as schooling of children, health concerns, and emotional stress, which can, in turn, be triggered by direct income loss, anxieties about future income, reduced social interaction, and isolation at home.…”

“…Various previous studies already show that, as of today, the pandemic has had a larger economic than health impact on people living in poverty ( Aushian and Abuya, 2020 , BRAC, 2020 , HSRC, 2020 , Kesar et al, 2020 , Le Nestour et al, 2020 , Malik et al, 2020 , Rahman and Matin, 2020 , Sumner et al, 2020 ). This outcome also seems to be the case for the urban poor in Accra, where many people are dependent on their own business in the informal economy.…”

“…The cost of such lockdowns, however, is highest for poor individuals, who are more likely to work in the informal economy and/or depend on a daily wage: for them, extreme physical-distancing regulations lead to an immediate loss of income. Recent studies on the impact of a shutdown of economic activities on low-income families consistently find that income and food consumption are reduced significantly ( Aushian and Abuya, 2020 , HSRC, 2020 , Kesar et al, 2020 , Le Nestour et al, 2020 , Malik et al, 2020 , Rahman and Matin, 2020 ). Due to the extraordinarily high economic burden on the poor and following social unrest ( Akinwotu and Asiedu, 2020 , Egger et al, 2020 , Ward, 2020 ) and police and military brutality ( Lamb, 2020 , Ngqakamba, 2020 , Wemakor, 2020 ), African constituents have been pressuring their governments, who are relaxing restrictions ( Giles and Mwai, 2020 , Tih, 2020 ) despite rising daily case numbers.…”

Socio-economic and environmental impacts of COVID-19 pandemic in Pakistan—an integrated analysis

“…As a result, in Pakistan the government also announced complete lockdown from March 23 to May 9, 2020, involving various sectors including educational institutes, businesses and public transport in all the provinces. As per the government guidelines, people employed in formal sector enjoyed job security and were also being paid during this lockdown, but those associated with informal sector had no access to all these benefits, and most of them were suspended (Malik et al 2020). From the global instances, it was analysed that the daily wagers, street vendors, domestic helpers, people involved in courier and delivery services, cleaners and waste collection personnel possess the maximum disease exposure risk.…”

The economics of the COVID-19 pandemic: an assessment

“…But the details of how these costs have played themselves out have varied enormously from country to country. Evidence from Pakistan, for instance, suggests that microfinance in low-income communities now faces a drastic crisis ( Malik et al , 2020 , this issue). Rapid-response surveys suggest that on average, week-on-week sales among microenterprise owners and household income both fell by about 90 per cent, households’ primary immediate concern in early April became how to secure food, and about 70 per cent of the sample of current microfinance borrowers reported that they could not repay their loans.…”