Update 8: SEDPI Rapid community assessment on the impact of COVID-19 to microenterprises

After one month of general community quarantine (GCQ) due to COVID-19, 84% of microenterprises are already open for business. Although this is in a backdrop of weak sales since almost all of those reported weaker demand for their products and services. On the positive side, microenterprises are reporting to have stable access on their supply needs.

There was one reported suspected case of COVID-19 out of the 4,389 respondents. There were no probable nor confirmed cases.

The research is part of a series of rapid community assessments that determines the economic impact of COVID-19 on microenterprises and the informal sector. SEDPI, a microfinance institution (MFI), conducted the survey from May 25-29 with respondents located in Agusan del Sur and Surigao del Sur.

Microenterprise recovery

Despite the weak demand, 82% of microenterprises are still confident to recover from the pandemic within two months, if they get sufficient capital to restart their livelihoods. The remaining 18% expect to recover within three to four months. The amount of financing needed to restart range between PhP3,000 to PhP9,000.

Government assistance

Almost all of SEDPI members were able to receive relief goods from the government. The relief goods were mostly rice, canned goods, and soap that would fulfill the needs of households in one to four days.

During the rapid community assessment conducted on April 6, only 10% of members were able to receive the cash assistance program from the government. This improved to 84%as of May 29. Each household received PhP3,000 to PhP5,000.

Financing options

All respondents are SEDPI members who accessed financial services such as loans, savings, insurance as well as financial literacy training. Ninety-five percent are women who have collateral-free loans up to PhP20,000 payable in six months to finance their livelihoods such as sari-sari stores, carinderia, farmers, fisherfolks, dressmaking and vending. The loans bear an interest rate of 3.33% per month which is comparable to credit card interest rates.

Due to sluggish demand, microenterprises prefer not to refinance their loans. Accessing more debt at this point, may not be used for productive purposes. Most would rather resume normal repayments while a few prefer to restructure their loans.

SEDPI financial inclusion officers report that members preferring to restructure loans are those that already have problematic repayments even before the pandemic. The same phenomenon was confirmed and observed in other microfinance institutions ARDCI, ASKI, and KCCDFI.

MFIs offer short-term loans that range from 3-6 months. Members are able to repay their loans quickly and could access repeat loans immediately. The cash assistance from the government may have also afforded microenterprises some elbow room in managing their finances, therefore there is less need for restructuring and refinancing.

 Essential financial service to low-income groups

There are approximately 8 million low-income households that access microfinance services in the Philippines. MFIs are front liners in the delivery of financial services to low-income groups who find it difficult to open deposit accounts and access loans from commercial banks.

During the start of the lockdown period, SEDPI predicted that as much as 70% of microenterprises would default on their loans to MFIs once repayments resume. This would be devastating to the industry since most MFIs have had no collections for almost two months. Liquidity to finance operations is of a particular challenge due to collection moratorium and continued overhead expenses piling up.

With the periodic rapid community assessments, the threat of mass default may be lesser than expected but would still push the financial sustainability of most MFIs to the brink of collapse. MFIs only have enough cash to survive for a maximum of six months with a 20% past-due rate on loans. This is based on a study of the Consultative Group to Assist the Poor (CGAP).

Financing MFIs to support microenterprises recover

SEDPI estimates that PhP40B economic assistance to microenterprises channeled through MFIs will address their financing needs to jumpstart their livelihoods. This is based on 8 million estimated number of microenterprises and PhP5,000 economic assistance package.

To lessen the burden of microenterprises, government financial institutions and commercial banks are encouraged to extend 0% loans to MFIs so that this could be passed on at lower cost to microenterprises. Lower pass on rate decreases the financial burden of microenterprises to repay.

Land Bank of the Philippines (LBP) came out with an iRESCUE program that provides restructuring of MFI loans to as long as 10 years with principal and interest repayment grace periods of up to three years. It is also reviving its Calamity Rehabilitation Support (CARES) program that can cater to the credit requirements of those affected individuals/entities in officially-declared natural and man-made calamities/disasters and/or in pests and diseases affected/damaged/devastated areas.

These are good initiatives of LBP and should be lauded since it sets a standard for commercial banks to follow. However, the programs could be further improved if the restructuring is extended at 0% interest owing to the fact that MFIs will surely bear huge loan losses due to the pandemic. This is a way to abate losses MFIs will absorb.

Islamic finance

 In SEDPI’s financial modeling for rebuilding and recovery of its microfinance operations, a debt to equity arrangement on the existing debt of MFIs to banks is the fastest way to recovery. This is because interest repayments will be suspended and will be replaced with dividends once the MFIs recover.

Within interest-based financing, recovery of MFIs would take five years or more to recoup loan losses due to the pandemic. In equity-based financing which is interest-free as in Islamic banking, it will take as short as two years to recover from the pandemic.

Last August 22, 2019, the Islamic Banking Act or R.A. 11439 was passed. However, the implementing rules and regulations (IRR) are not yet out. There is an opportunity to shift to Islamic banking amidst the pandemic so that the profit and loss sharing scheme between the bank and MFIs could be implemented.

It is therefore important that the IRR be released soonest so that banks can create Islamic Finance windows available to MFIs and the broader public.

Prioritizing microenterprises

The negative impact of COVID-19 to microenterprises is undeniable. As the government eases up community quarantines, the next task at hand is rebooting the economy. The research shows microenterprises may recover faster if the right support programs are provided at the right time.

Due to their nature, microenterprises have the ability to bounce back quickly because their level of business operations is not sophisticated and only needs a small amount to restart. Priority should be extended to them since they are the most vulnerable and also only need a small amount of government stimulus to get them back on their feet.

Government financial institutions should lead the way in supporting MFIs because this will directly impact financing options to support the rebuilding and recovery of microenterprises. It would also be a good signal for private commercial banks to follow suit.

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