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Demand for microenterprise products remains weak amid COVID pandemic

Update 7: SEDPI Rapid community assessment on the impact of COVID-19 to microenterprises

In the second week of general community quarantine (GCQ) due to COVID-19, only 13% of microenterprises experienced strong demand for their products and services. This is slump from a hopeful 49% expecting a stronger bounce back before the government ordered easing of community quarantine measures on May 1.

There were 44% among microenterprises that expected weaker demand but 78% of them actually experienced this in the same period. In contrast, 84% remain confident that access to supply for their livelihood won’t be a problem.

On a positive note, 73% of microenterprises already opened their business operations; an improvement from 31% during the lockdown period. There was also no reported suspect, probable nor confirmed case of COVID-19 among the respondents in the past month. However, this is in the context of a lack of mass testing in the area. Nonetheless, this may be the effect of the quarantine measures implemented.

The research is part of a series of rapid community assessments that determine the economic impact of COVID-19 on microenterprises and the informal sector. SEDPI, a microfinance institution (MFI), conducted the survey from May 11-15 with 4,479 respondents located in Agusan del Sur and Surigao del Sur.

 Microenterprise outlook

Despite the weak demand, 71% of microenterprises are still confident to recover from the pandemic within two months, if they have sufficient capital to restart their livelihoods. The remaining 29% expect to recover within three to six 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 48% on April 24, 60% on April 30, 75% on May 8 then 78% on May 15. 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.

Compared to previous weeks, less and less microenterprises are requesting for refinancing their loans. This dropped from a high of 23% of them needing refinancing two weeks ago to just 5% this week. Less refinancing requests mean less liquidity pressure to microfinance institutions (MFIs).

Members preferring to resume normal repayments slightly dipped to 68% compared to last week’s 70%. Conversely, those requesting for restructuring went up from 20% to 27% in the same period.

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 apparent sluggish demand may have led microenterprises to rethink accessing more debt that may not be used for productive purposes. 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 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. This good initiative 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.

Prioritizing microenterprises

There should be priority extended to micro-enterprises since they are among the most vulnerable groups and are in most need of social protection and economic assistance. Government financial institutions should lead the way in supporting MFIs because this will directly impact financing options that would be made available to microenterprises. It would also be a good signal for private commercial banks to follow suit.

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.

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