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Microenterprises show signs of bouncing back as lockdown eases

Update 9: SEDPI Rapid community assessment on the impact of COVID-19 to microenterprises

Six weeks after easing of lockdowns due to COVID-19, nine out of ten microenterprises are already open for business. This is the highest rate of microenterprises opening for business since April 24 in the midst of enhanced community quarantine in the country where only three of ten were open.

Microenterprises reporting strong demand in their products and services tripled from one out of ten to three out of ten in a span of two weeks. Access to supply needs remains stable. There was no reported suspected, probable nor confirmed case of COVID-19 out of 6,296 respondents.

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 June 8-12 with respondents located in Agusan del Sur and Surigao del Sur.

Microenterprise recovery

With demand picking up, a positive outlook to bounce back within one month improved. Those who expect to bounce back within one month doubled to almost 37% of respondents.

This is on the back of having sufficient capital to fund their microenterprises. 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 86%as of June 12. 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.

With microenterprises cautious on demand, they prefer not to refinance their loans. Accessing more debt at this point, may not be used for productive purposes.

Half opted to resume normal repayments while the other half requested for a longer grace period before they resume payments. An overwhelming majority of the latter requested for up to two months grace 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 cash assistance from the government may have also afforded microenterprises some elbow room in managing their finances.

 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.

Initially, SEDPI predicted that as much as 70% of microenterprises would default on their loans to MFIs once repayments resume due to the lockdown. Massive default at this magnitude would be devastating to the industry since most MFIs have had little to no collections from mid-March until the end of May.

Liquidity to finance operations is of a particular challenge due to extended grace periods and continued overhead expenses piling up. 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).

In the first week of June, MFIs reported improving collections with some managing to recover as much as 77% of collections. This is an improvement from a high of 47% collection rate for the month of May.

Should this trend continue, SEDPI estimates that default rates would be 10% -20% which is a far cry from the initial 70% default rate estimate. This is largely due to the number of microenterprises opening up and the increase in the collection from MFIs.

Caution on optimism is advised since the University of the Philippines reported that the local transmission rate of COVID-19 is still increasing. A second wave that could be more devastating is also not completely out of the picture. Should this happen, MFIs’ financial sustainability may be threatened.

 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.

The proposed Philippine economic stimulus package contains a total of PhP245 billion budget to assist micro, small and medium enterprises. Preferential option to those at the bottom of the pyramid should be extended first since these groups can bounce back quickly; only need a small amount of stimulus; will reduce the need for cash dole-outs; and will reach millions of Filipino low-income households.

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 its Interim Rehabilitation Support to Cushion Unfavorably-affected Enterprises by COVID-19 (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.

Development Bank of the Philippines (DBP) also launched its Rehabilitation Support Program on Severe Events (RESPONSE) that provides loan restructuring for up to five years with market-rate interest rates.

These are good initiatives of the two government financial institutions 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.

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.

Islamic finance

In SEDPI’s financial modeling for rebuilding and recovery of its microfinance operations, 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.

Based on simulations with 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.

Financial inclusion

It is also important to focus more on financial inclusion to make sure that bank accounts are opened for all low-income families so that they can easily access cash transfers and cash relief in times of disaster. This will and ensure that funds truly land in the pockets of low-income groups and could potentially reduce corruption and patronage politics.

In relation to this, even more, basic is to streamline processes for low-income groups to get government identification documents such as birth certificates, marriage certificates, and licenses.

This pandemic highlights that access to basic services starts with identity. It is therefore urgent to fast track the implementation of the Republic Act 11055 or the Philippine Identification System Act.

It is also high time to have universal disaster insurance since the Philippines ranks high in the World risk index. This will make us better prepared for disasters and pandemics in the future.

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 that microenterprises are showing positive signs of bouncing back faster.

This could be further hastened when appropriate 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.

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