For most financial institutions globally, 2020 Financial Year (FY2020) is likely to be described as a year of abysmal performance, an outlier which caste malignant spell on important financial indicators, especially liquidity and profitability. Unavoidably, Microfinance Institutions (MFIs) are spared by this imminent spell. This is because; MFIs predominantly serve the fragile Micro/SME segment of the market which has been massively hit by the COVID-19 pandemic, transmitting unprotected direct impact unto the MFIs as well.
You may recall that, MFIs have just emerged from the catharsis of the banking sector “clean up” by the Central Bank a year ago, which exercise saw some of them disappeared from the market completely. And here again is COVID19 pandemic, ravaging and eroding almost all their modest gains. What a double jeopardy it seems. In fact, had it not been COVID19 pandemic, most MFIs had projected FY2020 to consolidate gains, build trust and upgrade brand and reputation. Some had indeed intended to commence digital banking projects, which projects require massive capital injection.
The World Bank classifies MFIs to include; Non-Bank Deposit-taking Financial Institutions (such as Savings & Loans Companies, Finance Houses etc), Rural Banks, Financial NGOs, and Cooperative Associations, all offering simplified financial services to Micro/SME clients with loans, savings, and insurance services. The Bank of Ghana however, under the guidance of BSDTI Act 930, classifies these institutions as Specialized Deposit taking Institutions (SDIs). They have separate Regulatory Prudential Requirements from the universal banks, but of same significance.
MFIs play significant roles in an evolving economy like Ghana. They provide jobs; promote financial inclusion and financial literacy for the Micro/SME clients (which otherwise have limited access to main commercial banks). The World Bank estimates that, the global Micro/SME financing gap currently stands at $5.5trilion, a gap which provokes a call for MFIs to be well positioned and propelled to bridge. It is in this light that, efforts geared towards salvaging and reviving the MFI subsector are crucial strides. However, for them to survive the hostilities of FY2020, brought about by the combined effects of the vestiges of the “clean-up” and COVID19 pandemic, they must jealously watch and guard one financial indicator-liquidity, with curious attention.
The ease with which MFIs are able to meet their current and short term financial obligations as they fall due, defines their liquidity. Meeting your current and short term financial obligations means everything for your survival. They include payments to depositors on demand, suppliers of vital operational inputs (like IT software), staff salaries, utilities etc. In fact, not meeting these obligations promptly could mean your extinction from the market sooner than tomorrow. But unfortunately however, the COVID19 has brought untold hardship on MFIs as they struggle to recover loans granted to customers, and generate other financial income for liquidity purposes. Most MFIs have granted loan moratoriums to their customers spanning from 3-6months. This suggests postponement of immediate regular cash inflows to match current liabilities (obligations).
In fact, the Bank of Ghana’s Q1-2020 banking sector report reveals that, the MFI subsector “appear less resilient to liquidity and credit shocks”. This is due to “constrained liquidity conditions and capital shortfalls facing the subsector”. It further revealed that, liquidity stress-test conducted for the subsector shows minimal survival rate for most MFIs. This is a worrying revelation, and rightly so.
In this regard, MFIs are strongly advised to pay curious attention to (maintain and) remain liquid, especially in these chaotic times. They must desist from undertaking capital intensive projects likely to drain cash (liquidity) from them. They must be liquidity-minded rather than profitability-minded, at least for now. In fact, liquidity precedes profitability at all times. This is because, being profitable does not necessary mean being liquid for any given period. For example, an MFI could post good “bottom line” (profit), but could still be illiquid. This is attributable to non-cash items (such as depreciation, revaluation gains/losses, etc) considered in the profit basket for a given period. These items could misconstrue actual liquidity position for the same period. The non-cash items however, are subjective internal policies for the institution’s reporting style.
For MFIs to lessen liquidity constraints on them, they must undertake some draconian measures such as; negotiating for postponement of maturing debts (including supplier’s debt), temporary retrenchment for non-critical staff or slashing salaries, whilst putting operational cost under strict control. They may also convert other liquid assets into cash for temporary liquidity reliefs. When these measures are combined at appropriate intensities, even modest profitability is achievable.
As government gradually lessens lockdown restrictions on COVID, and business confidence showing signs of recovery, MFIs are strongly advised to exercise utmost credit and operational risk strategies, combined with sound corporate governance principles, in order not to exacerbate the current precarious liquidity plight.
To rescue the subsector from liquidity cleft, the Bank of Ghana has outlined temporary interventions, aiming at lessening liquidity stress on MFIs. These include:
- Providing liquidity support to Savings and Loans, and Finance House companies facing temporary liquidity challenges.
- Strengthen the capacity of ARB Apex Bank to provide liquidity support to rural and community banks facing temporary liquidity challenges.
- Extension of the deadline for MFIs to meet new capital requirements to December 2021.
- Reduction of the primary reserve ratio from 8% to 6% for Savings & Loans, Finance houses and rural banks. And reduction of primary reserve ratio from 10% to 8% for other microfinance companies.
- 30days loan repayment past due to be considered as current.
These interventions extended by the regulator must meticulously be appropriated by the MFIs for intended purpose of survival (liquidity) only, rather than using same for presumptuous profiteering enterprises, which eventually jeopardize the subsector, and result in uncalculated loss of depositors’ funds. A word to the wise…
The writer is an SME Banking Researcher
Email:[email protected] , Tel: 0549847220/0206866593