When COVID-19 disrupted social interactions across the globe, microfinance was one of the most affected sectors. Creditors could not meet their clients in person and therefore had difficulty in collecting repayments. On top of this, microfinance institutions (MFIs) faced challenges in disbursing loans due to the restrictions on movement and a decreased demand for credit from those borrowers with an uncertain economic future as a result of economic hardship. The credit risk ratio of MFIs, which measures the risk of underlying credit portfolios at risk after 30 days, grew on average by a staggering 45%, according to financial experts.
But, despite the destructive impact of the pandemic, the global microfinance industry is now currently experiencing significant growth and transformation following a spectacular revival. How has this been possible?
COVID-19 impact on the microfinance sector
When COVID-19 attacked the world, many MFIs experienced liquidity problems as loan repayments slowed down due to the inability of borrowers to make repayments on time. Higher default rates were observed on a global level. This translated into reduced capital adequacy due to losses on loans, the need for additional provisioning, and asset liquidation as well as increased health-related expenditure burdening low-income households.
The percentage of non-performing loans rose to higher than 20% in many regions in India, Bangladesh, Peru, and Bolivia as well in sub-Saharan Africa. However, while the COVID-19 pandemic highlighted the vulnerabilities of the sector, it has also spurred innovation and adaptation, potentially leading to more resilient and digitally integrated microfinance ecosystems with improved risk management.
Prior to the pandemic, the value of the global microfinance market was estimated at US$178.9 billion. Today, a little over one year after the World Health Organization declared that the virus was no longer a world health emergency, the microfinance market is estimated at close to US$200 billion.
As of 2024, the sector is projected to grow at a compound annual growth rate (CAGR) of approximately 12.3% from 2023 to 2027, with the market expected to increase by US$113.01 billion during this period. Several key trends are currently shaping the microfinance market such as digital connectivity and technological advances. The adoption of digital platforms, including social media, AI, and machine learning, is improving the efficiency and reach of microfinance services. This digital transformation facilitates quick and easy access to credit, making financial services more accessible to both underserved rural and urban communities.
Fig. 1 Global microfinance market value and forecast CAGR growth
Microfinance sector in Asia
In terms of regional growth, Asia appears to be the major driver. The Asia-Pacific region is witnessing rapid growth in microfinance due to the increasing number of small and medium-sized enterprises (SMEs) and the growing penetration of digital financial services. India and China are leading this growth, with substantial increases in SME activities and internet usage driving demand for microfinance services.
Microfinance sector in Africa
The microfinance market in Africa is experiencing significant growth and transformation, driven by increased demand for financial services among SMEs and the innovative approaches adopted by fintech companies. Rising demand for micro-credit from SMEs in Africa that provide services in the food, agriculture, and healthcare sectors that has inelastic demand allows businesses to pass on rising costs to consumers without significantly impacting loan performance. This resilience has helped MFIs to mitigate the recent effects of inflation and economic shocks.
Government initiatives and support from international institutions have been pivotal in bolstering the funding of the sector. For example, the European Investment Bank has provided substantial financial support to African MFIs and helped them to access technical assistance. Countries like Nigeria and Kenya have tightened licensing regulations and increased transaction reporting requirements to ensure sector stability and consumer protection.
Microfinance sector in Latin America
Latin America continues to be at the vanguard of the sector, having experienced a lower impact from the pandemic than other regions and with a continuing rapid tempo of bancarization. Fintech companies have played a crucial role in the expansion of microfinance by lowering entry barriers for individuals and businesses seeking credit, offering rapid lending decisions and flexible repayment terms that are tailored to the cash cycles of small businesses.
See also: How can FinTech help developing countries? | Experts’ Opinions
General situation
Overall, COVID-19 boosted the adoption of digitized processes as well as fintech innovations, including machine learning algorithms and alternative credit scoring metrics, and increased the pace of development as these have enhanced the efficiency and reach of microfinance services. Successful MFIs worldwide often employ hybrid distribution models that combine digital and offline data collection to make informed lending decisions, leveraging the insights of field officers on the ground that complement data-driven credit assessments to maintain low loan default rates.
Despite the positive outlook, the sector still faces weighty challenges such as lack of awareness about financial services among potential clients, regulatory constraints, sustainability concerns, and issues related to over-indebtedness. Addressing these challenges is crucial for the continued expansion and impact of MFIs.
There is still a long way to go when considered at the global level. According to the World Bank Global Findex database, worldwide bancarization has reached 76% of the global population, increasing from 62% in 2014 but this means there are still 1.4 billion unbanked people globally.
Final thoughts
The pandemic accelerated the adoption of digital technologies in the microfinance sector, including digital payments, mobile banking, and other digital tools, communication with clients, and managing operations remotely. There was a growing emphasis on financial literacy to help clients to manage their finances better during the crisis. Governments and central banks in many countries provided regulatory support, such as moratoriums on loan repayments, to ease the burden on borrowers and MFIs. Market players and regulators increased their focus on risk management and contingency planning to better prepare for future crises.
See also: Does financial education matter for a sustainable future? | Experts’ Opinions
Today, the microfinance sector seems to be poised for robust growth that is being driven by technological advances, increased financial inclusion efforts, and a response to the rising demand for credit among underserved populations, claims Standard Chartered, a respected multinational bank that is active in the microfinance sector. According to Standard Chartered, the potential for microfinancing is huge, with an expected rise of more than 60% of the amount of loans to small and medium-size enterprises between now and 2026.
