[PLENARY] Capital in the Age of COVID: Navigating the Uncharted Sea of Insolvency

  • Daniel ROZAS, European Microfinance Platform (e-MFP)
  • Michael BLOCKX, Incofin
  • Edouard SERS, Grameen Credit Agricole Foundation 
  • Lucia SPAGGIARI, MFR / Atlas
  • Deborah DRAKE, Financial Inclusion Equity Council (FIEC)


    Back in April 2020, during the first months of the pandemic, debt investors concerned about FSP liquidity came together to develop pre-agreed frameworks for rapid loan rescheduling for those that request it. Attention has since shifted to the state of FSP solvency, and now it is the equity investors' turn. The aim of this session was to explore the current state of FSP equity, and what can be expected in the near future.

    Daniel ROZAS introduced the diverse panel of equity investors, and invited them to explain the different strategies they are deploying to ensure that equity losses do not result in lower access to financial services for low income families. He first asked Lucia SPAGGIARI how capital is doing in the age of COVID-19.

    Spaggiari responded that in the beginning of the crisis, capital was well-managed. Basic indicators from the Atlas data system showed some degree of insolvency, but not drastic, and risk levels therefore levelled off in 2021. As a result there is a need for new equity solutions to go beyond the average solvency risk (provisions are low and funders need to mitigate risks), following the resilience within the sector. Some of the MFIs that struggled did so already before the crisis, shareholders possibly having to face write-offs.

    Edouard SERS of Grameen Credit Agricole Foundation added that in the past 18 months they analysed data, and felt that the picture of the sector is well up to date. Whereas early in the analysis some 60% of the partners indicated to be in need of new equity solutions, by June 2021 only 20% had not yet found a solution. When asked by Rozas about the drivers of this positive change, Sers replied that this shows the strong resilience in the sector. Out of the 20% remaining MFIs, some 10% were already struggling before the pandemic, and the other 10% just suffered from volatile circumstances with diverse struggles.

    Rozas then asked Spaggiari whether she saw any patterns in the uncertainty, and what about the outlook? Spaggiari responded that when projecting the various positive and negative scenarios with respect to insolvency, there seems to be an increase in credit risk, which is not expected to improve soon as provisioning is low. This made Rozas question the role of service providers like NGOs; according to Sers these are still looking for solutions and funders to mitigate the risks. Does this require write-offs as a way out, and what is the role of investors in this? Sers indicated that some of these service providers operate in very risky countries, and such circumstances require shareholders with deeper pockets, and not to forget proper risk strategies.

    On the question by Rozas about the impact on clients, and whom of these are most impacted, Spaggiari said this to be hitting in different proportions in different countries, mostly in the high-risk zones like in sub-Saharan Africa. Households that are more at risk are smaller and often part of cooperatives that do not have too many options.

    Rozas expanded the discussion by inviting the 3 remaining panellists to the discussion. Momina AIJAZUDDIN of IFC opened by saying that when things go wrong, you do not want to be a debt investor. When dividing the COVID period in 2 phases, the first period is marked by a relatively positive story of resilience of MFIs, while the recovery phase will see a need for the capital base to become stronger. Half of the MFIs are not seeing a need for equity capital. However, returns are getting thinner for DFIs and MIVs, also depending on country and regional risks. This changes the equity balance, and hence requires a more diverse landscape of investors for different purposes.

    Michael BLOCKX indicated that Incofin is in fact strengthening its liquidity base in crisis. For equity investors it is important to keep an eye on the end-borrower. Digitalisation offers solutions but also requires capabilities and giving up some control, along with avoiding digital exclusion.

    Rozas added that liquidity never became a sector-wide problem, which should be seen as a success. Investors are now having to face the challenges ahead, in particular also capitalisation for growth. Deborah DRAKE of the Financial Inclusion Equity Council (FIEC) remarked that equity and solvency depend much  on these challenges ahead and the ensuing strategy and capitalisation. Equity involves shareholding and a board that will take part in the decision-making. There must be transparency in the sharing of the burden, otherwise there will continue to be issues. Aijazuddin agreed that in a number of cases it is critical to cover the solvency risk rather than solving by equity injection.

    Are bigger entities taking over the smaller or better ones, what is the trade-off? Consolidation and a drive to grow will continue for lower cost of service. This may lead to mergers, asset transfer and new services. And it may also change the role of NGOs and other service providers, to be better equipped and serve the bottom of the pyramid, such as with specialised MSME lending through specialised lending vehicles.

    According to Aijazuddin, capitalisation and digitalisation is a clear sign of a recovery phase, while Blockx wondered about the appropriate structuring of equity funding and capital raising efficiency. Drake mentioned that there are no easy answers, and that it is a bit early to tell how best to structure funding.

    Rozas concluded by asking the panellists for final thoughts on equity investors, to which Aijazuddin responded that this depends on the country context, as well as overall risk and portfolio management. Blockx wanted to give a message of hope, embracing digitalisation as a way to reduce digital exclusion. Aijazuddin added that this will help the equity investors who are currently a bit frustrated that they cannot easily expand their portfolios.