Microfinance: why grass roots EM investing has proved resilient

The Covid-19 pandemic continues to be a significant factor influencing economic and market outlooks. However, after a challenging second quarter, many emerging markets are resuming economic activities and lifting lockdowns.

Many places in the developing world continue to struggle with the social and public health tolls of Covid-19. But many economies are reopening, with certain essential activities such as food production and distribution - things that microfinance often finances - sorely needed. In other places, such as Paraguay and Tajikistan (for example) the effective management of the public health crisis, and the reduced impact of Covid-19 did result in a quicker recovery and return to business.

As a result, many microfinance institutions have been going through the crisis much better than we had anticipated at the beginning of the pandemic.

An important barometer in this context is the number of rescheduling requests from institutions. During the spring lockdown period we worked closely with many of our investees to reschedule principal payments on loans that were due in 2020; this activity has subsided as of June. We have not received any new requests for rescheduling since June and we are cautiously optimistic about our investees’ efforts (by and large) to assess liquidity and manage it through the crisis.

A look at the markets

Many Asian markets continue to fare well with minimum disruption and partially or fully resumed economic activity. We have therefore selectively resumed investment activity in countries like India and Myanmar, where – despite lockdowns – the economy is picking up again and people are getting back to work.

The picture is somewhat different in Latin America, which remains largely under strict lockdown. The region currently has the highest number of cases and hence the economic impact remains significant. We are therefore proceeding cautiously in these markets. However, historically, these markets have been very resilient for microfinance and we see, even in the current difficult situation, a number of our investees showing signs of recovery.

Our approach during challenging times

We remain agile and proactive in these challenging market conditions. Taking a long-term view, we continue to focus on investees that can help us continue with our strategy and maximise our impact. We remain focused on high-quality and long-term companies with structural growth, that we believe will emerge from this crisis in a stronger position.

With regards to new distributions, we will continue to quickly adapt to this developing situation and work within the given limitations. As travel restrictions are in place in many countries where we operate, we are developing a new alternative framework to conduct due diligence in order to continue the sourcing of investment opportunities.

A careful glimpse into the future

Despite some general stabilisation and recommencing of business activity in many markets, the overall situation is still fluid. We, therefore, continue to closely monitor the situation with our teams in the respective regions and work closely with our investees to understand their needs and support them adequately.