Although the pandemic is proving anything but predictable, it is now a lot clearer what its ramifications are for MFIs and for vulnerable communities. Initial lockdowns had a substantial impact on both informal and formal economies, however informal economies have subsequently shown strong resilience.
Last year, the COVID crisis required the Fund to support its partner MFIs in a time of high uncertainty by entering into handshake agreements to restructure near-term maturities. During this time, we signed the Grameen’s Pledge to support microfinance institutions during the crisis period. Given the risks and uncertainty, disbursements were slowed, and liquidity was allowed to build up.
Overall risk levels (as measured, among others, by PAR 30 + Restructuring) are more elevated than they were pre-COVID. Nonetheless, positive trends have been seen in portfolios since the initial shocks.
As we see these positive progressions, our focus has changed. Although risk levels are higher, we notice that MFIs are operationally very active – and are playing a fundamental role in supporting informal economies at a time when other sources of funding are increasingly uncertain.
Given this, we are now focused on disbursements and are prioritising loans to existing partners which have shown good management throughout the crisis. MFIs are often looking to work with a smaller number of familiar funders, and the Fund is increasing its loan sizes to long-term partners with a good track record accordingly.
Most institutions now no longer require any form of COVID support measures and most COVID restructuring agreements have now been unwound. Certain institutions which were particularly hard hit still require measures – and LMDF remains part of the Grameen’s Pledge.
The lessons learnt during the peak of the COVID crisis continue to apply and LMDF maintains its focus on close communications with individual MFIs.
The portfolio remains well diversified, operating across many geographies, and supporting micro-entrepreneurs in many industries. Although COVID’s impact is very wide reaching, this lessens our exposure to any one area.
LMDF adopts a policy of hedging all its local currency position. This allows the Fund to be shielded from some of the volatility seen across markets at times of uncertainty.
Class C shareholders benefit from a first loss mitigation mechanism, which means losses of over 31% of the portfolio are possible before they lose any value.1 Of course, our aim is to avoid losses where possible, but we hope this cushion comforts during uncertain times.
We are, of course, available for any questions which you may have. Please stay in touch and stay safe!
1 as of 30/09/2021
– this article is subject to updates depending on the development of COVID-19 –