Spotlight 2.1 Strengthening the regulation and supervision of microfinance institutions
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ow-income households and micro-, small, and medium enterprises (MSMEs) in emerging economies often rely on microfinance institutions (MFIs) instead of conventional banks for financial services. The microfinance sector consists of a diverse group of regulated and unregulated financial service providers.1
Microfinance institutions are often the sole providers of financial services to vulnerable segments of a population. They play a critical role in local economies, household resilience, and women’s financial inclusion. One source suggests that up to 80 percent of MFI borrowers in emerging economies are female, and 65 percent are located in rural areas.2 MFIs rarely become large enough to threaten the stability of the financial system when they are in financial distress. But because many MSMEs and low-income households, including very poor, hardto-reach populations, depend on MFIs as a source of credit and as a custodian of their financial assets, the safety and soundness of the microfinance sector are critical for this population.
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Effects of the pandemic on MFIs and the policy and regulatory responses MSMEs and low-income households were affected disproportionately by the COVID-19 (coronavirus) pandemic and the ensuing containment measures. Many MFI clients, suffering significant income losses, were unable to pay loan installments. Meanwhile, some clients had no way to make payments in person during lockdowns and lacked digital payment alternatives. Moratoria were introduced to give MFI clients breathing room, while avoiding steep increases in capital buffers for MFIs, which would constrain lending.3 At the same time, credit moratoria delayed borrower payments, which
