The Impact of COVID-19 on the Microfinance Sector

Abstract

Extreme poverty all around the world has been on the rise in 2020 for the first time in over 20 years. Currently, around 36% of the population lives with less than $1.90 per day. The COVID-19 pandemic is expected to increase the number of individuals living in extreme poverty by up to 150 million people more. Services designed to combat poverty, such as microfinance institutions (herein referred to as MFIs), need to face this situation and find ways to improve it as quickly as possible. This dissertation examines the current situation of the microfinance sector in light of the COVID-19 pandemic. Ever since Muhammad Yunus founded the first microfinance program in 1974, MFIs have been alliviating poverty while still earning financial returns. After quickly expanding, most microfinance institutions are found in Asia, South America and Africa, with the majority of clients being women and small farmers in rural areas. The main goals of MFIs are to promote financial inclusion, women´s empowerment, and the development of the rural communities of small farmers. The COVID-19 pandemic has, for the most part, negatively impacted the microfinance sector. After the analysis of secondary surveys and previous research, it is proven that the pandemic has had a big impact on increasing poverty, lower income and a wide variety of governmental restrictions all over the world. Loans have become riskier and defaults more frequent, with just a few of the MFIs being able to use restrictive measures to their advantage. In light of the above, the necessity for tailored services, digital innovation and entering new markets can be arguably the next steps the sector must follow to adapt and overcome the current challenges.