Even though news stories presented a new global status quo every day, by early March certain things were clear. For one, the COVID-19 pandemic would create unprecedented disruptions not only to the global economy, but to education systems worldwide. According to UNESCO, 188 countries have put nationwide school closures in place, affecting 91 percent of enrolled learners – a shocking 1.6 billion children.
Because most schools are not set up to easily transition students to distance learning, this means significant challenges for children to continue learning, parents to teach their children while earning income, and ultimately for schools to stay afloat. With little cash reserves on hand, many low-fee school owners are struggling to continue paying their teachers and cover fixed costs. For many more, this includes repayments on an outstanding school improvement loan to their local MFI.
In Mayada El-Zoghbi’s recent blog post, she noted that visibility into responses from smaller financial institutions in low and medium-income markets is largely unclear at this stage in the pandemic. With this in mind, we wanted to shed light on how the pandemic has impacted MFI staff, operations and communications with school borrowers.
In Constant Contact with Partners
Opportunity EduFinance, with over 50 education lending partners across 22 countries, has quickly strategized a communication plan to understand what responses MFIs are taking, and what support they may need to ensure their own business continuity through this crisis. A financial institution with a strong risk mitigation plan is best situated to extend the right financial services to school owners and parents. These services can ultimately minimize educational disruption for children as soon as schools are safe to open again.
Over the last two weeks, the Opportunity EduFinance team has held consultation calls with MFI partners in countries with full or partial government-enforced lockdowns and nationwide school closures. These conversations indicate that there are similar trends in terms of loan restructuring, HR strategies, and process adjustments, while liquidity strategies vary by the size of the partner.
Education Loan Restructuring
The MFIs that Opportunity EduFinance partners with primarily offer two education loan products. Low-fee school owners access school improvement loans to invest in school infrastructure, materials or working capital. Parents use school fee loans when they have irregular income, helping them to effectively spread out the cost of their children’s education, which helps prevent school drop-out and missed classes.
For school improvement loan clients, most MFIs are providing a payment holiday or grace period, depending on the schools’ loan repayment capacity and their government’s measures and restrictions. In some cases, MFIs reported they are providing additional limited working capital loans and overdraft facilities to schools necessary to continue paying their teachers.
The majority of MFIs indicated prioritizing the restructuring of their school improvement loan portfolio and are still in the assessment phase of their school fee loan portfolio. However, some partners have already offered repayment holidays up to 3 months to loan clients, which includes parents with school fee loans.
Communication with School Borrowers
Based on experiences from previous crises, we know the best opportunity for loan recovery involves regular, supportive communications between the MFI and school borrowers to maintain a strong relationship. The majority of MFIs reported proactively reaching out to their school loan borrowers, strategically leveraging technology to communicate across a variety of channels and reach the largest number of borrowers. Notifications are being posted on the website and social media channels, and staff are contacting borrowers directly via instant messaging, calls, WhatsApp and SMS. Many MFIs are also sending messages to encourage the use of digital channels for savings and loan repayments.
MFI Coping Strategies
For their part, most MFIs contacted have set up emergency committees to lead the response to COVID-19 and implemented hygiene measures in branches, including handwashing, sanitizers and temperature monitoring.
Nearly all reported continuing to pay 100 percent of staff salaries, but some have been forced to close some branches and rotate staff, while others have requested staff take leave. In many cases bonuses have been suspended. Most management teams have also identified key positions and prepared for scenarios where some key staff are unavailable for a long period.
Operational Process Changes
Necessary and in many cases government mandated measures to slow the spread of COVID-19 have required various changes to operational processes. Many partners are reporting taking the following measures:
- Digitalization transformation: MFIs have been revisiting their digital channels for payment collection and communication with their customers.
- Remote work: Virtual meetings are replacing in-person meeting. This is requiring review and changes to more traditional management styles, as virtual meetings require more structure and limit the impact of non-verbal communications.
- Disaster recovery planning: Many senior leaders report testing, starting or updating their disaster recovery plan and processes.
- Suspended credit algorithm use: Because credit algorithms are based on past data, algorithms linking client characteristics to non-repayment risk might not be relevant in the current economic climate. MFIs that utilize algorithms for lending decisions reported understanding this challenge and have suspended their use, especially if they were set up to trigger automatic credit approvals.
- Strengthened compliance processes: Senior managers are evaluating ways to strengthen their compliance processes to face possible increases in fraud, which often occur in times of crisis.
Funding & Liquidity
The majority of MFIs advised they have already discussed potential repayment challenges with their debt investors and are renegotiating their loans. In terms of liquidity, it is too early to assess the full liquidity risk for MFIs since there is no visibility as to how long schools will be closed for in each market. In general, MFIs continue to maintain a strong position in terms of their deposits and have not seen a significant cash withdrawal from clients so far. However, if the situation continues, the need for working capital for MFIs is expected to increase.
Planning for Recovery
Opportunity EduFinance will continue to monitor school closures in each market and regularly engage our MFI partners during this crisis and recovery period. Potential support currently under discussion includes augmenting stress testing capacity for smaller MFIs, links to working capital, a toolkit on digital and online communication strategies, and e-learning modules for staff training and parent engagement. In the markets where we operate the Education Quality program with low-fee schools, our team is also supporting information sharing between education lenders and school borrowers.
Stress testing, links to working capital, and e-learning modules are enhanced support options currently under consideration.
Once schools do reopen, a major challenge will be how to get children back in school, ensure families can afford to send them back to school, rebuild schools’ teaching staff and catch learners up on what they’ve missed. This is particularly important for those that haven’t been able to continue learning at home. EduFinance will work with MFIs that would like to support these recovery plans to offer further guidance on types of financial services schools will need to reopen their doors to learners and maintain the momentum made in access to education over the last decade.