<p>What is the scale of impact of COVID-19 on MSMEs, and how are they coping? CFI&#8217;s analysis of <a href="https://centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/" target="_blank" rel="noopener">data from four emerging markets</a> (Colombia, India, Indonesia, and Nigeria) offers actionable insights for policymakers, investors, and market other ecosystem actors.</p>


The use of digital payments surged during the pandemic, forcing many MSMEs to turn to a range of digital tools for their businesses, including payments via mobile money, marketing products on social media, and selling on e-commerce platforms. Digital tools helped many MSMEs address challenges in the wake of the pandemic and ongoing economic conditions, but digital adoption among MSMEs has been slow and uneven.

In this report, CFI explores how MSMEs used digital products during the pandemic, what barriers they faced with digital adoption, and what can be done to support the growth of MSMEs in the digital economy.

Digital Adoption of MSMEs During COVID-19

Accounting for about 90 percent of businesses and employing more than 50 percent of the labor force in some markets, micro, small, and medium enterprises (MSMEs) are the backbone of the economy. However, since the pandemic began, MSME owners have experienced severe crises and challenges to their businesses. To understand the impact of the pandemic on these businesses and households, CFI conducted a <a href="https://www.centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact">longitudinal survey</a> of over 1,600 MSME owners from June 2020 to October 2021 over six waves, and conducted focus groups of 130 MSME owners from march to April 2022 in four countries — Colombia, India, Indonesia, and Nigeria.

This publication provides insights into how MSMEs have navigated challenges presented by the pandemic and what support they had available. It also presents lessons learned to help prepare for future crises, as well as recommendations for what inclusive finance stakeholders can prioritize to improve MSME resilience.

Preparing MSMEs for Future Crises: Lessons From COVID-19

<span data-contrast="auto">Imagine a woman, Rita, who owns a food shop in Delhi. She lives in a small home with her husband and two children. The incomes from her business and her husband’s job cover the rent for their small apartment, household essentials, and school expenses, while also allowing them to send money to their family in the village and save for future expenses. Climate change has intensified the monsoon season in the past few years, and two years ago, a record-setting flood caused damage to Rita’s shop and all her business supplies. She has been working hard to rebuild her business, but a lack of capital has prevented her from operating at full capacity. </span><a href="https://www.washingtonpost.com/weather/2022/04/28/india-pakistan-heat-wave-records/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">An intense heatwave now is affecting Delhi</span></a><span data-contrast="auto"> and posing new hurdles to Rita’s business.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>

<span data-contrast="auto">Rita’s situation is not unique and many small businesses around the world face similar challenges. Climate change disproportionately impacts low-income and vulnerable people and climate-related shocks are drastically altering the livelihoods and living conditions for many. Globally, MSMEs make up over </span><a href="https://www.un.org/en/observances/micro-small-medium-businesses-day" target="_blank" rel="noopener noreferrer"><span data-contrast="none">90 percent of firms and provide 70 percent of employment</span></a><span data-contrast="none">,</span><span data-contrast="auto"> and many are struggling with intensifying climate risks. As part of CFI’s </span><a href="https://www.centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact"><span data-contrast="none">longitudinal</span></a><span data-contrast="auto"> research on the impact of COVID-19 on MSMEs in four different markets (Colombia, India, Indonesia, and Nigeria), we conducted a dipstick survey in 2021 to understand the consequences of climate shocks on MSMEs and the ways they are preparing to adapt to climate change.</span>

<span class="TextRun SCXW240741547 BCX0" lang="EN-US" xml:lang="EN-US" data-contrast="auto"><span class="NormalTextRun SCXW240741547 BCX0">Our research revealed </span><span class="NormalTextRun SCXW240741547 BCX0">three takeaways:</span></span>
<h1>1  <span class="TextRun MacChromeBold SCXW188549418 BCX0" lang="EN-US" xml:lang="EN-US" data-contrast="auto"><span class="NormalTextRun SCXW188549418 BCX0">Climate </span><span class="NormalTextRun SCXW188549418 BCX0">C</span><span class="NormalTextRun SCXW188549418 BCX0">hange</span><span class="NormalTextRun SCXW188549418 BCX0"> is Impacting MSMEs and Hindering </span><span class="NormalTextRun SCXW188549418 BCX0">Their</span><span class="NormalTextRun SCXW188549418 BCX0"> Recover</span><span class="NormalTextRun SCXW188549418 BCX0">y</span> <span class="NormalTextRun SCXW188549418 BCX0">from </span><span class="NormalTextRun SCXW188549418 BCX0">COVID-19 </span><span class="NormalTextRun SCXW188549418 BCX0">F</span><span class="NormalTextRun SCXW188549418 BCX0">inancial</span><span class="NormalTextRun SCXW188549418 BCX0"> I</span><span class="NormalTextRun SCXW188549418 BCX0">mpacts</span></span><span class="EOP SCXW188549418 BCX0" data-ccp-props="{&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span></h1>
<span class="TextRun SCXW216687535 BCX0" lang="EN-US" xml:lang="EN-US" data-contrast="auto"><span class="NormalTextRun SCXW216687535 BCX0">Thirty-two </span><span class="NormalTextRun SCXW216687535 BCX0">percent of survey respondents </span><span class="NormalTextRun SCXW216687535 BCX0">reported </span><span class="NormalTextRun SCXW216687535 BCX0">that at least one </span><span class="NormalTextRun SCXW216687535 BCX0">climate shock</span><span class="NormalTextRun SCXW216687535 BCX0"> – including flood</span><span class="NormalTextRun SCXW216687535 BCX0">ing</span><span class="NormalTextRun SCXW216687535 BCX0">, sea level increase, </span><span class="NormalTextRun SCXW216687535 BCX0">heat wave, </span><span class="NormalTextRun SCXW216687535 BCX0">or </span><span class="NormalTextRun SCXW216687535 BCX0">drought – </span><span class="NormalTextRun SCXW216687535 BCX0">has </span><span class="NormalTextRun SCXW216687535 BCX0">impacted their business </span><span class="NormalTextRun SCXW216687535 BCX0">with</span><span class="NormalTextRun SCXW216687535 BCX0">in the past five years.</span> <span class="NormalTextRun SCXW216687535 BCX0">The types of climate shocks and their impact varied </span><span class="NormalTextRun SCXW216687535 BCX0">by</span><span class="NormalTextRun SCXW216687535 BCX0"> countr</span><span class="NormalTextRun SCXW216687535 BCX0">y</span><span class="NormalTextRun SCXW216687535 BCX0"> (see graph below).</span></span>

<img class="size-full wp-image-44468 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/05/MSME-Climate-Graph1-1.png" alt="" width="2696" height="1308" />

While climate change impacts all people, women bear the brunt of the escalating climate risks. <a href="https://www.unwomen.org/en/news/in-focus/csw61/women-in-informal-economy" target="_blank" rel="noopener noreferrer">Women make up much of the informal economy</a> and their <a href="https://www.un.org/en/chronicle/article/womenin-shadow-climate-change" target="_blank" rel="noopener noreferrer">livelihoods are more likely to be impacted by climate risks</a>. CFI’s data indicates that women show a higher level of concern than men that climate change will affect their ability to operate their business and maintain their quality of life – 61 percent of women business owners were concerned about this compared to 52 percent of men.

Additionally, among the MSME respondents who had been impacted by a climate shock, <a href="https://www.centerforfinancialinclusion.org/the-precarious-state-of-msmes-understanding-the-impact-of-covid-19-and-opportunities-to-support-their-recovery">recovery from the financial impacts of the pandemic appears to be slower</a> than those who had not faced a climate-related shock (see graph below).

<img class="size-full wp-image-44469 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/05/MSME-Climate-Graph2.png" alt="" width="2766" height="1394" />
<h1>2  <strong>MSMEs Are Unable to Actively Prepare for the Accelerated Effects of Climate Change</strong></h1>
Extreme climate events are becoming a more frequent phenomenon around the world. And for MSME owners with limited resources and time, preparing for climate change can be a challenge. Across all survey respondents, only 47 percent reported that they had an operating plan in place for business continuity (see graph below).

Sixty-two percent said they are confident in their ability to get a loan to rebuild their business following a climate disaster, and 53 percent said they had friends and family who could provide financial support in the event of a climate shock. During the COVID-19 crisis, help from friends and family was essential to the ability of MSMEs to survive. In the immediate aftermath of the pandemic, 44 percent of business owners in Colombia said they borrowed from friends and family compared to 11 percent who borrowed from a financial service provider. This demonstrates the importance of both formal financial services and informal networks in supporting climate resilience.

Only 23 percent reported that they had an insurance plan for climate disasters, and 38 percent said they had savings set aside to cope with climate disasters. While there were variations among countries in the strategies employed to combat a future climate shock, data suggests that MSME owners are more likely to rely on reactionary strategies than preventative ones.

<img class="wp-image-44470 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/05/MSME-Climate-Graph3.png" alt="" width="1022" height="881" />
<h1>3  <strong>MSMEs Need Support From Governments and Financial Services Providers to Adapt Their Businesses to Increasing Climate Risks</strong></h1>
<a href="https://www.centerforfinancialinclusion.org/green-inclusive-finance-a-framework-for-understanding-how-financial-services-can-help-low-income-people-weather-climate-related-risks">CFI’s green inclusive finance framework</a> outlines four pathways – Mitigation, Resilience, Adaptation, and Transition – that help to understand how inclusive finance can support low-income and vulnerable populations prepare for climate-related impacts. Financial services can help MSMEs build resiliency and respond to the disastrous effects of climate change. For example, access to savings products and emergency loans can help MSME owners carry out cost-intensive efforts to rebuild their business after an extreme weather event.

Our survey data indicates that MSMEs need support from governments and financial services providers to build resilience and adapt to climate change. In some cases, such as insurance products, governments and financial service providers will need to work together to ensure MSMEs have access to appropriate and affordable financial services.

A significant share of MSME owners who experienced a climate shock faced damage to their shop or inventory (see graph below). To manage the impacts of climate disasters on their business operations, MSMEs need financing to make upgrades to their business location or inventory storage. Governments can provide grants or low-cost loans to MSMEs for making upgrades that would help avoid more drastic consequences of a climate emergency.

Climate Change Adds to Challenges for MSMEs Recovering from COVID: Three Takeaways from CFI Surveys

As we look back at the last two years of the pandemic, the disproportionate impact on women is striking. Because of COVID-19, many women left the workforce and shut down their businesses. As schools and care facilities closed, women took on additional responsibilities related to childcare, eldercare, and household chores. The World Economic Forum estimated that the global gender gap – as measured by the gap in health, education, economic and political attainments – <a href="https://www.weforum.org/press/2021/03/pandemic-pushes-back-gender-parity-by-a-generation-report-finds/" target="_blank" rel="noopener noreferrer">increased by 36 years in 2021</a> as the burdens of the pandemic took a toll on women.
<blockquote class="pullquote--right">We must first understand how women were impacted by the pandemic to support a gender-inclusive recovery.</blockquote>
Now, as we rebuild from the effects of COVID-19, we must remember that women are not a homogenous group. Women MSME owners have unique needs when it comes to financial products and services. We have a unique opportunity to build more equitable systems, but to do so, we must first understand how women were impacted by the pandemic to support a gender-inclusive recovery.

<a href="https://www.centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact">Data from CFI's longitudinal surveys</a> in Colombia, India, Indonesia, and Nigeria, illustrates how women-owned businesses have struggled to recover and rebuild – even more so when compared to those owned by men. This research is part of our partnership with the <a href="https://www.mastercardcenter.org/" target="_blank" rel="noopener noreferrer">Mastercard Center for Inclusive Growth</a>.

From our data, we see the following three trends:
<h1><b><span data-contrast="auto">1   Women-Owned Businesses Were Disproportionately Affected</span></b></h1>
<a href="https://www.centerforfinancialinclusion.org/the-precarious-state-of-msmes-understanding-the-impact-of-covid-19-and-opportunities-to-support-their-recovery"><span data-contrast="none">MSMEs in emerging markets</span></a> – particularly micro and small businesses – bore the brunt of the economic slowdown. Many businesses struggled to keep their doors open as consumer spending declined. Reduced business income severely impacted many business owners' household finances and dramatically affected their ability to respond to challenges. But the economic fallout was particularly drastic for women business owners.

In the first wave of surveys CFI conducted in the early months of the pandemic, 18 percent of women reported having closed their businesses, 6 percentage points higher than men. While both men and women respondents reported a decline in business profits and an inability to cover business expenses using revenue at similar rates in wave 1, in the latest survey conducted a year after the first wave, women reported declining profits and inability to cover expenses at a higher rate than men, highlighting the uneven nature of the recovery (see “Profit Trends” table).

<img class="wp-image-44192 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/03/Picture1.png" alt="" width="1064" height="659" />

Women business owners also experienced a greater impact on household resilience and higher rates of food insecurity than their male counterparts. Twenty percent of women business owners said someone in their household had eaten fewer or smaller meals compared to 13 percent of men business owners, according to data collected in the second half of 2021.
<h1><strong>2   Women Owners Are Less Likely to Transact Digitally</strong></h1>
Digital platforms allowed many business owners to continue operating during COVID-19 and enabled them to reach new customers despite movement restrictions. Data from CFI’s surveys shows that the use of mobile money was an effective tool in supporting the resilience of many MSME businesses. From our data, business owners who used mobile money were more likely to cover business expenses with revenue and to report increased profit levels.

But our data also shows that women are less likely to conduct financial transactions via a mobile phone, use mobile money, or own a mobile money account (see “Mobile Money by Gender”). Women are also less likely to know the benefits of mobile money or to know what a mobile money account is (see “Reasons for Not Owning a Mobile Money Account”).

&nbsp;

<img class="wp-image-44193 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/03/Picture3.png" alt="" width="921" height="506" />

&nbsp;

<img class="wp-image-44194 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/03/Picture4.png" alt="" width="941" height="678" />

&nbsp;

Globally, a significant gender gap in smartphone ownership and access to mobile internet remains. In 2020, <a href="https://www.gsma.com/r/wp-content/uploads/2021/07/The-Mobile-Gender-Gap-Report-2021.pdf" target="_blank" rel="noopener noreferrer">women were 7 percent less likely to own a mobile phone and 15 percent less likely to use mobile internet than men</a>. CFI's sample has little to no gender gap in smartphone ownership, yet there is a substantial gap in the use of mobile money between men and women, indicating that there may be other barriers to digital adoption beyond access.

One of the barriers for lower levels of digital adoption among women could be a lack of knowledge of digital tools and the <a href="https://www.centerforfinancialinclusion.org/if-you-see-something-say-something">available protection mechanisms</a> for digital transactions. Our survey data suggests that women were less likely to know the fees associated with mobile money accounts and less likely to understand how to report suspicious activity using mobile money.
<h1><strong>3   Women Saved More, But Informally</strong></h1>
We also saw a difference among men and women in their level of trust in formal financial institutions. A higher proportion of women reported saving during the pandemic (see “Savings Activity”) but preferred to save via informal means over formal bank or mobile money accounts (see “Savings Instruments”) as compared to men. Additionally, women revealed a high level of concern with financial institutions collecting their personal data. These findings support the hypothesis that the lack of trust in formal institutions and data privacy concerns can hinder the adoption of formal financial services and digital tools among women.

<img class="size-full wp-image-44236 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/03/MSME-graphs-5-and-6.png" alt="" width="1500" height="872" />
<h1><strong>Pushing for Gender Inclusive Recovery</strong></h1>
As we prepare for the post-pandemic world, we have an opportunity to build more equitable products, services, and systems. Donors and market facilitators must invest in building women's financial health and digital skills. Governments must prioritize policies related to childcare and education that support women’s participation in the economy. Financial service providers and digital platforms must integrate gender norms into their products and services. A gender-inclusive recovery can finally bring about a sustainable change by eliminating barriers to women's empowerment.

An Equitable Rebuilding: Learnings from Women-Owned MSMEs

The Precarious State of MSMEs: Understanding the Impact of COVID-19  and Opportunities to Support their Recovery

The impacts of COVID-19 on small and medium-sized businesses in Nigeria, Colombia, India, and Indonesia are changing all the time. But one thing has remained constant since March 2020: low-income people in emerging markets are still dealing with extreme challenges and major disruptions to their livelihoods. While business closures have declined since their pandemic peak and MSMEs are employing more people, recovery in areas such as household resilience and coping strategies has not brought things back to pre-pandemic levels and has not kept pace with recovery in developed markets.

Below is the first in a series of blog posts zeroing in on key takeaways from our <a href="https://centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact/">ongoing, longitudinal research in these markets</a>.

The first four waves of data from Lagos are analyzed in this post. Data visualizations from Wave 5 results from Lagos will be posted <a href="https://centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact/nigeria/">here</a> later in August 2021; Wave 6 will follow shortly thereafter.

In the coming weeks, the second and third posts in this series will feature COVID’s impacts in Indonesia and India, respectively.

This research is part of our partnership with the <a href="https://www.mastercardcenter.org/" target="_blank" rel="noopener noreferrer">Mastercard Center for Inclusive Growth</a>. See also the accompanying slides for additional charts and insights.
<h2>1. Nigeria’s economy was fragile before the pandemic began.</h2>
According to the World Bank, Nigeria’s economy had not fully recovered from the 2014-16 economic recession, which was driven by a decline in oil prices, by the time the pandemic struck. In fact, before the pandemic, the <a href="https://www.worldbank.org/en/news/press-release/2020/06/25/nigerias-economy-faces-worst-recession-in-four-decades-says-new-world-bank-report" target="_blank" rel="noopener noreferrer">World Bank</a> and <a href="https://www.imf.org/en/News/Articles/2020/02/17/pr2053-IMF-Staff-Concludes-Article-IV-Consultation-to-Nigeria" target="_blank" rel="noopener noreferrer">IMF</a> downgraded its economic growth forecasts from a projected 2.5 to 2 percent.
<h2>2. Restrictions on movement and simultaneous declines in oil prices lead to a reduction in aggregate demand and an economic contraction.</h2>
In response to the pandemic, Nigerian officials instituted widespread restrictions on movement throughout the country. This depressed aggregate demand by closing shops and preventing people’s movement, exacerbating the economy’s weaknesses. Data from the MAP surveys highlights this: nine percent of all businesses closed, and of those, government restrictions were the primary cause of closure for 55 percent of businesses. Additionally, the data indicated a significant drop-off in customer traffic to shops, and 80 percent of firms reported declines in profit levels in the immediate aftermath of the pandemic. Simultaneously, global <a href="https://markets.businessinsider.com/commodities/oil-price?type=wti?utm_source=feedly" target="_blank" rel="noopener noreferrer">oil prices</a> crashed from a high of $59/barrel in February to a low of about $19/barrel by April, reducing government revenues at a time when <a href="http://documents1.worldbank.org/curated/en/695491593024516552/pdf/Nigeria-in-Times-of-COVID-19-Laying-Foundations-for-a-Strong-Recovery.pdf" target="_blank" rel="noopener noreferrer">fiscal resources were needed for a response</a>. Oil prices have since recovered to above pre-pandemic levels to around $69.
<h2>3. The impact of this contraction on MSME owners was dramatic, making it difficult for owners to cover expenses and leading to significant layoffs.</h2>
The decline in profits mentioned above foreshadowed widespread inability by owners to cover their expenses from revenues alone: 45 percent of owners said they could not do this in the months following the start of the pandemic. Widespread layoffs were followed by a 55 percent reduction in the workforce by July of 2020. <a href="https://centerforfinancialinclusion.org/nigerians-are-in-desperate-need-of-relief-as-covid-19-reduces-wealth-and-stresses-coping-strategies/">Impacts</a> of similar types and magnitude were seen in surveys by BFA, i2i, and the World Bank.
<h2>4. Households suffered as incomes declined — they were unable to cover expenses for household essentials and experienced dramatic food insecurity.</h2>
<img class="alignleft size-full wp-image-42973" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/08/cover-household-expenses-nigeria.jpg" alt="cover household expenses nigeria" width="500" height="286" />The MAP surveys showed that owners’ households experienced declining fortunes along with their businesses. The share of business owners reporting they could not cover household expenses was 56 percent. Responses on food insecurity reflected this vulnerable financial position: 60 percent of owners reported they or someone in their household had eaten fewer or smaller meals since the pandemic began because there was not enough money to buy food; 34 percent of owners reported that they or someone in their house had gone to bed hungry in July 2020. These responses were emblematic of the pervasive challenges facing other Nigerians, with studies showing <a href="https://centerforfinancialinclusion.org/nigerians-are-in-desperate-need-of-relief-as-covid-19-reduces-wealth-and-stresses-coping-strategies/">widespread food insecurity</a> across the country.
<h2>5. Owners’ businesses and households partially rebounded as government restrictions eased.</h2>
Nigeria began easing restrictions in movement in July 2020, and data from the second wave showed that businesses partially rebounded. For instance, the MAP surveys showed that half of the owners with a closed business in Wave 1 had restarted operations or started a new venture in Wave 2. During the same period, the number of employees at MSMEs increased by 70 percent, and the share of businesses reporting they could cover their operating expenses increased from 54 to 60 percent. Marginal improvements in household resilience accompanied those advances, with the share of owners reporting their households could cover their essential expenses increasing from 44 to 56 percent, and the share of owners reporting the worst food insecurity declined by 8 percentage points.
<h2>6. However, these initial gains appear to be tapering off, raising the specter of persistently lower economic performance.</h2>
<img class="aligncenter size-full wp-image-42985" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/08/total-employment-levels-nigeria-v6.png" alt="total employment levels nigeria v6" width="600" height="188" />

Gains in the number of operating businesses between Wave 1 and Wave 2 were substantial. Increases in the percentage of businesses that were operating were smaller but steadily increased between waves 2 and 4. Wave 4 survey data from March 2021 shows that 1.75 percent of businesses were closed in compared to 4.25 percent in Wave 2. However, the share of owners reporting they could cover business expenses from revenue increased by only one percentage point between Waves 2 and 4; and employment levels remained largely unchanged (resting about 30 percent below their pre-pandemic peak). While the share of owners reporting their households could cover essential expenses improved from 56 to 67 percent, food insecurity declined only somewhat between Waves 2 and 4 (even in Wave 4, 20 percent reported at least one member of their household going hungry).
<h2>7. Business owners’ financial tools have been stressed by the pandemic, hampering their ability to bootstrap recovery.</h2>
<img class="size-full wp-image-42974 alignright" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/08/table-nigerians-going-to-bed-hungry.jpg" alt="table nigerians going to bed hungry" width="500" height="212" />In the year before the pandemic, an equal share of owners reported having made a savings deposit and a savings withdrawal. Between the start of the pandemic and the Wave 1 survey, the share of respondents reporting they made a withdrawal was more than double the share reporting they made a deposit (28 percent saved versus 64 percent withdrew savings), indicating a major drawdown of cash reserves. This pattern moderated in Waves 2 and 3, but only slightly. Data from the later waves also confirmed the extent of the spend-down with respondents reporting they had used around 60 percent of their savings by Wave 4. Borrowing has appeared to be the primary financial tool to fill this gap: the share of respondents reporting receiving a new, formal loan increased from 14 percent in Wave 1 to 41 percent in Wave 3. However, a large share (56 percent in Wave 1, 45 percent in Wave 2, 39 percent in Wave 3, and 31 percent in Wave 4) of respondents reported that they have skipped a loan payment as a coping strategy.
<h2>8. They also appear to have few lifelines available to help relieve stress on their finances.</h2>
The MAP surveys also show strong evidence that business owners have few mechanisms to ease pressure on their finances. As noted above, while borrowing has increased, there is evidence that the ability to repay is a challenge. About one-third of respondents have taken loans from friends and family — which tend to be shorter-term, cheaper, and more flexible than formal loans — since the pandemic began. Other support from friends and family is limited. For instance, MSME owners are much more likely to be the sender of domestic cash transfers to friends and family than recipients and only a small share of owners reported receiving international remittances. Government support has also been paltry, with only 5 percent of MSME owners reported receiving a government transfer of any kind since the pandemic began.
<h2>9. Consequently, owners appear to be relying on sweat equity, price adjustments, and payment arrangements to boost revenue.</h2>
With financial stress ongoing, owners have turned en masse to improving their fortunes by contributing sweat equity. With government restrictions lifted, a growing share of respondents (about 50 percent in Wave 1 and 64 percent in Wave 4) reported working longer hours to make ends meet and satisfy customer demand. Meanwhile, increasing shares of respondents are adjusting their prices — slashing prices on some goods, putting a premium on others — to move inventory, and respondents have grown increasingly likely to experiment with offering store credit or not. Not all these strategies are complementary, and there is some evidence that the use of a mismatched set of coping strategies is not helping businesses.
<h2>10. It remains to be seen if international aid agreements will fill the fiscal stimulus gap, accelerate growth, and aid MSMEs’ recovery.</h2>
Nigeria’s cash-strapped government has been able to offer limited fiscal stimulus to boost aggregate demand so far, hampering a recovery. The <a href="https://www.worldbank.org/en/data/interactive/2020/04/14/map-of-sme-support-measures-in-response-to-covid-19" target="_blank" rel="noopener noreferrer">stimulus</a> that has been offered has been relatively small, offered in the form of targeted credit facilities, and aimed at small and medium formal firms in specific, hard-hit sectors like aviation, hospitality, and manufacturing — none of which is likely to benefit MSMEs like those in the MAP survey. At the end of 2020, the World Bank announced a $3 billion agreement to support Nigeria’s recovery, including $750 million for the Nigeria COVID-19 Action Recovery and Economic Stimulus (CARES) program, which aims to get aid to provide social transfers to low-income households, improve food security, and support MSMEs. Future waves should hopefully show if this aid improves MSMEs owners’ financial well-being.

Keep following this space for more key survey insights from microfinance clients in Lagos as well as India and Indonesia.

10 Things to Know About Nigerian MSMEs’ Experience with COVID-19

Earth Day was held on April 22nd to celebrate and promote environmental protection, including climate action. In the past decade, it has served as a momentary reminder of the need to respond to the causes and effects of climate change.

For much of the world, though, a reminder is hardly necessary. Dramatic shifts in weather patterns yield bizarre, destructive conditions at an increasing rate. The impact of these shocks on low-income people is profound as this population is more likely to be affected by and have difficulty recovering from climate shocks. The evidence shows that financial tools can help low-income people prepare for and respond to these negative events. However, more work needs to be done to develop appropriate financial products that help low-income households, entrepreneurs, and smallholder farmers mitigate and adapt to climate risk, which is why this topic is one of CFI’s four <a href="https://centerforfinancialinclusion.org/crisis-and-opportunity-reimagining-inclusive-finance-after-the-pandemic/" target="_blank" rel="noopener noreferrer">strategic pillars</a>.

In an effort to build the evidence base on this topic, CFI launched a dipstick survey of urban MSME owners on their experiences with climate shocks. This is part of our broader four-country, longitudinal survey <a href="https://centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact/" target="_blank" rel="noopener noreferrer">monitoring the impact of COVID-19 on MSMEs</a>. The goal of the dipstick survey was to illuminate MSMEs’ resilience to climate change by examining the shocks that impacted them, the consequences of those events for their businesses, and whether there was a correlation between experiencing negative impacts in the recent past and the ability to recover from COVID-19 today.

CFI completed the first of these dipstick surveys with its panel of MSME owners in Lagos, Nigeria, in early March, and the data is striking, showing a large portion of owners have been negatively impacted by recent climate events and those that have been impacted are recovering more slowly from COVID-19 than their peers. This research is part of our partnership with the <a href="https://www.mastercardcenter.org/" target="_blank" rel="noopener noreferrer">Mastercard Center for Inclusive Growth</a>.
<h3>A quarter of MSME owners have had their business negatively affected by a climate shock in the past 5 years.</h3>
A coastal megacity, <a href="https://lcluc.umd.edu/hotspot/urbanization-lagos-nigeria#:~:text=Lagos%20experienced%20an%20influx%20of,urban%20area%20in%20the%20world." target="_blank" rel="noopener noreferrer">Lagos has grown dramatically</a> in the past twenty years, with surrounding wetlands paved in favor of poorly planned urban development. Simultaneously, weather patterns have shifted, making Lagos <a href="https://qz.com/africa/628387/an-unusually-intense-lagos-heatwave-reminds-nigerians-theyre-not-ready-for-climate-change/" target="_blank" rel="noopener noreferrer">hotter</a>, encouraging the formation of massive thunderstorms with <a href="https://qz.com/africa/1054825/climate-change-in-nigeria-floods-in-lagos-abuja-niger-delta-are-going-to-get-a-lot-worse/" target="_blank" rel="noopener noreferrer">heavy rainfall</a>. With no meaningful flood control system to speak of, these conditions have given rise to frequent, <a href="https://www.cnn.com/2017/07/09/africa/lagos-flood-storms" target="_blank" rel="noopener noreferrer">destructive urban floods</a>. Rising sea levels and increased vulnerability to storm surges <a href="https://guardian.ng/news/how-rising-seas-may-wipe-off-lagos-others-by-2050/" target="_blank" rel="noopener noreferrer">exacerbate the risk of flooding</a> throughout the city.

Over the course of the past five years, 24 percent of MSME owners in CFI’s survey reported that they had been negatively impacted by at least one of these trends, with flooding from heavy rains being the most common shock owners experienced. Of those owners who experienced a negative shock, most experienced a disruption to the supply of goods to their business and a reduction in customer traffic to their stores (see the graph below). Significant shares of respondents also reported longer-lasting, and likely more costly, impacts such as damage to or loss of inventory or their place of business.

<img class="aligncenter size-full wp-image-42354" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/04/Negative-Impact-of-a-Climate-Shock.png" alt="" width="800" height="204" />
<h3>MSME owners who experienced a major climate shock in the past 5 years are struggling more than their peers to recover from the COVID-19 pandemic.</h3>
A surprising finding from this survey was that there were no meaningful differences in the characteristics of owners—such as owner gender, industry, business size, and pre-pandemic profit level, among others—who experienced these shocks and those that did not, and yet these two groups are experiencing dramatically different outcomes during the COVID-19 pandemic.

<img class="alignleft size-full wp-image-42355" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/04/Covering-Expenses-Climate.png" alt="graph covering expenses" width="500" height="485" />For instance, MSME owners who experienced a climate shock were less likely to report that they could cover their operating expenses from revenue. In addition, owners who did not experience a shock were much more likely to report that their profits were trending upward compared to their peers, suggesting a stronger recovery from the initial pandemic-induced downturn.

Their households were struggling too. Owners who experienced a climate shock were less likely to be covering household expenses from earned income than an owner who had not experienced a shock. And strikingly, of the respondents who reported that they were experiencing extreme household food insecurity, all of them had been impacted by one of these shocks in the past five years.

This is correlation, not causation — based on the survey design, CFI cannot say that experiencing a negative impact in the past five years caused an owner to be less resilient to the COVID-19 pandemic with certainty. However, there is a large body of research on the <a href="https://openknowledge.worldbank.org/handle/10986/25335" target="_blank" rel="noopener noreferrer">compounding effects of disasters on well-being</a> — including livelihood opportunities, asset loss, and physical health — and the lack of resources available to low-income populations to recover from them. It is not hard to imagine that an MSME owner who leveraged her financial resources to recover from a flood is less likely to have resources available to respond to a future disaster.

<img class="alignright size-full wp-image-42356" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/04/At-Least-One-Household-Member-Has-.png" alt="table" width="400" height="234" />There is data from the survey to support the hypothesis that it is harder for low-income households to leverage their portfolio of financial resources to respond to a series of shocks, even when those shocks are years apart. For instance, MSME owners who experienced a climate shock in the past 5 years reported they would be less likely to use credit, savings, or cash transfers from friends or family to recover from a similar shock in the future. The COVID-19 data shows that this phenomenon is in play currently: owners who experienced a climate shock saved and borrowed less often than their peers who had not been impacted by a shock in CFI’s most recent survey wave. They are sending money to and receiving it from their social networks at similar rates, though. Use of insurance is negligible in both groups despite <a href="https://www.poverty-action.org/sites/default/files/publications/Building-Resilience-through-Financial-Inclusion-English.pdf" target="_blank" rel="noopener noreferrer">strong evidence</a> that it is an effective tool for helping people plan for and respond to economic shocks.
<h3>Stakeholders can help MSMEs build back better, but careful consideration will need to be given to the financial tools they need to make it through inevitable systems changes.</h3>
In the wake of COVID-19, there have been calls for communities to “build back better” by investing in development that makes them resilient to future disasters. For communities in Lagos, this data suggests that low-income entrepreneurs who have experienced a climate-related shock will need more support to build back better than their peers who have not experienced such shocks.

In the medium-term, this support will likely need to take the form of systems-level investments in infrastructure by the government to mitigate the risk of future shocks. Lagos needs improved flood control systems. But any large, public works project in densely populated areas is likely to disrupt MSME owners that live and work in affected communities. The government would need to consider how to keep an investment in resilient infrastructure from becoming another economic shock for these people. Offering grants or low-cost, government-sponsored loans to affected businesses during construction may help them survive.
<blockquote class="pullquote--left">FSPs, regulators, and policymakers will need to work together to ensure MSME owners have continued access to appropriate and affordable financial services.</blockquote>
In the meantime, financial service providers (FSPs), regulators, and policymakers will need to work together to ensure MSME owners have continued access to appropriate and affordable financial services. As climate science is mainstreamed into <a href="https://www.mckinsey.com/business-functions/risk/our-insights/banking-imperatives-for-managing-climate-risk" target="_blank" rel="noopener noreferrer">credit risk models</a> and <a href="https://www.swissre.com/risk-knowledge/mitigating-climate-risk/decoding-climate-change-what-does-it-mean-for-the-underwriter.html">insurance underwriting</a>, financial services will become more costly for low-income consumers living and working in risky areas. In their current iteration, certain financial products, like flood insurance, are likely to become unaffordable as the systemic nature of the risk grows. It will be critical for the government and the private sector to work collaboratively in such circumstances to ensure the supply of financial services to underserved communities. This could involve things like packaging government-sponsored flood insurance with private loans to de-risk lending and investment for FSPs and MSME owners, respectively.

This will not be easy to do. The government will need guidance on what policy measures are effective; FSPs will need to discover new, effective business models; and consumers will need additional support to ensure that they understand and are protected from risks associated with climate-focused financial products. These takeaways underscore the need for CFI’s focus on these elements as part of our climate agenda.

<em>For us, studying climate risk will not be just an Earth Day affair: we will continue our dipstick surveys in Colombia, India, and Indonesia in the coming months to study MSME owners' experience with climate shocks. Stay tuned for announcements of new data releases to CFI’s <a href="https://centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact/" target="_blank" rel="noopener noreferrer">data dashboards</a>. Follow us (<a href="https://www.linkedin.com/showcase/center-for-financial-inclusion-at-accion/?viewAsMember=true" target="_blank" rel="noopener noreferrer">LinkedIn</a>, <a href="https://twitter.com/CFI_Accion" target="_blank" rel="noopener noreferrer">Twitter</a>, <a href="https://centerforfinancialinclusion.us5.list-manage.com/subscribe/post?u=394352ae963270aef6c51680d&amp;id=9df382106a" target="_blank" rel="noopener noreferrer">newsletter</a>) on our journey of learning and advocacy.</em>

Climate Change is Exacerbating Obstacles to COVID-19 Recovery for MSMEs in Nigeria

Results from CFI’s second wave survey of the economic impact of COVID-19 on micro, small, and medium enterprises (MSMEs) are cause for cautious optimism, showing MSMEs are generally on an upward trajectory after weathering the initial economic devastation caused by the pandemic. While these indicators of recovery are promising, there are several signs that MSMEs, and their owners’ households, are vulnerable to another economic downturn. Given the volatility caused by COVID-19, what can policymakers and financial service providers (FSPs) do to bolster the recovery and decrease vulnerability?
<h2>Businesses Are Opening, Profit Levels Are Stabilizing, and Hiring Has Increased Dramatically</h2>
In the first wave, 15 percent of MSME owners reported their business closed at the beginning of the pandemic. As I wrote in <a href="https://centerforfinancialinclusion.org/on-the-economic-frontlines-of-covid-19-early-insights-from-msmes-grappling-with-the-crisis/" target="_blank" rel="noopener noreferrer">CFI’s brief examining that data</a>, most of these closures were the result of government restrictions on movement in response to the public health crisis, but by the time CFI completed its first set of surveys, governments in three of the four countries (Colombia, India, and Nigeria) had recently or were planning on loosening restrictions. Thus, it may be of little surprise to see that large shares of respondents with a closed business in wave 1 reported they were operating in wave 2. The declines in closures in each market were dramatic, falling by at least 50 percent.

<img class="aligncenter size-full wp-image-41996" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/03/table-1-share-of-closed-businesses-MSME-covid-blog-post.png" alt="table " width="700" height="179" />

As the business climate improved, so did MSMEs’ earnings. In the first wave, 83 percent of respondents reported their profits declined -- a staggering figure which was indicative of the liquidity challenges respondents were facing. Those declines have bottomed out for most respondents. In every market other than Indonesia, the share of businesses with profits that have stayed the same or increased was larger than the share of businesses with profits on the decline.

<img class="aligncenter size-full wp-image-42012" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/03/table2v2-profit-trend-since-wave-1-covid-MSME-blog-CFI.png" alt="table 2" width="700" height="221" />

There is evidence that the improvement in profit trends had a positive impact on business operations. As shown in Table 3, the share of owners reporting they could cover their expenses from operating revenue increased in each market, although those gains were not significant in Indonesia. In addition, there has been an expansive increase in the number of people MSMEs employed in Colombia, India, and Nigeria. Employment surged by 66 percent in Colombia and 42 percent in Nigeria relative to wave 1. In India, employment nearly doubled and was higher in wave 2 than it was at its pre-pandemic peak.
<p style="text-align: center;"><img class="aligncenter size-full wp-image-41998" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/03/Table-3-Share-of-businesses-covering-operating-expenses-covid-MSME-blog-post.png" alt="table 3" width="700" height="182" /></p>

<h2>But MSME Recovery, Household Resilience Are Vulnerable</h2>
This data is encouraging but there are still several indicators highlighting the fragility of the recovery. For instance, while it is positive that many businesses have re-opened, most of those are new businesses that entrepreneurs started as opposed to closed businesses that re-opened once pandemic restrictions were lifted. While the number of businesses in this scenario is too small for robust quantitative analysis, there are indications that these businesses are in a more precarious financial position than their peers that never closed. For example, in Colombia, new business owners reported spending down more of their savings (80 percent) compared to owners who never closed (70 percent). Meanwhile, the number and value of outstanding loans were similar in both groups. Similar patterns can be seen in Nigeria, too. Meanwhile, the improvement in profit trends is promising, but as Table 2 shows, there was a large minority of respondents -- and a majority in Indonesia -- who reported their profits were still on the decline.
<blockquote class="pullquote--right">There are indicators that MSMEs’ recovery -- and the resilience of respondents’ households -- is vulnerable to another economic downturn.</blockquote>
This fragility extends to MSME owners’ households: the data shows that there were no consistent improvements in household resilience. Colombia, India, and Indonesia all displayed similar patterns defined by meager, if any, changes in the share of respondents reporting their households could cover essential expenses, the duration for which they could continue doing so given no income, and levels of food security. Nigeria showed the most expansive improvement in household resilience relative to wave 1, with more respondents reporting their households could cover their essential expenses and that they could do so for longer if they lost all their income. However, food security -- even after a decline -- remained persistently high. Twenty-five percent of respondents reported they or someone in their household had gone to bed hungry since wave 1 because there was not enough money for food. And while there is some evidence that financial flows are increasing, households’ best buffer against an economic shock, savings, has largely been exhausted.

<img class="aligncenter size-full wp-image-42009" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/03/table-4-use-of-savings-pandemic-MSMEs-covid-blog-1-1.png" alt="" width="500" height="121" />
<h2>Policymakers Should Provide Direct Assistance, Regulators Should Continue Prudential Flexibility</h2>
In CFI’s <a href="https://centerforfinancialinclusion.org/on-the-economic-frontlines-of-covid-19-early-insights-from-msmes-grappling-with-the-crisis/" target="_blank" rel="noopener noreferrer">brief</a> examining the first wave of survey data, I discussed how most MSMEs in our survey were not recipients of direct assistance despite major expansions of social assistance programs in each survey market. That was also true in the second wave of survey data. The only country where respondents reported a significant difference in receiving public support was India. Levels of support remained limited and unchanged in the other markets.

For MSMEs in low-income countries, this appears to be a widespread issue with the World Bank reporting that <a href="https://www.worldbank.org/en/news/feature/2021/02/17/tracking-an-unprecedented-year-for-businesses-everywhere?cid=SHR_SitesShareLI_EN_EXT" target="_blank" rel="noopener noreferrer">only 10 percent of businesses in low-income markets said they received some sort of public support</a>. They also noted how the probability of receiving policy support was substantially lower for smaller firms, which comprise the majority of CFI’s sample, compared to larger firms.
<blockquote class="pullquote--left">To ensure the recovery continues, policymakers should provide direct assistance to MSMEs and regulators should continue affording prudential flexibility to FSPs.</blockquote>
Collectively, this data continues to support the need for expanded support measures that are structured to provide immediate relief to MSMEs. They also provide additional guidance on potential ways to design programs to be most impactful. For instance, efforts aimed at maintaining or boosting employment are less likely to have a major impact given the gains seen in wave 2. However, there appears to be a need to support MSME owners who have closed one business because of the pandemic and are now starting another. As this data suggests, this group is particularly vulnerable, so direct assistance that helps them improve their financial position (by providing grants, lower-cost debt, or other measures) would be particularly beneficial.

In addition to an expansion of direct assistance programs, I also wrote about the need in the medium-term for FSPs, especially lenders, to adapt their products and services to support MSMEs’ liquidity. Since then, <a href="https://centerforfinancialinclusion.org/regulatory-flexibility-during-the-pandemic-emerging-lessons/" target="_blank" rel="noopener noreferrer">CFI released a policy brief</a> which explored, among other topics, how flexibility of prudential regulations could serve as a powerful tool to help FSPs and their clients cope during the pandemic. With the ability to offer moratoria, pardon interest, and offer other restructuring, FSPs can meaningfully support the liquidity needs of their customers. Denise Dias, the author of the policy brief, notes that regulatory flexibility, which many regulators have adopted in response to COVID-19, allows FSPs to provide relief to borrowers without needing to automatically reclassify the loans as higher risk, which in turn preserves FSPs’ liquidity and supports their short-term viability.

There is ample evidence to suggest there is value in extending this flexibility into the future as many respondents’ ability to fulfill their debt obligations remains constrained by persistently lower earnings, declining profits, and an ability to cover operating expenses from revenue alone. It is, however, important to note that this is not a blanket approach and regulators need to evaluate the circumstances in their markets carefully. In Indonesia, for example, continued flexibility appears especially important as respondents in that market underperformed in the recovery relative to their peers. In India, however, additional regulatory flexibility appears less necessary as MSMEs there have generally been performing well.

Cautious Optimism: MSMEs Are Rebounding From the Impacts of COVID-19

<h2>Our Guests:</h2>
<ul>
 	<li>
<h3><a href="https://www.mastercardcenter.org/our-team/payal-dalal" target="_blank" rel="noopener noreferrer">Payal Dalal</a>, Mastercard Center for Inclusive Growth</h3>
</li>
 	<li>
<h3><a href="https://www.cgap.org/about/people/rashmi-pillai" target="_blank" rel="noopener noreferrer">Rashmi Pillai</a>, FSD Uganda</h3>
</li>
 	<li>
<h3><a href="https://blogs.worldbank.org/team/syed-mohsin-ahmed" target="_blank" rel="noopener noreferrer">Syed Mohsin Ahmed</a>, Pakistan Microfinance Network</h3>
</li>
 	<li>
<h3><a href="https://www.centerforfinancialinclusion.org/bio/denise-dias" target="_blank" rel="noopener noreferrer">Denise Dias</a>, Financial Regulatory and Supervisory Consultant and CFI Author</h3>
</li>
 	<li>
<h3><a href="https://centerforfinancialinclusion.org/people/eric-noggle/" target="_blank" rel="noopener noreferrer">Eric Noggle</a>, Center for Financial Inclusion</h3>
</li>
</ul>
<h3>Moderator: <a href="https://centerforfinancialinclusion.org/people/mayada-el-zoghbi/" target="_blank" rel="noopener noreferrer">Mayada El-Zoghbi</a>, Center for Financial Inclusion</h3>

Live Discussion: COVID-19 Policy Measures and the Impact on MSMEs

The data from CFI’s surveys on emerging-market MSMEs tells a stark tale: COVID-19 has closed 15 percent of all businesses; 83 percent of operating MSMEs have seen a dramatic decline in profits, leading to struggles covering operating expenses; 46 percent of closed MSMEs report government-imposed restrictions on movement as the most direct cause of their business closure. There is no obvious "best practice" coping strategy MSMEs are using, and it’s a tough road for many MSMEs trying to return to pre-pandemic financial health.

Armed with the right insights and data, however, policymakers and other ecosystem actors can target interventions that help rather than harm.

This brief contains insights needed to support MSME recovery. It summarizes and analyzes the first wave of data from a research project on the financial health of MSME owners/operators during COVID-19. At the program's core is a longitudinal, six-wave survey in four countries: Colombia, India, Indonesia, and Nigeria. In each country, CFI is surveying MSME clients at one financial institution participating in our <a href="https://centerforfinancialinclusion.org/understanding-covid19s-impact-on-financial-health-of-msmes/" target="_blank" rel="noopener noreferrer">partnership</a> with Mastercard every other month for one year.

Visit the <a href="https://centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/" target="_blank" rel="noopener noreferrer">COVID-19 and MSMEs: Data and Analysis to Understand Impact</a> program page to interact with the data dashboards and read other analyses.

On the Economic Frontlines of COVID-19: Early Insights From MSMEs Grappling With the Crisis

What is the scale of impact of COVID-19 on MSMEs, and how are they coping? CFI's analysis of longitudinal data from four emerging markets (Colombia, India, Indonesia, and Nigeria) offers actionable insights for policymakers, investors, and other ecosystem actors. 

Shradha Modi

Lauren Braniff

Lucciana Alvarez Ruiz

Aeriel Emig

Eric Noggle

Madeleine Longwell

Bolivia

Colombia

East Asia and Pacific

India

Indonesia

Latin America and The Caribbean

Nigeria

South Asia

Sub-Saharan Africa

Challenges and Crises

Delivery Channels

Digital Transformation

Enabling Environment

Entrepreneurs of MSMEs

Financial Health

Resilience

Underserved Groups

Women

Credit

MSME/SME Finance

Financial Capability

Personal Financial Management

Financial Service Providers

Insurance

Microfinance Institutions

Policy, Regulation and Government Initiatives

Data Analytics

Financial Technology

Report

Blog Post

Brief

Webinar

COVID-19 and MSMEs: Data and Analysis to Understand Impact

India is a global leader in financial inclusion. For over a decade, Accion has worked with and learned from India’s innovators, investors, and policymakers to expand economic opportunity for its people and businesses.

Though Nigeria’s government has set ambitious goals for financial inclusion, the majority of its people lack a formal bank account. Accion has worked in the country since 2007 to expand access to financial services.

Katia Huayta Zapata

Data from across the financial inclusion industry shows the economic upheaval COVID-19 is causing throughout Nigeria. <a href="https://www.centerforfinancialinclusion.org/msmes-in-lagos-struggle-due-to-covid-19-but-remain-positive" target="_blank" rel="noopener noreferrer">In addition to data collected by CFI</a>, we examined the results of four other surveys of COVID-19’s impact throughout the country. When considered collectively, the data tells a story in which the public health crisis has led to policies which slowed economic activity. Consequently, income has declined—for employers and employees alike—and there appears to be massive reductions in available work. The data also suggests Nigerians’ capacity to respond is finite as households draw down savings and struggle to repay debts, exacerbating their struggle to put enough food on the table.
<h2>Survey Summary</h2>
CFI looked at five surveys that have been conducted since COVID-19 reached Nigeria. A summary of those surveys—including sample size, notes on sampling method, survey dates, and major topics covered—is available in Table 1.

There are three things to highlight about this set of surveys which are meaningful when interpreting the results. First, the survey methods used varied, and <a href="https://news.gallup.com/opinion/methodology/233291/why-phone-web-survey-results-aren.aspx" target="_blank" rel="noopener noreferrer">these different modes have shown to yield different responses to the same question in other studies</a>. BFA used an online survey, GeoPoll’s survey was delivered via SMS to its database of respondents while CFI, i2i, and the World Bank conducted surveys by phone.

Second, the samples target different populations of interest and the selection methodology differed. BFA used a sample of paid, online respondents while GeoPoll relied on its database of mobile subscribers who tend to be younger, more literate, and wealthier than the population at large. CFI’s sample of MSMEs were clients of Accion Microfinance Bank in Lagos. Only i2i and the World Bank surveys were nationally representative. This diversity can help give confidence in patterns we identify: <em>there is strong circumstantial evidence the trend is true</em> if all five surveys show a similar trend with a similar magnitude. A downside, though, is that because of the heterogeneity in methods, circumstantial is the best we can do—this is not an empirical comparison.

Third, these surveys happened at proximate but not identical times. BFA’s survey was the earliest and the <em>initial</em> World Bank survey, which includes two waves, also happened shortly after the pandemic struck. i2i’s longitudinal survey was conducted <em>during a two-and-a-half-month period</em>. These differences are relevant because of the immediacy of COVID-19’s impact. Even differences of a few weeks could have had meaningful effects on responses.

Nigerians Are in Desperate Need of Relief as COVID-19 Reduces Wealth and Stresses Coping Strategies

Micro, small, and medium enterprises (MSMEs) in Indonesia are suffering in the wake of COVID-19 according to data collected by CFI. Seventeen percent of the businesses in the sample have closed, and 85 percent of those that continue to operate estimate their profits have decreased, often by 50 percent or more.

Owners of the MSMEs that were operating at the time of the survey remained optimistic despite the economic downturn. Almost two-thirds reported they were covering their business expenses with revenue and thought they could keep their doors open for another three months based on how things were going. In addition to altering their business practices to stay open, the data on owners’ use of financial tools suggests that they are drawing down their financial resources, raising concerns that they have little cushion for the months ahead.

From July 13 to August 8, 2020, CFI conducted phone interviews with a random sample of <a href="https://bina-artha.com/" target="_blank" rel="noopener noreferrer">Bina Artha Ventura (BAV)</a> clients in Indonesia. BAV, which is <a href="https://www.accion.org/mastercard-and-accions-partnership-to-unlock-millions-of-underserved-microbusinesses" target="_blank" rel="noopener noreferrer">participating in Accion’s partnership with Mastercard</a>, is a microfinance institution that uses a group lending methodology to serve entrepreneurs, mostly women, who predominantly live in rural areas. CFI completed 730 interviews, 660 of which were with female MSME owners. Two-thirds of the owners ran sole proprietorships while 31 percent ran microenterprises (one to 10 employees). Those microbusinesses employed an average of three people before the pandemic. MSMEs in the sample have been operating for almost eight years on average. Most businesses were grocery or food stands, although farming and the sale of household goods were also common. This is one of six surveys CFI is conducting in Indonesia as part of its <a href="https://www.centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact" target="_blank" rel="noopener noreferrer">ongoing effort to study the impact of COVID-19 on the financial health of MSMEs</a>. As with data from CFI’s first survey in Nigeria, the data from this survey is <a href="https://www.centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/indonesia" target="_blank" rel="noopener noreferrer">presented in this interactive dashboard</a>.
<h2>Survey Insights</h2>
<h4>Nearly one in five women-led businesses have closed. They were almost twice as likely to close as male-led businesses.</h4>
<blockquote>Of the women-led microbusinesses that closed, 78 percent said they were completely confident that they would reopen in the future, but only 57 percent of the women-led sole proprietorships that closed said the same.</blockquote>
Since COVID-19 struck Indonesia, 18 percent of women-led businesses in the sample have closed. These closures have proportionally impacted businesses of different types and sizes, and they have been driven largely by a drop in customer demand, likely the result of restrictions on movement being enforced in the country. The owners of these businesses were generally confident that they would be able to restart their business in the future, but there were major differences based on how large the businesses were prior to the pandemic. Of the women-led microbusinesses that closed, 78 percent said they were completely confident that they would reopen in the future, but only 57 percent of the women-led sole proprietorships that closed said the same. Importantly, women-led businesses were almost twice as likely to close as male-led businesses. Of the 70 male-led businesses in the sample, only 10 percent had shuttered their operations.
<h4>COVID-19 has led to dramatic declines in profits, but roughly two-thirds of businesses say they are covering their expenses.</h4>
<blockquote>70 percent of operating businesses reported a decrease in profits of 50 percent or more.</blockquote>
Businesses generally did well in the year before the pandemic struck. Fifty-six percent of respondents reported their profits increased compared to the year before while 38 percent said they had stayed the same. Only 5 percent of people said their profits had declined, but that number has skyrocketed since COVID-19: 85 percent of businesses reported that their profits have declined compared to pre-pandemic levels. Those declines have been dramatic, with 70 percent of operating businesses reporting a decrease in profits of 50 percent or more. While profit levels shrunk dramatically, owners were confident that they would be resilient to this shock. Sixty-three percent of owners said they were covering their expenses just with business revenue and think they could continue operating for at least three months based on how things were going.
<h4>MSMEs are trying to survive by changing business practices to boost revenue and cut costs, including reducing their labor force.</h4>
<blockquote>Half of operating microenterprises reported that they cut employees.</blockquote>
MSME owners are employing a mix of revenue-boosting and cost-cutting measures to ensure their revenues continue covering their expenses. For instance, a third of all operating businesses reported offering discounts to stimulate sales while a fifth chose to raise prices instead. Almost a fifth of businesses started a delivery service since the pandemic began. Cost-cutting measures were also common. For those businesses with employees, reducing the size of their workforce and work hours for staff was an important strategy. Half of operating microenterprises reported that they cut employees, leading to a 42 percent reduction in employment within this segment. This action likely had downstream effects. Many owners reported that they were working longer hours to meet customer demand or make ends meet, potentially a result of a reduced workforce.
<h4>In addition to their businesses, owners’ households are enduring, but data on financial tools suggests their margin of error is small.</h4>
Three-quarters of households reported that they were covering all their expenses with non-debt income sources. Severe food insecurity – defined as people going to bed hungry because of a lack of money – was relatively low at 10 percent. In comparison, CFI’s survey of urban MSME owners in Lagos, Nigeria found that 34 percent of owners reported severe food insecurity in their households.

While this is encouraging, a closer look at the financial tools owners are using to cope with the crisis suggests that conditions are likely to worsen. For example, 22 percent of owners sold a household asset to keep their business running. Of the households that sold an asset, only 63 percent reported being able to cover their expenses compared to 79 percent who did not sell an asset. Similarly, 47 percent of MSME owners reported skipping a loan payment, and those owners were less likely to have covered their household expenses by a similar margin compared to those who had made their payments.
<blockquote>Savings also appears to have collapsed in the months since the pandemic hit.</blockquote>
Savings also appears to have collapsed in the months since the pandemic hit. Since March, only 38 percent of people reported saving while 53 percent reported withdrawing money from savings. In the year prior to the pandemic, 84 percent of people reported saving compared to 54 percent who said they withdrew money. While the comparison is not one-to-one because of the different periods, it is certainly not encouraging, especially because savings is another indicator of households’ ability to cope. Ninety percent of owners who had saved since March reported being able to cover their household expenses compared to only 67 percent of owners who had not saved.

Collectively, this analysis implies respondents have dwindling financial options. Only so many assets can be sold, and savings will dry up if not replenished. Debts not repaid choke future lines of credit. These underlying patterns may help to explain a less optimistic sentiment shared by respondents: 79 percent said they could only cover their essentials for a month or less if their income sources dried up.
<h2>Summary and Reflections</h2>
Since the pandemic reached Indonesia in March, 17 percent of businesses have closed, profits have collapsed, and employment has plummeted. Women-owned businesses have been hit especially hard, with 18 percent of them closing compared to only 10 percent of male-owned businesses. Owners who managed to keep their business open reported a high degree of confidence in their ability to continue operating, relying on a mix of revenue-boosting and cost-cutting business practices to ensure their revenues continue to at least meet their expenses. This has helped stave off catastrophe at home, where food insecurity remains low and people continue to cover their household expenses.

However, data on the use of financial tools suggests owners and their households have little margin for error in the months ahead. Selling household assets, skipping loan payments, and net savings withdrawal activity indicate that respondents are already relying heavily on financial tools to meet their basic needs. Without a change in their circumstances, it is unlikely that MSME owners will be able to replenish these resources. Thus, it is reasonable to expect a worsening financial situation in the months ahead.

<em>This survey is part of our partnership with <a href="https://www.accion.org/mastercard-and-accion-partner-to-unlock-growth-for-millions-of-underserved-microbusinesses-around-the-world" target="_blank" rel="noopener noreferrer">Mastercard Center for Inclusive Growth</a> to understand the impact of COVID-19 on MSMEs.</em>

MSMEs in Indonesia Are Surviving but COVID-19 Leaves Little Margin for Error

New data from CFI’s <a href="https://centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/" target="_blank" rel="noopener noreferrer">survey of micro, small, and medium enterprises (MSMEs) in Lagos, Nigeria</a>, show the staggering impact of COVID-19. Since the <a href="https://www.bbc.com/news/world-africa-51671834" target="_blank" rel="noopener noreferrer">first confirmed case</a> of COVID-19 in Nigeria in late February, 9 percent of the 737 businesses in the sample have closed; the number of employees has declined by 51 percent compared to its high point the preceding year; and 80 percent of businesses have seen their profits decline.

The data also show MSME owners’ households in a precarious position. More than half of business owners said their household is currently not covering their expenses from earned income, and if their income were to dry up, nearly 60 percent would be unable to pay for essentials within a month. Food insecurity is high, too – one-third of respondents reported they or someone in their household has gone to bed hungry in the past two months because there has not been enough money to buy food.

This survey is part of CFI’s multi-country effort to <a href="https://centerforfinancialinclusion.org/understanding-covid19s-impact-on-financial-health-of-msmes/" target="_blank" rel="noopener noreferrer">understand the impact of COVID-19 on the financial health of MSMEs</a> and is the first of six longitudinal surveys in Lagos. Broadly, the survey seeks to understand which businesses are shuttering their operations and why; how the performance and practices of operating businesses have changed; what financial tools MSMEs are using and whether their use is correlated with businesses’ resilience; and how changes in these livelihoods are related to changes in household well-being. The initial survey aimed to establish a retrospective baseline for firm performance and financial tool use in addition to capturing changes in behavior and outcomes since COVID-19 arrived in Nigeria. Future surveys – which will occur every two months for the next year – will track these indicators over time.

From June 16 to July 15, 2020, CFI conducted phone interviews with a random sample of Accion Microfinance Bank (AMfB) clients living in Lagos. AMfB is participating in <a href="https://www.accion.org/mastercard-and-accion-partner-to-unlock-growth-for-millions-of-underserved-microbusinesses-around-the-world" target="_blank" rel="noopener noreferrer">Accion’s partnership with Mastercard</a>, which supports the digital transformation of financial service providers. CFI completed interviews with 737 respondents, 55 percent of whom were women. Two-thirds of the businesses in the sample were micro-enterprises (1 to 10 employees) while another quarter were sole proprietorships. Most business were well-established, with an average operating age of 13 years. There was a healthy mix of businesses, including grocers, school operators, and manufacturing businesses.

CFI is presenting its data from this survey effort in this <a href="https://centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/nigeria/" target="_blank" rel="noopener noreferrer">data dashboard</a>. The dashboard is a living document – it will be updated as CFI refines and conducts new analysis, and as new data from other surveys becomes available.
<h2>Survey Insights</h2>
<h3>Nine percent of businesses have closed since COVID-19, but owners are confident they will reopen again.</h3>
The data show that 64 of the 737 businesses in the sample shuttered their operations since COVID-19 arrived in Nigeria. Of these, 40 of the businesses closed because of government restrictions on their businesses. School operators were disproportionately affected. Of the 44 school operators in the sample, 52 percent reported not operating. Of all the other types of businesses – like grocers, tailors, or electronic stores – with an n of 10 or more in the data, only the share of restaurants that have closed cracked double digits at 12 percent. At the time of the survey, these entrepreneurs were confident that they would reopen their businesses when government restrictions are lifted.
<h3>Total employment is down by 51 percent. Closed businesses are a major contributor to the decline, but nominally small losses incurred by microenterprises are adding up.</h3>
The survey asked respondents to report the largest number of staff – full-time, part-time, and seasonal –they employed at one time in the 12 months preceding coronavirus. They included family members if they were paid a wage. Against that benchmark, employment has plummeted. Prior to coronavirus, MSMEs in the sample employed 3,001 people. At the time of the survey, that number had dropped by 51 percent to 1,468 people.

Two major patterns are contributing to the decline. First, business closures are a significant driver of net job loss, largely because so many schools, which are major employers, shut down. A mere seven percent of the entire sample – representing 53 closed businesses – accounted for 44 percent of net job losses, and closed schools accounted for nearly 80 percent of that. Second, many microenterprises have lost a nominally small number of employees (on average, just more than one), which collectively has a significant impact on employment. The 463 operating micro businesses have lost 550 employees, roughly a third of all jobs lost.
<h3>Those job losses are symptomatic of the drop in profits that 80 percent of MSMEs are experiencing.</h3>
Prior to COVID-19, 63 percent of businesses reported their profits increased compared to the year before, but the pandemic has halted that progress. Eighty percent of businesses reported their profits have fallen since the start of the pandemic. Including the businesses that have closed, half of all businesses said they can no longer cover their operating expenses. If there is any consolation, it is that most businesses – even those with a negative cash flow – reported a modest runway before needing to shutter operations. Based on how things were going at the time of the survey, 72 percent of operating businesses estimated they could manage for at least another 3 months before shutting down.
<h3>MSMEs are employing a variety of coping strategies to keep their businesses afloat.</h3>
Businesses were coping using a diverse mix of strategies. For instance, in addition to the dramatic reduction in the workforce, owners are cutting employees’ hours and working longer hours instead. About 11 percent of owners increased prices, 38 percent reduced prices, and 28 percent had done both. Similarly, 32 percent of respondents stopped selling to customers on credit while 29 percent started doing so. Meanwhile, the number of people making savings withdrawals since the pandemic began outpaced the number of people making deposits by just more than two-to-one. For reference, this ratio was effectively one-to-one in the year before the pandemic began.
<h3>Many owners’ households appear to be on the precipice, with an inability to cover expenses and indications of food insecurity.</h3>
Predictably, given their businesses’ performance, owners’ households appeared to be struggling. Fifty-six percent of owners said their household could not cover all their expenses with the combined income household members are earning. If income were to dry up completely, the cushion for the households appears to be very small – 60 percent of owners said their households could cover expenses for a month or less. Households’ financial struggles are having very real impacts: roughly a third of owners reported someone in their household had to go to bed hungry at some point in the past two months because there was not enough money to buy food.
<h2>Summary and Next Steps</h2>
Collectively, this preliminary analysis of CFI’s survey data suggests MSMEs in Lagos are being walloped by COVID-19. The general slowdown in economic activity resulting from restrictions on movement has led to a dramatic reversal of MSMEs’ fortunes. With profits declining, owners are slashing jobs and resorting to a mix of strategies to keep operating. While they expect to be able to do so for a few months, their households stand to suffer more in the near term as expenses of essential items outpace the income available to pay for them.

While the sample is not statistically representative of MSMEs in Lagos, this information adds to the growing set of data available from <a href="https://datastudio.google.com/u/0/reporting/1yyG5QHGV-v-bxw6pJNZvwtqnIfCLj-7q/page/rw0JB" target="_blank" rel="noopener noreferrer">Bankable Frontiers Associates</a>, <a href="https://covid19tracker.africa/country/NGA/summary" target="_blank" rel="noopener noreferrer">insight2impact</a>, and the <a href="https://www.worldbank.org/en/country/nigeria/brief/monitoring-covid-19-impact-on-nigerian-households" target="_blank" rel="noopener noreferrer">World Bank</a>, among others, examining the impact of COVID-19 on households and livelihoods in Nigeria. In a future blog post, we’ll examine the learnings from the collective pieces of work in-depth, but each indicates severe economic stress consistent with this data. For instance, both the insight2impact and World Bank data indicate food insecurity occurring at similar rates to what was seen in this survey. Additionally, CFI will examine what policymakers can do to help mitigate these concerning findings. Whatever the intervention, it must happen quickly. In the meantime, business will struggle and dinner plates will be empty.

<em>This survey is part of our partnership with <a href="https://www.accion.org/mastercard-and-accion-partner-to-unlock-growth-for-millions-of-underserved-microbusinesses-around-the-world" target="_blank" rel="noopener noreferrer">Mastercard Center for Inclusive Growth</a> to understand the impact of COVID-19 on MSMEs.</em>

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