Lessons from 2008 for the COVID-19 crisis: Illiquidity is as dangerous as insolvency
Virtual Roundtable Recap
On Thursday, March 26, 2020, the SME Finance Forum hosted the first of a new series of weekly virtual roundtables on the economic effects of the COVID-19 pandemic. In these discussions, we link experts from the public and private sectors to share insights on mitigation, stabilization, and recovery.
Momina Aijazuddin, Global Head of Microfinance and Financial Inclusion at IFC, and Sam Taussig, Global Head of Policy for member Kabbage, the U.S.-based fintech that specializes in lending to SMEs—joined the March 26 roundtable to address the specific needs and concerns of MSMEs that have already lost much if not most of their business.
Both speakers emphasized a key lesson from the 2008 global financial crisis: Governments and financial institutions must act quickly to stave off a liquidity crunch in the SME sector. If the global SME sector should experience such a crunch, tens of thousands of otherwise viable businesses could go bankrupt. This before they even have the chance to benefit from medium-term stabilization efforts.
Both the public and private sectors can help fend off a liquidity collapse. Taussig outlined how governments can “simulate” SME revenues, funding the fixed costs of SMEs (such as salaries, rent, and utilities) during the brief period in which sales are effectively impossible. Aijazuddin described how IFC is joining this effort, with $8 billion already committed for trade financing and fast-track COVID-19 mitigation finance.
On the private sector side, she presented several examples of how digital-finance companies can ease the cash-flow constriction faced by SMEs. For example, China’s Ant Financial has offered concessionary or interest-free loans to 8.5 million businesses affected by the pandemic. Meanwhile, Kenya’s M-PESA, a mobile-based payments network, will be waiving fees for MSMEs for the next three months.
Governments, financial institutions, and banks do have the financial firepower to avert a liquidity crisis, but the question is: will they be fast enough? By their very nature, such events are unexpected and develop very suddenly. Averting catastrophe requires disbursing aid in days, not months.
For the typical Kabbage client, borrowing $30,000 or less and with only 10 days’ operating cash-in-hand, paper filings, human assessments, and checks in the mail are not going to be quick enough to avert serious cash-flow issues.
This is where partnerships with the fintech sector can make all the difference. As Taussig outlined, automated methods of credit assessment could provide a dramatically faster route to deciding which SMEs should receive taxpayer-funded aid. The automated, contactless payment networks pioneered by the sector could help to quickly disburse this aid.
If governments are willing to let fintechs into the process, the enormous capital available to public institutions could get to recipients in time, given fintechs’ speed and flexibility. This could greatly help to mitigate the liquidity stoppage—and form remarkable new partnerships in the process.
For details on upcoming virtual roundtables, visit this link.
Edited by: Elizabeth Gibbens, IFC.