COVID-19 pandemic impact on microfinance industry

Abstract The COVID-19 pandemic is the world’s deadliest health pandemic since the 1918 flu pandemic and caused one of the deepest economic crises since the Great Depression of the 1930s. As COVID-19 spread with alarming speed, every area of global business was impacted. One of the most severely impacted businesses was microfinance institutions (MFIs) and their borrowers. Despite the rapid growth of digital financial services, the microfinance industry still relies heavily on in-person, face-to-face transactions. Government imposed lockdowns and travel restrictions significantly reduced MFIs’ ability to conduct normal business. The purpose of this paper is to examine the impact of COVID-19 pandemic on the microfinance industry. We employed three widely used risk-adjusted measures, modified Sharpe ratio, maximum drawdown, and Calmar ratio, to evaluate the performance of MFIs’ equity prices as well as benchmark portfolios during the first year of the COVID-19 pandemic. From March 2020 to December 2020, microfinance institutions’ risk-adjusted performances were lower than the risk-adjusted performances of their respective country benchmark portfolios. These, in turn, were lower than the risk-adjusted performances of global benchmark portfolios. MFIs’ performances were not unique but reflected the severe impact experienced by the rest of the financial industry. But as a group, MFIs were more severely impacted by the pandemic than other financial institutions.