The impact of COVID-19 on MFIs, small and medium enterprises and farmers in Indonesia
The COVID-19 pandemic does not only impact human health, but has evolved into a much bigger issue affecting the global economy. Many countries felt the devastating result of COVID-19, but the ones struggling the most are emerging countries where the virus has stifled economic growth.
Southeast Asia’s largest economy, Indonesia, is one of those emerging countries that is impacted by the pandemic. The country is now in a critical stage as the virus has become a national crisis, impacting many businesses and industries. The National Economic Reform Program that targets small and medium enterprises (SMEs) and agriculture development by providing easy microloan access is facing challenges, since many SME owners and farmers are unable to run their businesses and are now in debt. Consequently, the loan providers are looking at risk of loan default as well as facing operational issues because of social distancing measures.
In this article, I will share some information about how microfinance institutions (MFIs), SMEs and the agriculture sector in Indonesia are reacting to this global pandemic:
1. How MFIs react:
One of the main issues of COVID-19 for the MFIs, especially those who rely on weekly or periodic collections, relates to the limitation of face-to-face interaction with members. The limitations imposed in various areas by the government accentuate this and affects repayments. Feedback indicates that even if members want to repay the loan, local villagers prohibit the entry of the field staff. This challenge seems to highlight an opportunity for prompting cashless and digital transactions.
Their solutions:
Partner with digital providers — Some MFIs have realized the importance of going digital and doing digital transactions, and therefore they have started discussions with digital payment providers. The implementation however, might not take place soon because of capacity constraints within the financial institutions. Donors and development organizations can use this opportunity for capacity building for digital financial services, training as well as “change management” for new processes.
Modify operations — Another option is to organize collection through group leaders. Group leaders will visit the members and collect repayment from them. MFI staff then set an appointment with the group leaders to collect the cash before delivering it back to the branch.
2. How SMEs react:
Many SMEs are feeling the impact of the lockdown, as they are unable to run their business or only in a limited manner. A number of shops are not allowed to open due to government sanctions, such as in the city of Bogor in the West Java province. Even in other areas, where some shopkeepers can still operate their businesses, there are very few customers. Daily necessity businesses such as food selling are still performing, but others are suffering.
Their solutions:
Digital implementation — Many SMEs in cities have been using digital platforms to sell their products and these SMEs are still doing OK with their sales. With the availability of various digital marketplace startups such as Tokopedia, Bukalapak, Grab and Gojek, more SMEs are now looking at these channels to sustain their business, at least until the pandemic is over.
Using the government aid programme — Many SMEs were given loan relaxation as part of the government’s aid. The government also provides individual support in form of so-called aid cards. An SME owner can use the card for basic needs, as well as to access online business training.
Emergency action — My previous research showed that in some of the rural areas, most of the MFI members, who may be entrepreneurs, usually also have “backup plan” for hard times. This includes working as day laborer in nearby neighborhoods to earn money (which is not possible anymore due to social distancing measure) or changing their business line to sell other products that still have demand, such as food.
3. Agriculture impact:
The agricultural sector is not impacted in terms of production but in the demand for produce. With many restaurants closing and restriction of market operational hours, there is a slump in demand and a significant price drop. Farmers are now left with two options: sell at a loss to the middleman, or wait until things improve, even if this means cutting consumption and going hungry.
Operationally, the distribution of the products is hampered due to local government’s quarantine measures for any “outsider” to the village. This also applies to the logistic officers who are supposed to bring the products to the market. They now have to wait 14 days before they can transact with local village farmers.
Their solution:
Going digital — Again, this is still the best solution for businesses at the moment, including the farmers. Tanihub, one of Indonesia’s agritech companies, stated that at least 20,000 new users have been added since the pandemic. Agritech companies might bring a better price offer to the farmers instead of a middleman from their local village. Nevertheless, the operational issues are yet to be sorted because even if the farmer goes digital, the product does not: the deliveries are still going to be delayed due to the quarantine measures.
Conclusion
The pandemic has forced entrepreneurs to innovate in order to sustain their businesses. Some of these solutions are aimed to address the challenge in the short run and some may have benefits that will definitely last beyond covid-19. The most important thing is that MFIs, SMEs and farmers should always be prepared and able to adapt quickly towards changes to survive the situation today as well as crises that may occur in the future.
