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January 04, 2022

Microfinance and rural non-farm employment in developing countries during the Covid-19 crisis

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The Covid-19 pandemic and associated economic crises continue to affect countries across the world. Early estimates projected that the pandemic would result in sharp economic contractions for 119 out of 128 low- and middle-income countries. While everyone is vulnerable to the pandemic, the poor have been the most vulnerable to infection, loss of income, and increased hunger. In 34 low- and middle-income countries, self-employed women and workers in the non-agricultural sector (both often among the poorest members of society) experienced some of the largest drops in employment during the early months of the pandemic in 2020. These households are often the clients of microfinance institutions (MFIs), and they have built their small enterprises by taking loans from MFIs.  

For the rural non-farm sector, the pandemic came as both a demand as well as a supply shock. At the beginning of the pandemic, most governments imposed some restrictions on mobility, typically hitting the poor the hardest. For example, in a nationally representative primary survey in rural Bangladesh, more than half of the households in the sample reported their main earner had lost employment and more than a quarter of the households reported having multiple members who had lost jobs because of the pandemic-induced lockdown. Similar findings are documented in India, Pakistan, Myanmar, and Nepal.

At the beginning of the pandemic, loan collections by MFIs faltered, dropping to less than 5% in the second quarter of 2020. This was primarily due to the demand shock faced by small enterprises. The restrictions on mobility coupled with job losses forced consumers to cut down their demand for goods and services typically supplied by small businesses in rural areas. Since regular cash flows are critical to service MFI loans that require frequent payments (often in the form of weekly instalments), many small businesses were no longer able to pay these payments during the lockdown. However, as the restrictions eased and economic activities resumed, MFIs in many countries experienced a “V-shaped” recovery and had almost returned to pre-pandemic levels by the first quarter of 2021.

According to the most recent estimates of the World Bank, the pandemic has forced 100 million people back into poverty, erasing all the gains in poverty alleviation made in the last five to six years. However, in contrast to the scale and depth of the Covid-19 induced economic shock, the extent of social support provided in many developing countries has been inadequate. Based on large-sample household surveys in nine low- and middle-income countries, the evidence shows that the proportion of respondents who report benefiting from government or NGO transfer programs varies from 0 to 49% (with a median of 11%). Moreover, transfers to businesses were mostly limited to large businesses in the formal sector, often bypassing small enterprises operating in rural areas. Given that the rollout of the vaccines has thus far been limited to rich countries and urban areas of developing countries, the negative impacts of the economic crises are likely to persist for some time in rural areas of developing countries. Therefore, supporting small enterprises in rural areas will continue to be critical for a sustainable economic recovery.

© Shyamal Chowdhury

Shyamal Chowdhury is Professor of Economics at the University of Sydney, Australia, and a Research Fellow of IZA.

Read Shyamal Chowdhury's full IZA World of Labor article, "Microfinance and rural non-farm employment in developing countries."

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