January 6, 2021

IMF Suggests That Most of the COVID-19 Emergency Recovery Fund be Channeled Through SACCOs


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In rural Gatsibo district, eastern Rwanda, locals wait at the Umurenge Sacco Kiramuruzi. It is these rural financial institutions that reach tens of thousands of small businesses

The emergency economic recovery fund (ERF) set up by government to help companies recover from the devastating impact of the coronovirus pandemic may need to be channeled through SACCOs.

The multi-billion Francs fund unveiled in June last year comprises a debt restructuring window for hotels of US$50 million, working capital financing windows for large corporates, SMEs, and microbusinesses of US$47 million, as well as a guarantee scheme for up to 75 percent of the Fund’s loans to SMEs totalling US$3 million.

The Fund’s financing is lent to banks, microfinance institutions (MFIs), and Savings and Credit Cooperative Organizations (SACCOs), at zero or low interest, who in turn use it to provide loan restructuring for hotels or working-capital financing, at reduced rates, to firms deemed viable.

In addition, beneficiaries are required to meet several criteria, including on tax compliance and the magnitude of their sale reductions.

The Chronicles’ review showed that due to the stringent nature of the requirements, few small firms had benefited from the Fund. In addition, the fund was not reaching a part of the economy that employs 91% of the country’s workforce.

ALSO READ: Government’s Emergency Loans Not Meant for Sector Employing 90% Workforce

Now, the International Monetary Fund (IMF) says the commercial banks have “low appetite” for the Fund’s money because there is not much demand for these loans from clients. This is also because commercial banks maintain high interest rates and had “overly stringent eligibility criteria” for companies to qualify for the corona funds.

Following public outcry that the money was not easy ro access due to tough eligibility criteria, government reviewed the requirements.

The IMF, in its review of the Covid-19 economic recovery fund published January 4, says it sees continued low uptake of the money from banks.

It writes: “Application volumes have subsequently increased but remain limited. Indeed, by channeling funds mostly through the banking system, the ERF is likely to continue facing the same structural obstacles that hampered financial inclusion for SMEs pre-COVID-19, including low risk appetite from banks. Moreover, banks’ interest margins are compressed under the ERF (6 to 8 percent vs above 11 percent outside the ERF) which further exacerbates banks’ low appetite.”

Instead, the IMF’s review shows that the Fund’s money released through SACCOs was more impactful. Uptake by clients increased upon easing of the eligibility criteria – with outstanding applications totaling 250 percent of the available capital, according to the IMF.

“This good performance relative to the bank-managed windows likely reflect SACCOs’ innately higher ability to deal with the informality of firms’ operating environment. This suggests that a stronger focus on this window could provide dividends.”

In other words the IMF is suggesting the government puts more of what it pumped into SACCOs because more people are accessing these loans, than in commercial banks – which actually has widespread impact on the wider economy.

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