The COVID pandemic is a “grey swan” event—a known unknown. MSMEs are among the hardest hit by its economic fallout. In this piece, we analyze how MSMEs cope with analogous grey swan events like disasters and draw parallels to suggest ideas on immediate relief and policy perspectives to build long-term resilience.
MSMEs are drivers of GDP and employment in all developing economies. The quicker we help them get back on their feet, the sooner we can end the economic misery that has befallen entrepreneurs and workers, especially those in the informal sector. The COVID-19 pandemic is a “grey swan” event, that is, it is a known unknown. It has no real precedent in terms of disruption at this scale, but we can find analogies in the aftermath of disasters and hazards, such as typhoons, floods, and tsunamis, to inform policy responses.
In 2018, MSC conducted a study with MSMEs in the Philippines to understand how they are affected by disasters. In the study, we assessed their coping mechanisms in the aftermath. The Philippines has historically been on the receiving end of disasters, such as typhoons and floods. MSMEs in the Philippines have had to respond to disruptions caused by these disasters, develop coping mechanisms, and work their way out of these challenges. In this blog, we will reiterate insights gathered from the study and draw parallels to identify pertinent responses for the ongoing pandemic.
An interruption in business is the culmination of all the challenges that an MSME faces after a disaster. This interruption is heightened by disruptions in the value chain and limited access to cash. The following graphic summarizes the causes and aftermath of such a business interruption below.
GIZ – RFPI in the Philippines commissioned the MSC study, “Disaster Risk Insurance for MSMEs in the Philippines” in 2018. The insights generated led to the development of MSME-focused insurance responses by insurers in the Philippines. MSC conducted the study across three regions in the Philippines: Luzon, Visayas, and Mindanao. The sample comprised 121 MSMEs, with 66% micro, 30% small, and 4% medium enterprises across multiple lines of business.
MSME- business interruption
Source: MSC analysis
Because of such disruption, MSMEs face directly as well as indirect financial losses. Direct losses include loss of assets, such as buildings, machinery and equipment, and loss of inventory. Indirect losses, on the other hand, are due to business stoppage, value chain disruption, unavailability of raw materials, and decrease in revenue. Overall, indirect losses from a catastrophe account for more cumulative losses than direct losses suffered.
In the aftermath of disasters, MSMEs usually need a cash infusion to re-start businesses. The study identified that on average, 34% of respondents relied on formal credit, such as MFIs and pawnshops, while 33% of respondents reported self-financing losses using their savings. Only 15% of respondents took financial support from informal sources, while 18% of respondents were forced to reduce their workforce to cut down on costs.
Savings are the most readily available source of funding. However, entrepreneurs rarely demarcate their savings. Therefore, they use the same savings to meet the needs of their household and business. As a result, we found these resources only helped MSMEs bridge an eight to 10-day business interruption period. Cost-cutting was also an option, but only for larger MSMEs with enough staff to downsize. Most micro-enterprises are generally family-owned or operated. Reducing their workforce is not an option. We also found that after a disaster, 10%-12% of the MSMEs surveyed did not recover and shut down permanently. These were mostly microenterprises, and these businesses could not withstand a disruption of more than 60 days.
Government ministries in the Philippines have developed policy-level responses to strengthen the resilience of MSMEs. The Department of Trade and Industry (DTI) has established a financing mechanism that facilitates access to credit for MSMEs in the aftermath of a disaster. The DTI further promotes business continuity planning as part of its business finance and management education campaigns called “Mentor Me”, which target MSMEs. The DTI also supports the development of risk financing tools, such as insurance for disasters. Our study also concluded that business interruption insurance would benefit MSMEs after disasters.
On the user front, MSMEs identified that an ideal business interruption insurance product should have the following features:
MSME identified features for business interruption insurance product
Source: MSC analysis
There are parallels for supporting MSMEs hit by COVID-19. MSC is currently undertaking a three-stage research study across eight countries in Asia and Africa to understand the nature and extent of the impact of the COVID-19 pandemic on MSMEs. The insights from the 2018 Philippines study correlate closely with initial findings from MSC’s dip-stick study of MSEs in eight countries. Some key support areas for MSMEs include:
At the policy level, long-term resilience of MSMEs must be at the core of all measures to limit fall-outs from such shocks in the future:
Confronted with “grey swan” events, such as a disaster or pandemic, MSMEs face long business interruptions. The immediate response in such situations must be swift and blended. In the long-term, policymakers should focus on helping MSMEs devise business continuity and risk management plans by promoting risk reserves and business interruption insurance solutions. MSMEs must also adopt digital financial services because, as the current COVID-19 pandemic has shown, digital access remains largely functional when all other avenues have shut down. For now, however, we must focus on getting cash into the hands of MSMEs, and fast.
Reference note:
On March 11, 2020, the World Health Organization (WHO) declared COVID-19 a global health pandemic. Life as we once knew it has been suspended suddenly. Among those who have been hit the hardest are micro, small, and medium enterprises (MSMEs).
As per the IFC, an enterprise qualifies as a micro, small or medium if it meets two out of three criteria of the IFC MSME definition (employees, assets, and sales), or if an outstanding loan on its books falls within the relevant MSME loan size proxy
criteria of the IFC MSME definition
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