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COVID-19 & MSMEs: Data and Analysis to Understand Impact

How MSMEs used digital products during the pandemic, what barriers they faced, and what can be done to support their growth in the digital economy.

Digital Adoption of MSMEs During COVID-19

Jennifer Isern

Alok Misra

This blog post is part of a series that highlights takeaways from a global workshop at Lehigh University, where leaders from the inclusive finance sector discussed the question of whether financial inclusion is more relevant than ever during the pandemic crisis. This blog post is extracted from a more detailed policy brief.

Blog Post

COVID-19 created extraordinary challenges for Indian households, businesses, and the economy. Lockdowns triggered economic contractions vastly surpassing the initial trade shocks, travel restrictions, and other measures. Millions of people migrated from urban to rural areas. The downturn rapidly reduced working hours and raised unemployment. The consequences and survival tactics for households and businesses varied by sector and state, exacerbating existing disparities for low-income and rural households.

These were among the challenges discussed by about two dozen leaders of microfinance organizations, impact investors, and analysts from around the world who convened recently at a workshop hosted by Lehigh University’s <a href="https://business.lehigh.edu/centers/martindale-center/about" target="_blank" rel="noopener noreferrer">Martindale Center</a> to share views on how financial inclusion interacted with the socio-economic crises of the pandemic. The event built on the success of a previous similar workshop that resulted in the publication of The Future of Microfinance by Brookings Institution Press in 2020.

This blog post is extracted from a <a href="https://business.lehigh.edu/sites/default/files/2022-11/Martindale%20Policy%20Brief%20Indian%20Financial%20Inclusion%20Sept%202022.pdf" target="_blank" rel="noopener noreferrer">more detailed Policy Brief</a>.
<h1><strong>Shock for Clients and MFIs </strong></h1>
The pandemic triggered new challenges for both clients and microfinance institutions (MFIs). <a href="https://www.dvara.com/research/wp-content/uploads/2020/06/COVID-19-Impact-on-Daily-Life-CIDL-Survey.pdf" target="_blank" rel="noopener noreferrer">Evidence</a> points to clients’ precipitous loss of income, depletion of meager savings, increasing indebtedness, and difficult coping strategies that risk pushing millions back into poverty. MFIs had to quickly adapt, which accelerated trends toward digitalization and virtual connectivity with clients. Households struggled to understand the implications of MFIs’ loan repayment moratoriums and confronted hard choices between daily needs, repaying loans, and conserving cash for an uncertain future.

Early in the outbreak, MFIs were hit hard. The microfinance model relies on frequent physical interaction with customers. Lockdowns brought operations to a standstill and repayments came under pressure, creating liquidity issues, particularly for non-bank (NBFC) MFIs.

The impact was stark:
<ul>
 	<li>Disbursements from April to June 2020 fell to Rs 61.9 billion (~$800 million) compared to where they had been pre-COVID at Rs 711.9 billion (~$9.2 billion).</li>
 	<li>Portfolio at risk (PAR) rose; PAR&gt;30 days peaked at 22 percent in June 2021 and has improved considerably since.</li>
 	<li>Unemployment jumped to 24 percent in 2021.</li>
 	<li><a href="https://mospi.gov.in/documents/213904/416359/3_Draft_press_note_Migration_PLFS_2020_21.docx1655189017846.pdf/c85c0fe3-6b5a-b704-7683-7db7acd9fa42" target="_blank" rel="noopener noreferrer">The Periodic Labour Force Survey from July 2020–June 2021</a> showed a migration rate of 48 percent among urban women in India and 23 percent among urban males, more than half of whom returned to their rural homes; possibly the country’s worst reverse migration.</li>
</ul>
<h1><strong>Policy Responses</strong></h1>
The public sector led crisis response, mitigating damage and helping relaunch the economy. Since 2020, both the Reserve Bank of India (RBI) and the Government of India have taken critical actions for microfinance clients and institutions.

RBI’s twin approach included liquidity injection and restructuring. RBI allowed lenders to offer moratoriums on loan repayments and directed maintaining an account’s status in credit bureau reporting while in moratorium to protect customers’ credit histories and access to credit in the future. The moratorium severely stressed NBFC-MFIs. A survey amongst Microfinance Institutions Network (MFIN) members in June 2021 found NBFC-MFIs had moratorium for approximately one-third of repayment installments—creating tremendous pressure to manage liquidity given that NBFC-MFIs rely on customer repayments to repay their own debt obligations. And with fixed salary and infrastructure costs, most MFIs have little leeway to quickly change operational costs.
<blockquote class="pullquote--right">Non-bank MFIs had moratorium for approximately 1/3 of repayment installments, creating tremendous pressure to manage liquidity.</blockquote>
Additionally, the RBI’s August 2020 "<a href="https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11941&amp;Mode=0" target="_blank" rel="noopener noreferrer">Resolution Framework for COVID-19 Related Stress</a>" was a one-time resolution for loans not in default beyond 30 days. And later, RBI allowed lenders to restructure individual and small business loans. Both resolutions provided much-needed relief to microfinance customers.

For MFIs, RBI also launched special liquidity de-stressing schemes and relaxed loan provisioning requirements. The Ministry of Finance supplemented the efforts with partial credit guarantees, an “ex-gratia” scheme to pay the difference between compound and simple interest for six months for specified loan types, and the <a href="https://www.india.gov.in/spotlight/pm-street-vendors-atmanirbhar-nidhi-pm-svanidhi" target="_blank" rel="noopener noreferrer">PM Svanidhi scheme</a> of lending and credit guarantees to assist street vendors. However, while helpful, these measures could not fully relieve lenders’ liquidity challenges.

The situation improved in September 2020 as customers’ repayments resumed. In parallel, policymakers recognized the significance of microfinance for inclusive growth, giving a strong recovery signal to the market.

But the microfinance sector entered the 2021–2022 financial year facing an uncertain and unprecedented impact of COVID-19: a second wave of infections and partial lockdowns again hurt customers’ livelihoods and limited lenders’ operational mobility. The government developed <a href="https://www.ncgtc.in/en/products-n-services/cgsmfi" target="_blank" rel="noopener noreferrer">another credit guarantee scheme</a> for a yet broader array of MFIs, building on suggestions from MFIN, which worked closely with the Ministry of Finance.

The government also implemented additional fiscal measures, such as:
<h3><strong>Relief for households, including:</strong></h3>
<ul>
 	<li>In-kind (food and cooking gas) and cash transfers to senior citizens, widows, disabled, farmers, and women Jan Dhan Account holders (a national savings scheme for previously unbanked)</li>
 	<li>Insurance coverage for healthcare workers</li>
 	<li>Wage increases for those working under the <a href="https://nrega.nic.in/netnrega/mgnrega_new/NREGA_home.aspx" target="_blank" rel="noopener noreferrer">Mahatma Gandhi National Rural Employment Guarantee Act</a> and support for building and construction workers</li>
 	<li>Collateral-free loans to self-help groups</li>
 	<li>Reduced retirement fund contributions</li>
 	<li>Employment opportunities for migrant workers</li>
</ul>
<h3><strong>Relief for micro, small and medium enterprises (MSMEs), including:</strong></h3>
<ul>
 	<li>Collateral-free loans with a 100 percent guarantee</li>
 	<li>Subordinate debt for stressed MSMEs with partial guarantee</li>
 	<li>Partial guarantees for public sector banks on loans to NBFCs, housing finance companies, and MFIs</li>
 	<li>A fund of funds for equity infusion into MSMEs</li>
 	<li>Additional support to farmers via concessional credit</li>
</ul>
<h3><strong>Regulatory and compliance measures, including: </strong></h3>
<ul>
 	<li>Postponing tax-filing and other compliance deadlines</li>
 	<li>Reduced penalties for overdue goods and services tax filings</li>
 	<li>Modified government procurement rules</li>
 	<li>Faster clearing of MSME dues</li>
 	<li>Insolvency and bankruptcy code-related relaxations for MSMEs</li>
</ul>
The combination of these extraordinary fiscal and monetary measures, backed by the world’s largest vaccination program, helped the Indian economy mitigate the COVID meltdown. By March 2022, the microfinance industry showed clear signs of recovery: loan disbursements returning to pre-COVID levels; repayments above 95 percent; and no MFIs declaring default during the pandemic’s two years.
<h1><strong>Financial Institution Responses</strong></h1>
In parallel, lenders faced daunting challenges in managing ongoing connections with customers, continuing operations amidst re­strictions, ensuring employee safety, managing liquidity to cover operational costs and debt obligations, and adapting operations to accelerate the use of mobile phones and digital pay­ments. Lenders needed to balance ex­pectations among customers, employees, and investors, while continuously weighing multiple and rapidly changing variables around the unpredictable pandemic, lock­downs, and economic recovery.
<blockquote class="pullquote--right">While the RBI’s loan repayment moratorium gave immediate relief, related calculations were confusing.</blockquote>
While the RBI’s loan repayment moratorium gave immediate relief, related calculations were confusing. Customers found it difficult to understand how the moratorium would impact their repayments and costs and struggled to make informed choices. Restrictions on mobility and group meetings made explaining even harder for lenders. Customers also questioned—rightly so—the logic and ethics of accrued interest; they felt repayment delays were beyond their control, entirely attributable to the pandemic. Varied approaches amongst the lenders, for example about interest accrual, revising loan tenure, and installment amounts, and timing of interest collection during the moratorium, further confounded the issue. Lenders and MFIN made several efforts such as <a href="https://mfinindia.org/Resources/videos" target="_blank" rel="noopener noreferrer">audio-visuals</a>, direct calling to customers, awareness campaigns, and dedicated mobile apps catering to specific customer needs. Nevertheless, an found that one-fifth of respondents reported not fully understanding the moratorium. In any case, given customers’ uncertainty, lack of safety nets, and need to preserve cash for essential expenses, more than 90 percent opted for a moratorium.

Another critical challenge was ensuring fair and respectful interaction with customers. Higher delinquencies, pressure for collections on the lenders' side, customer hardships, and confusion about loan information created stressful interactions. In an MFIN survey in March 2021, 9 percent of customers reported experiencing employee misbehavior within the previous six months related to loan recovery. Handling such tensions required a balanced approach combining transparency, patience, and empathy. This meant educating customers about the moratorium and implications of their choices and using objective criteria for assessing stressed customers.
<blockquote>Handling tensions between employees and customers required a balanced approach combining transparency, patience, and empathy.</blockquote>
Maintaining microfinance’s classic close and frequent interaction with customers while following COVID protocols re­quired new approaches. Lenders ex­tensively turned to live or automated phone calls. To ensure employ­ees interacted appropriately with customers, lend­ers organized special training on customer interac­tions and phone etiquette. MFIN also developed a learning video for field-level employees focusing on best-practice interactions considering COVID. For field interactions, lenders split groups and met smaller subgroups in larger open spaces. Further, many MFIs supported customers with emergency aid for health, food, and essential supplies. In parallel, at the employee level, MFIs added controls to monitor repayments, aiming to avoid misinformation, misbehavior, forced collections, and embezzlement by field-level employees.

Lenders also expanded mechanisms for informing customers and addressing queries and grievances, including <a href="https://mfinindia.org/ourwork/clientprotection" target="_blank" rel="noopener noreferrer">MFIN's Customer Grievance Redressal Mechanism (CGRM)</a>, which supports customers in resolving complaints. Both MFIN and member NBFC-MFIs leveraged the CGRM to take customer feedback, understand specific risks, and do topical surveys. The major reasons for complaints included insurance claims settlements, disputes with credit reports, and loan repayments or disbursements. MFIN then used these customer voices to design awareness videos to address common queries and concerns. Customers also have access to regulatory mechanisms and the RBI’s newly expanded <a href="https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11546&amp;Mode=0" target="_blank" rel="noopener noreferrer">Ombudsman program</a> for grievance escalation.
<h1><strong>Addressing Over-indebtedness</strong></h1>
Over the years, customer over-indebtedness has been a paramount challenge for the industry. Regulatory and industry standards set explicit norms to address indebtedness through caps on multiple lending and total level of customer indebtedness. However, the scale and prognosis of the problem are complex and imprecise. Guestimates of over-indebtedness in India vary from 2 to 25 percent. Measurement challenges include lack of evidence on income (due to assessment challenges), unknown actual indebtedness levels given informal and formal credit reporting that silos different types of lending, and high levels of loan repayments. <a href="https://www.dvara.com/research/wp-content/uploads/2017/01/When-is-Microcredit-Unsuitable-Guidelines-for-Lending.pdf" target="_blank" rel="noopener noreferrer">Research</a> and anecdotal evidence suggest low-income households take loans and adjust expenses to repay existing loans. Group liability can also mask customer repayment stress. As such, over-indebtedness remains a core issue, and brings reputational, political, regulatory, and credit risks to the industry, undermining trust in microcredit providers and increasing risks for customers.

Despite these challenges, in recent years, the industry in India has maintained satisfactory performance in meeting regulatory standards on indebtedness. Equifax data for March 2021, on over 60 million customers with active microcredit loans, showed that 70 percent had a relationship with only a single lender, and 74 percent had loans outstanding of Rs 50,000 or less (~$650).
<h1><strong>Conclusions</strong></h1>
Five overarching lessons can be taken from the COVID crisis in the Indian microfinance sector:
<ol>
 	<li><strong>Severe shock cannot be met by institutions on their own and requires both monetary and fiscal support to avoid systemic instability.</strong> Support was provided swiftly and decisively by the RBI and Government of India, working closely with self-regulatory organizations and microfinance lenders.</li>
 	<li><strong>Capacity</strong> <strong>building for MFI customers and employees is critical. </strong>Customers demonstrated tremendous adaptability to new conditions, including lockdowns, digital payments, and lenders’ new customer service approaches. However, lenders needed sustained efforts in capacity building for customers and employees to help them adjust.</li>
 	<li><strong>Customers maintained resilience to economic shocks.</strong> Microfinance clients’ activities are typically integral to community life, like selling vegetables, groceries, or other core consumption items, so they are less affected by macroeconomic shocks.</li>
 	<li><strong>Customers value MFIs that are dependable, support clients, and provide responsible financial services.</strong> During the crisis, customers worked carefully with microfinance providers to avoid triggering adverse repayment records that would jeopardize future access to financial services.</li>
 	<li><strong>MFIs and their investors need to set realistic expectations for institutional performance amid unprecedented crises</strong>. During the pandemic, institutions that were responsive to individual client situations balanced institutional needs with client realities through repayment delays, extending loan tenures, and providing new loans. Institutions in India that responded with empathy during the crisis have been rewarded with higher client retention, loyalty, and overall improved recovery post-pandemic.</li>
</ol>

Indian Financial Inclusion during COVID and Recovery: Public Policy to the Rescue

David Porteous

Jesse Fripp

International ESG frameworks can be a source of both risk and opportunity for financial institutions, but many organizations have not yet engaged and often look to regulators or investors to lead and guide discussions.

ESG frameworks provide standards and guidance for how companies should integrate the consideration of risks and opportunities arising from environmental, social, and governance factors into their practices at all levels. But could the implementation of the frameworks themselves become a source of risk or of opportunity for companies?

We set out to explore this question in a well-defined subset of companies: financial institutions operating in the ‘Global South’, that is, low- and middle-income countries. We engaged with leaders from 32 financial institutions, including banks, fintechs, and non-bank and microfinance institutions with a fairly even spread among them. They represented institutions of different scale—around two fifths were large with over a million current clients, one fifth were small with less than 50,000 clients, and the rest were in between. In a <a href="https://www.fmo.nl/southern-voice-in-esg" target="_blank" rel="noopener noreferrer">new report</a> called Southern Voice in ESG, we seek to provide some answers to this question.

<img class="aligncenter wp-image-45394 size-full" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/11/ESG-FIs.png" alt="" width="970" height="788" />
<h1><strong>Why Is This Question Even Relevant?</strong></h1>
The question about the potential implications of ESG frameworks is relevant because of the accelerating pace of adoption of ESG measures globally. In some places, ESG measures are known interchangeably as sustainability measures, although both terms are rather vague and ill defined. The pace has been driven by two channels—investors and regulators.

On the one hand, the proportion of institutional capital under some form of ESG mandate has continued to rise, especially in the Global North (high-income countries), so any entity seeking to raise capital there would likely be subject at least to questions. This would apply whether the capital is equity or debt, and especially if it comes from public development finance institutions who have by and large adopted ESG policies relating to their practices.

On the other hand, regulators have become an active channel for entrenching frameworks in domestic regulation, so that they are no longer voluntary but compulsory. While some Northern regulators have been especially outspoken on the issue, Southern regulators have increasingly paid attention. The <a href="https://www.sbfnetwork.org/" target="_blank" rel="noopener noreferrer">Sustainable Banking and Finance Network</a> now has 62 regulators from the global South at different stages of adopting the frameworks. And voluntary frameworks are becoming international standards: consultations on the <a href="https://www.ifrs.org/projects/work-plan/general-sustainability-related-disclosures/" target="_blank" rel="noopener noreferrer">new draft IFRS Sustainability standards S1 and S2</a> closed in July 2022, with the expectation that final standards in these areas may be issued in 2023. Regulators generally require regulated financial institutions as well as public companies to follow IFRS accounting standards, so the influence of standards like these is likely to be global.
<h1><strong>The Frameworks Will Have Material Implications</strong></h1>
Not surprisingly, our respondents already sensed the mounting pressures: almost 80 percent of the people with whom we spoke in the Global South expected that their depth and breadth of reporting would change in the next three years as a result of ESG pressures – in other words, that the frameworks would have a material impact. More than 70 percent said that it was ‘important or very important now’ to have capacity internally on ESG. However, only 7 percent described the current levels of skills and knowledge inside their organizations as adequate for their needs at present – more than half reported ‘some but limited’ or no skills in this area. They aren’t alone – ESG skills are in high demand but are scarce globally, according to this <a href="https://podcasts.apple.com/us/podcast/esg-insider-a-podcast-from-s-p-global/id1475521006?i=1000578199477" target="_blank" rel="noopener noreferrer">recent podcast</a>.
<blockquote>"More than 70 percent said that it was ‘important or very important now’ to have capacity internally on ESG. However, only 7 percent described the current levels of skills and knowledge inside their organizations as adequate."</blockquote>
<h1><strong>What Are the Potential Risks or Opportunities?</strong></h1>
The impact of the ESG frameworks is expected to be material in the next three years, and there is already a shortage of capacity to address them. How could the frameworks themselves be risks or opportunities? During our discussions, we saw the following risks and opportunities:

Potential risks:
<ul>
 	<li>Diversion of skills and focus</li>
 	<li>Costs to implement</li>
 	<li>Distraction from other national priorities</li>
 	<li>Constrained access to capital if not compliant</li>
 	<li>Changed nature of impact from organization’s mission</li>
 	<li>Strategic focus that is not aligned with institutional purpose</li>
 	<li>Rapid adoption may be only skin deep: i.e. “ESG-washing” if the approach is compliance driven</li>
</ul>
Opportunities identified:
<ul>
 	<li>Differentiation from competitors in capital raise</li>
 	<li>Differentiation on staffing</li>
 	<li>Implementing new ESRMs</li>
 	<li>Resourcing for new areas of capacity-building</li>
 	<li>Funding for new portfolio development</li>
</ul>
An issue of rising importance was the heightened emphasis on the ‘E’, with most associated indicators focusing on mitigation of climate risk. As one respondent put it, “The E has landed, the S is nowhere, and the G is hiding somewhere in the other two.” Most Southern financial institutions to which we spoke were ill prepared to report on climate risk measures, although they cared deeply about what some called ‘the S in the E’, that is, the adaptation and resilience indicators among vulnerable populations whom they served, many of whom live in the areas most exposed to the effects of climate change though their own carbon footprints are very small.
<h1><strong>Which Is It — Risk or Opportunity?</strong></h1>
So, what is the answer: are the emerging frameworks seen more as risks or as opportunities? Our sample indicated a mix of both. For example, when asked to indicate their level of agreement on a scale of 1 (fully agree) to 5 (fully disagree) with the statement: “ESG frameworks are on balance a positive force for our organization”, responses averaged 2.7, almost right in the neutral middle, with little difference between banks and non-banks. Responding to the statement “ESG frameworks encourage us to consider opportunities for value creation more than the need for compliance,” responses averaged a very similar 2.8. Similarly, “ESG frameworks create new reporting burdens which are disproportionate to the likely benefits” yielded an average of 3.1, right around the neutral midpoint. However, as one respondent told us, “Different frameworks may bring specific risks or opportunities, but overall, we see having an approach to sustainability is an imperative, not a choice.”
<h1><strong>ESG Voice in the South</strong></h1>
To date, most international ESG frameworks have been developed mainly under Northern leadership and pressure, reflecting the environmental and social priorities experienced there. This is quite different from earlier moves in areas of impact finance, like modern microfinance which was ‘born’ in the Global South and whose leading early practitioners like Grameen Bank’s Mohammed Yunus, BRAC’s Fazle Abed or Bancosol’s Pancho Otero were outspoken social entrepreneurs living and working there.

We sought to understand whether international ESG frameworks considered the needs and context of developing economies. The overall average score here reflected a range of views –with many neutral, perhaps because of lack of knowledge, but some strong divergence around this.

We asked all respondents to identify leading Southern voices with a distinct view on the issue, but received few suggestions. While there clearly is some Southern voice represented in most if not all of the major framework bodies like UNEP-FI or IFRS, there is less evidence at present of a distinctly Southern voice around these issues. However, as Southern-based financial institutions start to pay more attention to the issue of ESG framed in this way, new voices are likely to emerge with the interest and passion to engage locally, regionally, or internationally.

In the course of our discussions, we encountered the view that the impact of ESG frameworks may be less asymmetric by geography (i.e. whether based in the Global North or South) but by size of institution. Small and medium sized institutions have less capacity to hire new skills and absorb the resource costs than large ones, wherever they are based. A proportional approach to the introduction especially of compulsory frameworks is needed to ameliorate this risk.
<h1><strong>What to Do About It?</strong></h1>
Our aim at this stage was primarily to benchmark current reality as the basis of considering future actions. For example, almost half the respondents reported that they had no senior manager with a designated responsibility for sustainability, although one fifth already had placed someone in this role.

The possible strategic stance of a financial institution on this issue depends on how material the issue is, which will vary based on factors like client base, regulator attitude, extent of foreign funding, and the extent to which they believe ESG frameworks are locally influenceable. This will be a function of how much domestic regulators are influenced by international norms, and whether they are open to local adaptation.

Our findings point to several possible directions to mitigate risk and emphasize opportunities:
<ol>
 	<li><strong>Discussion and advocacy:</strong> While less than half of the institutions currently discussed ESG issues in the trade groups of which they are a part, almost double this number expressed interest in being part of discussions going forward. One positive example of <a href="https://fsdafrica.org/press-release/anca-announcement/" target="_blank" rel="noopener noreferrer">proactive engagement is the work of FSDA</a> supporting the piloting of Taskforce for Nature-Based Financial Disclosures, the next frontier within the ‘E’ of ESG, with a sample of large African FIs.</li>
 	<li><strong>Capacity building:</strong> There are many examples of courses being offered, in person and online, but most at present are developed by prominent Northern-based universities like Cambridge or Yale, or Northern professional bodies like the <a href="https://www.iema.net/" target="_blank" rel="noopener noreferrer">Institute of Environmental Management and Assessment</a>. There are opportunities to support regional offerings to spread awareness and knowledge.</li>
 	<li><strong>Technical support:</strong> Several institutions directly asked about technical support offerings. However, in a recent training session for Kenyan banks run, experts from UNEP-FI said that, due to the fast-moving pace in this area, many consultants may not have more knowledge than the bank staff themselves. Local technical support may need further capacity building to be helpful.</li>
</ol>
<h1><strong>Conclusion</strong></h1>
Southern financial institutions clearly believe that international ESG frameworks matter and that they will affect their activities in some way, negative and/or positive, in the next three to five years. As the numerous voluntary frameworks converge and start to harden into standards and even local regulation, it is important that Southern financial institutions have voice and can participate meaningfully at all levels: both shaping international frameworks and especially adapting them for regional and local implementations. The urgency of climate action for mitigation in large emitting nations risks provoking a ‘rush to regulate’ Southern financial institutions whose clients may not themselves be major emitters of CO2, though their livelihoods are highly vulnerable and in need of adaptation support. In the presence of conflicting priorities and constrained local resources, it will take time to regulate appropriately. However, supporting Southern financial institutions to adapt to these priorities over time will likely improve ESG outcomes for these institutions and for the many vulnerable clients they serve.

ESG Frameworks: Risks or opportunities for financial institutions?

Enjiang Cheng

Iwan Nazirwan

Hang Nguyen

This blog post is part of a series that highlights takeaways from a global workshop at Lehigh University, where leaders from the inclusive finance sector discussed the question of whether financial inclusion is more relevant than ever during the pandemic crisis. This blog post is excerpted from a more detailed policy brief.

Throughout the COVID-19 pandemic, people, businesses, and governments across Asia were able to access a wide array of financial services, which proved to be a critical resource. Lockdowns accelerated the shift towards digital payments. Households relied on financial services to stay resilient, access their savings, pay bills, conduct their business, receive social payments, and pay government fees. Many financial institutions across Asia responded quickly to the socio-economic challenges facing their clients and their own institutional survival.

Perspectives and lessons learned from Asia, by far the largest regional market for inclusive financial services, were of central interest for about two dozen leaders of microfinance organizations, impact investors, and analysts from around the world who convened recently at a workshop hosted by Lehigh University’s <a href="https://business.lehigh.edu/centers/martindale-center/about" target="_blank" rel="noopener noreferrer">Martindale Center</a> to share views on how financial inclusion interacted with the socio-economic crises of the pandemic. The event built on the success of a previous similar workshop that resulted in the publication of <a href="https://www.brookings.edu/book/the-future-of-microfinance/" target="_blank" rel="noopener noreferrer">The Future of Microfinance</a> by Brookings Institution Press in 2020.

This blog post is excerpted from a more <a href="https://business.lehigh.edu/sites/default/files/2022-11/Martindale%20Policy%20Brief%20Perspectives%20from%20Asia%20Aug%202022_0.pdf" target="_blank" rel="noopener noreferrer">detailed policy brief</a>.
<h1><strong>Cross-regional Commonalities</strong></h1>
Clients demonstrated agility and resiliency. However, recovery is uneven across Asia and globally. Many households face greater vulnerability, with the World Bank estimating 50 million to 200 million people falling back into poverty of less than $2 per day. <a href="https://cdn.finca.org/wp-content/uploads/20220804185511/Profiling-the-Most-Vulnerable_Data-Summary.pdf" target="_blank" rel="noopener noreferrer">Research by FINCA International</a> shows that 50 percent of their clients skipped meals to cope.

Discussion among workshop participants identified several cross-cutting takeaways from the Asian financial institutions that successfully helped their clients weather the pandemic.

<strong>Product offerings that support consumers:</strong>
<ul>
 	<li>Financial service providers (FSPs) that focused on their clients and tailored solutions rebounded faster. This required dynamic leadership, team cohesion, quick decisions, and clear communications to adapt to fast-changing realities.</li>
 	<li>FSPs offering diverse ranges of services—especially payments, deposits, loans, and in some cases insurance—fared better.</li>
 	<li>Lockdowns accelerated digital financial services. Digital payments provided lifelines for buying and selling essential goods and services. In parallel, combining physical and digital outreach enabled FSPs to engage with clients, monitor lending and liquidity, and manage costs.</li>
 	<li>Despite predictions that households would deplete savings, in some countries deposit levels stabilized and even increased while remittances and government-to-person payments increased.</li>
 	<li>Embedded finance—e.g., lending for agricultural value chains, wholesale-retail businesses, consumer purchases, and elsewhere throughout the supply chain—is resilient and growing.</li>
</ul>
<strong>Managing funding:</strong>
<ul>
 	<li>Managing liquidity and avoiding over lending were critical for FSPs to stay solvent. Deposit-taking institutions proved more resilient, with deeper liquidity. Recognizing the threat, multiple central banks and governments provided liquidity measures across Asia and the Pacific.</li>
 	<li>International investors and lenders restructured funding and provided new lines of credit or equity infusions to their FSP partners in the region, easing liquidity constraints.</li>
</ul>
<strong>Role of government:</strong>
<ul>
 	<li>Across the region, central banks and governments played key roles. Successful interventions include liquidity programs for banks and clients, expanded government-to-person payments, consumer protection and data privacy measures, loan restructuring, and fraud prevention especially for the growing online lending sector.</li>
</ul>
<h1><strong>Perspectives from China</strong></h1>
Micro, small, and medium-sized enterprises (MSMEs), especially in services, were hit hardest by lockdowns in China, resulting in bankruptcies and job losses. The government supported MSMEs mainly via tax reduction and financial regulators directing Chinese banks to increase lending to MSMEs. According to the People’s Bank of China, as of May 2022, MSME lending grew <a href="https://www.tellerreport.com/business/2022-05-26-central-bank--promote-the-establishment-of-a-long-term-mechanism-for-financial-services-for-small-and-micro-enterprises-who-dare-to-lend--willing-to-lend--and-will-lend.BkxyEO2Dc.html" target="_blank" rel="noopener noreferrer">20 percent</a> year-on-year for 24 consecutive months from April 2020.

However, expansion by Chinese banks might have a devastating effect on traditional non-banking lenders to MSMEs, including microfinance institutions (MFIs). With non-bank lenders’ costs of funding (around <a href="http://www.pbc.gov.cn/en/3688006/index.html" target="_blank" rel="noopener noreferrer">6–7 percent annually</a>) higher than banks (averaging 5.24 percent in April 2022) they will struggle to compete and become more vulnerable to shocks. Already, many non-bank lenders are confronting governance issues and rising non-performing loans. As government policies on MSME lending ease with pandemic recovery, banks are expected to slash MSME lending.

Banks withdrawing and non-bank lenders being more vulnerable portends a looming credit crunch. Institutional reforms for struggling FSPs, including upgrading fintech capacity, will be crucial to maintain a competitive MSME financing market. In parallel, support could include subsidies directed towards MSMEs and their employees, and extending low cost on-lending from China's central bank for agricultural and MSME financing to non-banking financial institutions.

Recovering from the pandemic, China is well placed to continue impressive financial inclusion growth given rapid development of internet infrastructure, expanding use of big data, and widespread adoption of new credit risk models incorporating broader sets of factors in lending decisions. Combining online and offline client interaction can be a potent strategy to reach MSME clients, especially in remote or rural areas. Further, insurance could be expanded, as could value chain financing, given the growth of the agriculture sector and consumer food value chains.
<h1><strong>Perspectives from India</strong></h1>
In India, evidence points to precipitous loss of income, depletion of savings, increasing indebtedness, and difficult coping strategies that may bring millions back to poverty. The public sector led the crisis response; both the Reserve Bank of India (RBI) and the government undertook critical actions, mitigating damage to MFIs, their clients, and the economy. Examples include RBI’s swift injection of new liquidity, rules to restructure loans and ease provisioning requirements, and a moratorium on loan repayments and interest payments.

Even so, loan repayments faltered, creating liquidity issues, particularly for non-bank MFIs (NBFC-MFIs) that did not receive moratorium on their own loans from lenders. A survey of Microfinance Institutions Network (MFIN) members in June 2021 found that just over a third of NBFC-MFIs received moratoriums. In response, the RBI and other government entities issued new lines of credit, guarantee programs, and other financial support, often designed in close collaboration with finance sector organizations like MFIN.

Nonetheless, MFIs faced daunting, even existential, challenges: operating amidst lockdowns and sustaining connections with customers; ensuring employee safety; managing liquidity to cover operational costs and debt obligations; and accelerating use of mobile phones and digital payments. MFIs also combatted misinformation on social media and scaled-up mechanisms to respond to client queries and grievances. Many supported customers with emergency aid for health, food, and essential supplies.

By March 2022, as the crisis eased, the RBI opened a new chapter and revised regulations. Now, all entities doing microfinance lending­—whether bank or NBFC-MFI—will operate under similar regulation, a welcome shift from micro-rules to principles-based policy. Key pillars include a debt repayment threshold at 50 percent of client income, pricing deregulation, and enhanced client protection. Building on resilience demonstrated during the pandemic and efficiency from expanded digital processing, the sector is well positioned. MFIs currently serve approximately 60 million people; the estimated inclusive finance market across India is <a href="https://mfinindia.org/Resources/studyreport" target="_blank" rel="noopener noreferrer">221 million people</a>. The sector needs to expand responsibly in areas hitherto underserved due to earlier rigid price controls, launch innovative products, and demonstrate clear impact.
<h1><strong>Perspectives from Indonesia</strong></h1>
The range of inclusive FSPs in Indonesia is diverse and includes banks, rural banks, non-bank financial institutions (NBFI), cooperatives, and other community-based lenders; each segment operates under specialized laws and regulations. The sector is distinguished by following both conventional and Islamic-based principles (sharia).

Pandemic-induced increases in non-performing loans and in costs of loan reserves, exacerbated by depositors withdrawing funds for household needs and emergency spending, fueled dire shortages of cashflow and liquidity—particularly for smaller and rural institutions. Management and staff were deeply affected and risked their own safety in working and providing services to clients.

FSPs struggled to manage loan collections. In some cases, clients faced surprise late payment penalties, coercive collections, improper collateral seizure, and other behavior that put clients at risk. Women experienced greater challenges. Rising domestic and homeschooling responsibilities during the lockdowns meant less time for their businesses. Some MSMEs adopted new business models such online marketing and transactions and/or adding health-related products in high demand during the pandemic. However, many businesses failed and people migrated from cities back to home villages, seeking lower costs of living and job alternatives in the (less-affected) agricultural sector.

Of note, during the pandemic, cross-border online lending platforms increased activity in Indonesia, despite being illegal and unregulated. These platforms provide quick cash but charge very high prices, and many of the more serious consumer harassment cases have been tied to them. Belatedly, the national police started taking action to curb illegal online lenders.

In response to these challenges, the Indonesian government introduced low-income household safety nets including direct cash transfers, non-monetary grants and subsidies, new regulations on FSP loan rescheduling, and liquidity support for businesses via new or expanded credit programs. Helpful too, private lenders offered FSPs to reschedule loans and assistance in digitalizing loan origination and disbursement.

MFIs that are further advanced in digitalizing operations have been able to survive and grow and are well positioned to shift millions of MSMEs to online financial services, supply chains, and other services. The Ministry of Cooperatives and SMEs reports that <a href="https://www.g20.org/digitization-encourages-msmes-to-be-higher-quality/" target="_blank" rel="noopener noreferrer">19.5 million MSEMs are already active online</a>; the government aims to have 30 million MSMEs <a href="https://www.g20.org/digitization-encourages-msmes-to-be-higher-quality/" target="_blank" rel="noopener noreferrer">online by 2024</a>. Deepening digital operations would improve operational efficiency, client satisfaction, credit risk mitigation, and business profitability.
<h1><strong>Perspectives from the Pacific Island Countries</strong></h1>
Many Pacific Island countries were spared severe health effects of COVID-19. However, socio-economic effects were dramatic given plummeting tourism and other commerce. The region’s reliance on overseas migrant workers makes remittances and digital payments critical, and they became even more so during the pandemic. Tonga, Fiji, and Samoa lead the region in receiving remittances. In fact, <a href="https://pressroom.ifc.org/all/pages/PressDetail.aspx?ID=26060" target="_blank" rel="noopener noreferrer">Tonga is the top recipient in the region</a>, with remittances close to 40 percent of GDP.

Yet, estimates suggest that only about 30 percent of adults across the region (excluding Fiji) have access to financial services. Hence, governments and private sector institutions have launched several initiatives to boost financial inclusion.

Core regional challenges include bank de-risking and the high cost of remittances. Even before the pandemic, many banks sought to lower risks by ceasing services to money transfer operators (MTOs) due to concerns about anti-money laundering and know-your-customer regulatory compliance. Multiple MTOs were forced to close. Service availability fell and costs to send money home rose. Across the Pacific region, <a href="https://blogs.worldbank.org/peoplemove/global-remittance-flows-2021-year-recovery-and-surprises" target="_blank" rel="noopener noreferrer">average fees exceed 10 percent</a> compared to 6.38 percent globally, a gap widened during the pandemic by further reduction in providers.

For several years, the World Bank and IFC have supported Pacific countries to strengthen regulatory frameworks and payment system infrastructures. For example, the <a href="https://pressroom.ifc.org/all/pages/PressDetail.aspx?ID=26060" target="_blank" rel="noopener noreferrer">IFC supported Tonga Development Bank</a> to establish new digital remittances corridors with New Zealand and Australia, enabling Tongans to send money at a much lower cost of about 5 percent. The program now covers 95 percent of Tongan seasonal workers in New Zealand. The corridor between Australia and Tonga launched at a crucial time, in November 2020. As people under lockdown sought online solutions, usage surged, seeing a significant increase in financial inclusion.

Digital financial services will continue to grow in the Pacific countries, with central banks progressing in operationalizing the national electronic payment systems in Fiji, Samoa, Solomon Islands, and Vanuatu. In parallel and building on these efforts, commercial banks and telecom companies are offering new digital payment and remittance products. Households and small businesses in Pacific countries stand to benefit from national payment system reforms that will help modernize national and regional financial architecture, in turn driving inclusive economic development and making every day financial transactions easier.

Rebuilding After COVID: Financial Inclusion Across Asia

Alex Silva

This blog post is part of a series that highlights takeaways from a global workshop at Lehigh University, where leaders from the inclusive finance sector discussed the question of whether financial inclusion is more relevant than ever during the pandemic crisis.

<span data-contrast="auto">COVID-19 has had outsized impact on global poverty, especially in Latin America where the shockwave from the pandemic generated major headwinds for the inclusive finance sector. How have the sector and its clients navigated the storm? What lessons can we draw from how inclusive finance providers, such as microfinance institutions, managed to maintain sustainability and foster resilience among their clients? How different among global regions have responses, impacts, and future focal challenges been, and why?</span>

<span data-contrast="auto">These were among the questions for about two dozen leaders of microfinance organizations, impact investors, and analysts from around the world who convened recently at a workshop hosted by Lehigh University’s </span><a href="https://business.lehigh.edu/centers/martindale-center/about" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Martindale Center</span></a><span data-contrast="auto"> to share views on how financial inclusion interacted with the socio-economic crises of the pandemic. The event built on the success of a previous similar workshop that resulted in the publication of </span><a href="https://www.brookings.edu/book/the-future-of-microfinance/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">The Future of Microfinance</span></a><span data-contrast="auto"> by Brookings Institution Press in 2020.</span>
<h1><b><span data-contrast="auto">Focus, Focus, Focus on Clients and Staff</span></b></h1>
<span data-contrast="auto">A major part of the Lehigh workshop discussion, led by CEOs of three leading Latin American microfinance institutions (MFIs), focused on experiences of institutions in Latin America and the Caribbean (LAC). One of the central areas of agreement about lessons learned was that client-centricity was key to minimizing the impact of the COVID-19 crisis on Latin American MFIs. Lockdowns throughout the region were quite strict and prolonged (on average six-plus months). Not only were the respective economies badly hurt—with GNP drops of about 7 percent to 9 percent </span><a href="https://www.oecd.org/coronavirus/policy-responses/covid-19-in-latin-america-and-the-caribbean-regional-socio-economic-implications-and-policy-priorities-93a64fde/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">according to the OECD</span></a><span data-contrast="auto">—but also, probably more importantly, target clientele, who live day to day and need to go out to generate income, were particularly hard hit.</span>
<blockquote class="pullquote--left"><span data-contrast="auto">Client-centricity was key to minimizing the impact of the COVID-19 crisis on Latin American MFIs.</span></blockquote>
<span data-contrast="auto">Being client-centric during the worst of the pandemic meant being constantly in touch with clients and being flexible and able to adapt to changing needs. Further, participating leaders of Latin American MFIs uniformly agreed that beyond considering the needs of an organization’s external clients it was also equally important for MFIs to listen and adapt, internally, to the needs of their employees. Only through ensuring staff’s commitment and loyalty have MFIs in the LAC region been able to maintain adequate communication and contact with their clients through the pandemic. Given how the prevailing “high-touch” MFI operating methodologies heavily rely on proximity and constant follow-up with clients, regular and transparent client communications became critical under the crisis’ rapidly evolving enabling environments.</span>

<span data-contrast="auto">Workshop participants stressed the importance of MFIs remaining flexible and quickly reacting to changing circumstances, such as providing client-specific, case-by-case restructuring and/or increases in loan sizes, as well as seeking cost reduction through improved efficiency and productivity, notably increasing the use of digital tools wherever feasible. On the flip side, practices that practitioners agreed did not work well included: blanket or indiscriminate across-the-board restructuring and refinancing; generalized increases in loan amounts; and indiscriminate down-to-the-bone cost cutting.</span>
<h1><b><span data-contrast="auto">Crisis Management by MFIs and Clients</span></b></h1>
<span data-contrast="auto">It’s important to highlight factors that normally would have had a material negative impact on MFIs and their clients but, in the case of LAC, ended up having minimal effect. Specifically: liquidity. Because of people’s inability to leave their dwellings due to strict lockdowns, coupled with government sanctioned system-wide loan repayment moratoriums, microentrepreneurs were for the most part not repaying their loans. Under those circumstances, one might have anticipated that MFIs’ liquidity would rapidly deteriorate and reach crisis levels. However, MFIs largely managed to avoid liquidity issues through a combination of extended grace periods implemented by host country governments and international funders, coupled with enhanced liquidity management by the MFIs. As severe and long-lasting as the COVID crisis has been, most well-managed MFIs appear to have survived </span><a href="https://www.cgap.org/sites/default/files/datasets/2021_4_CGAP_Symbiotics_COVID_Briefing.pdf" target="_blank" rel="noopener noreferrer"><span data-contrast="none">relatively well</span></a><span data-contrast="auto">.</span>
<blockquote class="pullquote--right"><span data-contrast="auto">For the inclusive finance sector’s target clients, the pandemic was, after all, not “the crisis” but rather “one more crisis.”</span></blockquote>
<span data-contrast="auto">Beyond palliative measures implemented by governments and funders, and the rapid and seemingly appropriate responses of most organizations, it is important to note just how resilient microentrepreneurs are. Beyond the imperative need to “sink-or-swim” for those that live so precariously—and without taking away from how severe the COVID crisis was for low-income people across the globe—Lehigh workshop participants noted that microentrepreneurs, in fact, are always operating under duress. Workshop participants agreed that the target population lives in an essentially permanent state of crisis. Indeed, in most of the corresponding enabling environments, MFI clients deal daily with everchanging rules of the game, shifting regulations and market dynamics, violence and insecurity, and nature-related external shocks (such as, but not limited to, hurricanes, earthquakes, floods, droughts) that are being </span><a href="https://www.centerforfinancialinclusion.org/climate-change-adds-to-challenges-for-msmes-recovering-from-covid-three-takeaways-from-cfi-surveys"><span data-contrast="none">exacerbated by climate change</span></a><span data-contrast="auto">. Thus, for the inclusive finance sector’s target clients, the pandemic was, after all, not “the crisis” but rather “one more crisis.”</span>
<h1><b><span data-contrast="auto">Three Rs of Digitalization</span></b></h1>
<span data-contrast="auto">The need for and convenience of having available digital mechanisms through which MFIs could interact with their clients became very evident during the pandemic. Accordingly, digitalization efforts received a </span><a href="https://blogs.worldbank.org/latinamerica/rise-digital-financial-inclusion-during-covid-19-pandemic" target="_blank" rel="noopener noreferrer"><span data-contrast="none">renewed push</span></a><span data-contrast="auto"> throughout the LAC region. Overall, organizations that were ahead-of-the-curve in the digitalization process before the pandemic were able to better cope with the new challenges of interacting virtually with clients. Nevertheless, participants at the Lehigh workshop emphasized that for MFIs digitalization is not a silver bullet that will solve all their problems but is rather one more tool for which levels and speed of implementation need to be clearly defined based on an MFI’s resources.</span>
<blockquote><span data-contrast="auto">MFIs digitalization is not a silver bullet that will solve all their problems but is rather one more tool for which levels and speed of implementation need to be clearly defined.</span></blockquote>
<span data-contrast="auto">Specifically, any digitalization plan should take into account the three Rs: a) </span><b><span data-contrast="auto">Reason</span></b><span data-contrast="auto">—why is more digitalization needed (e.g., reduce costs, improve client services)?; b) </span><b><span data-contrast="auto">Resources</span></b><span data-contrast="auto">—what is available to the MFI not only in terms of financial resources to cover implementation expenses, but also in terms of human resources, local telecom infrastructure, etc.?; and c) </span><b><span data-contrast="auto">Return</span></b><span data-contrast="auto">—what are the expected returns from implementing the process? Further, given that only what is measured gets done, it is important to clearly define how each of the relevant variables (better service, lower costs, etc.) will get measured, reported, and assessed.</span>

<span data-contrast="auto">The Latin American MFIs participating at the Lehigh workshop prioritized distribution processes (e.g., data collection, disbursements, collections) over analytics, algorithms, or artificial intelligence (AI). Participating practitioners frequently mentioned current limitations of AI as an ongoing challenge; specifically that low levels of existing actuarial data limit the ability to build AI tools. Moreover, compounding that existing barrier, in the wake of the crisis, most pre-pandemic data trends became less dependable as elements to predict future behavior.</span>
<h1><b><span data-contrast="auto">Focus Forward</span></b></h1>
<span data-contrast="auto">The workshop highlighted several areas for the inclusive finance sector to focus on moving forward:</span>
<h4><b><span data-contrast="auto">1. Digitalization</span></b></h4>
<span data-contrast="auto">This is an area most providers of inclusive financial services need to work on and for which appropriate guidance and capacity building support at the industry level could have substantial benefits. (For more workshop takeaways on digitalization, see </span><a href="https://www.centerforfinancialinclusion.org/digitally-reshaping-inclusive-financial-services-in-the-wake-of-covid-19"><span data-contrast="none">previous blog in this CFI series</span></a><span data-contrast="auto">.)</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559740&quot;:276}">
</span>
<h4><b><span data-contrast="auto">2. Consolidation</span></b></h4>
<span data-contrast="auto">Expectations had been that a severe crisis, such as the one associated with the COVID pandemic, would precipitate </span><a href="https://www.jstor.org/stable/10.7864/j.ctvbnm3hx.12" target="_blank" rel="noopener noreferrer"><span data-contrast="none">industry consolidation</span></a><span data-contrast="auto">. Somewhat surprisingly, it appears that overall, this has not been the case. While it might be too early to come to definitive conclusions— circumstances could still change and regional or national variations may emerge—so far, the extreme duress of smaller and weaker MFIs that could have triggered consolidation processes has been less than anticipated. At most, the crisis might have accelerated consolidation trends in a small subset of places where such developments were already underway. </span>
<h4><b><span data-contrast="auto">3. Governance</span></b></h4>
<span data-contrast="auto">The MFIs that have been the most severely affected by the COVID crisis have common management and governance weaknesses. Thus, the topic of building strong governance practices surfaced as a key area where leaders and proponents of the financial inclusion sector would be well advised to concentrate their efforts.</span>
<h4><b><span data-contrast="auto">4. Subsidies</span></b></h4>
<span data-contrast="auto">The noticeable trend among international donors and aid agencies to diminish subsidized support for microfinance is probably appropriate given that, overall, the industry seems to have matured and continues to evolve in healthy directions in terms of financial sustainability and social impact. Moving forward, the substantial support provided to the microfinance industry—including technical assistance, direct funding, and soft resources—might not be as transformational as it was in the past. Nevertheless, while the sector’s self-sufficient maturity might be true overall, there are specific instances in which support is still justified, for example, support for remote and rural inclusion efforts, digitalization guidance and capacity building, governance, and specific focus on regions or countries affected by climate change or other exogenous shocks.</span>

&nbsp;

<i><span data-contrast="auto">Participants of the Lehigh University workshop included Mercedes Canalda, CEO, Banco Adopem, Dominican Republic, Edgardo Perez, CEO, Fundación Génesis Empresarial, Guatemala, and Ralph Guerra, CEO, Compartamos Financiera, Peru. This note represents the author’s views, not necessarily those of other participants.</span></i>

Client-Centricity Leads the Way in Latin American Inclusive Finance Reponses to COVID-19

Till Bruckner

This blog post shares research from Triple Jump’s assessment of how the pandemic affected borrowers, their businesses, and their capacity to service loans across five countries in Latin America and Southeast Asia.

<em>CFI is focused on understanding how COVID-19 is impacting MSMEs and conducted a </em><a href="https://www.centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact"><em>longitudinal survey</em></a><em> to understand the scale of its impact. As part of CFI’s learning agenda on this topic, we welcome other perspectives and research on how COVID-19 impacted low-income entrepreneurs. This post shares research from Triple Jump’s assessment of how the pandemic affected borrowers, their businesses, and their capacity to service loans across five countries in Latin America and Southeast Asia.</em>

&nbsp;

Proponents of financial inclusion often argue that it <a href="https://nextbillion.net/relief-through-finance/" target="_blank" rel="noopener noreferrer">boosts borrowers’ resilience</a>, defined as “<a href="https://www.emerald.com/insight/content/doi/10.1108/JEC-06-2015-0033/full/html" target="_blank" rel="noopener noreferrer">reducing the financial vulnerabilities of communities at risk</a>,” notably by helping clients to build assets and gain access to credit. That theory was put to the test on a global scale during the COVID-19 pandemic, when lockdowns and changes in consumption patterns severely undermined the ability of many micro and small entrepreneurs to keep their businesses afloat.

Did financial inclusion really reduce entrepreneurs’ financial vulnerabilities in this context? To find out, Triple Jump and several partners conducted eight separate surveys of 1,638 microfinance borrowers across five countries in South America and Southeast Asia—Bolivia, Cambodia, Colombia, Myanmar, and Peru—during the second half of 2021, more than a year after the start of the pandemic. Analyzing the data from Triple Jump’s <a href="https://triplejump.eu/tj_coping_covid19_effects_sep2022/" target="_blank" rel="noopener noreferrer">findings</a>, three key lessons emerged.
<h1>Lesson #1: External Shocks Do Not Affect All Borrowers Equally</h1>
We found considerable differences between borrowers in terms of whether, and to what extent, they suffered financial shocks in the wake of the pandemic. In Peru, approximately one-third of borrowers reported that their financial situation had worsened significantly, another third had suffered a more moderate decline, and for the remaining third, the situation had not deteriorated at all.
<h4><em>Percentage of Borrowers Reporting Worsened Family Financial Situation</em></h4>
<img class="alignnone size-full wp-image-45325" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/11/TJ-blog-post1.png" alt="" width="2071" height="660" />

A closer look at the data revealed that borrowers whose families lived in poverty suffered a greater financial shock than those who were over the poverty line. Staying with the example of Peru, the financial situation of 78 percent of families below the poverty line declined even further in the wake of COVID, while this was true for 62 percent of families above it.

But again, there were significant differences at the household level, with a small minority of low-income clients even finding themselves in a slightly better financial position post-COVID than they had been before.
<h4><em>Changes in Family Financial Situation by Poverty Status in Peru</em></h4>
<img class="alignnone size-full wp-image-45326" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/11/TJ-blog-post2.png" alt="" width="2071" height="453" />

Thus, while it is true that, on average, some groups of borrowers will be worse affected by systemic shocks, lenders must bear in mind that the impacts on individual borrowers within any given group—even within especially hard-hit groups—may be very different.
<h1><strong>Lesson #2: The Formal Sector Only Forms Part of the Larger Resilience Picture</strong></h1>
Entrepreneurs in all five countries reported using a variety of coping strategies to respond to pandemic-related shocks. While some of those strategies involved formal sector lenders, most did not. When we looked at the data, three trends emerged.

First, drawing down savings and borrowing additional funds were only two among many coping strategies that respondents had employed. Other widely used coping strategies included reducing business stock, laying off employees, reducing business or household investments, selling and pawning assets, and cutting down on food consumption.

Second, most entrepreneurs across countries did not borrow additional funds from any source to help them weather the crisis. ‘Crisis borrowing’ was most frequently reported in Colombia with 56 percent of respondents having used the strategy. At the low-end of the spectrum, only 21 percent of Cambodian entrepreneurs had borrowed additional funds.

Third, when people did seek and secure a ‘crisis loan’, the role of banks and microfinance institutions varied widely between countries. In Peru and Colombia, around three-quarters of ‘crisis loans’ were provided by the formal sector, while in Bolivia, Cambodia, and Myanmar, informal sources of credit predominated.
<h4><em>Percentage of ‘Crisis Borrowers’ Who Borrowed from a Bank or MFI</em></h4>
<img class="alignnone size-full wp-image-45327" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/11/TJ-blog-post3.png" alt="" width="2112" height="724" />

Thus, while financial inclusion can, and often does, contribute to building resilience by allowing people to accumulate savings in times of plenty and access credit in times of crisis, entrepreneurs widely employ other strategies involving a diverse set of players to navigate crises.
<h1>Lesson #3: Need for a Nuanced Approach</h1>
Considering the above data, it appears that financial inclusion did indeed boost some borrowers’ resilience in the wake of the pandemic, and we found no indications that financial inclusion reduced the resilience of any borrowers. At the same time, many entrepreneurs chose to pursue alternative coping strategies that did not involve accessing formal financial services—ranging from reducing investments over seeking alternative or additional employment to cutting down on household consumption.

Thus, it appears that financial inclusion does boost borrowers’ resilience on average, but that this benefit is only sought and experienced by some borrowers. Future attempts to better understand the link between financial inclusion and resilience will need to focus on the individual business or household level.

&nbsp;

<em>This blog post is based on data collected for the report “</em><a href="https://triplejump.eu/tj_coping_covid19_effects_sep2022/" target="_blank" rel="noopener noreferrer"><strong><em>Coping with long-lasting effects of the pandemic: How financial institutions supported borrowers affected by Covid</em></strong></a><em>,” published by Triple Jump in September 2022. The report is the result of a collaboration between Triple Jump, Banco de Desarrollo de América Latina (CAF), and the Responsible Inclusive Finance Facility for Southeast Asia (RIFF-SEA); the latter is managed by the Social Performance Task Force. The underlying surveys were executed by 60 Decibels. </em><em>This article was commissioned by Triple Jump.</em>

Does Financial Inclusion Boost Borrowers’ Resilience? Three Lessons from the Pandemic

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Moving Beyond Access Toward Improving Outcomes

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Alexandra (Alex) Rizzi

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Consumer privacy risks have proliferated in the last decade in parallel with the increased adoption of digital technologies and the availability of consumer data. The great onboarding onto digital finance necessitated by COVID-19 also opened up vulnerable consumers to data misuse through scams in markets like the Philippines, Kenya, and India, among many others. Privacy violations can also have serious long-term consequences for financial inclusion and, even as access has improved, trust remains a critical ingredient in translating that progress into sustainable gains for consumers.

Evidence shows that when consumers fall prey to privacy-related harms, the loss of trust dissuades them from the opportunities afforded by digital finance. Privacy implications not only affect consumers but also impact businesses. While compliance with new data protection regulations has brought stronger safeguards, the rapid speed at which consumer data is collected, used, and shared in digital finance has far outpaced consumers’ understanding. For low-income digital financial consumers, the limits of informed consent and choice are even starker.

This report is intended to be an introduction to Privacy by Design (PbD) and to review the main PbD approaches in literature and wider market practice for their potential applications in the inclusive finance sector. The analysis is based on a literature review and key informant interviews with privacy and inclusive finance experts conducted by the Center for Financial Inclusion (CFI) between May and August 2022. The paper groups findings into four approaches to PbD, each of which attempts to embed privacy through different means, often by combining various tools, methods, and areas of application. The paper also identifies a series of gaps and barriers that limit the potential of PbD, particularly in emerging markets and developing economies. The report closes with considerations for the adaption of PbD for fintechs working with low-income and vulnerable consumers. CFI aims to build off this initial report to develop practical guidance on PbD for fintech product teams.

Embedding Trust: The Potential of Privacy by Design for Inclusive Finance

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<p>This is an example page. It&#8217;s different from a blog post because it will stay in one place and will show up in your site navigation (in most themes). Most people start with an About page that introduces them to potential site visitors. It might say something like this:</p>
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<p>&#8230;or something like this:</p>
<blockquote><p>The XYZ Doohickey Company was founded in 1971, and has been providing quality doohickeys to the public ever since. Located in Gotham City, XYZ employs over 2,000 people and does all kinds of awesome things for the Gotham community.</p></blockquote>
<p>As a new WordPress user, you should go to <a href="https://content.centerforfinancialinclusion.org/wp-admin/">your dashboard</a> to delete this page and create new pages for your content. Have fun!</p>


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