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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

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.

Blog Post

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>Why Is This Question Even Relevant?</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>The Frameworks Will Have Material Implications</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>What Are the Potential Risks or Opportunities?</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>Which Is It — Risk or Opportunity?</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>ESG Voice in the South</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>What to Do About It?</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>Discussion and advocacy: 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>Capacity building: 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>Technical support: 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>Conclusion</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?

Jennifer Isern

Enjiang Cheng

Alok Misra

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 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>Cross-regional Commonalities</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.

Product offerings that support consumers:
<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>
Managing funding:
<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>
Role of government:
<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>Perspectives from China</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>Perspectives from India</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>Perspectives from Indonesia</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>Perspectives from the Pacific Island Countries</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.

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?

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 <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.
<h1>Focus, Focus, Focus on Clients and Staff</h1>
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 <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">according to the OECD</a>—but also, probably more importantly, target clientele, who live day to day and need to go out to generate income, were particularly hard hit.
<blockquote class="pullquote--left">Client-centricity was key to minimizing the impact of the COVID-19 crisis on Latin American MFIs.</blockquote>
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.

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.
<h1>Crisis Management by MFIs and Clients</h1>
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 <a href="https://www.cgap.org/sites/default/files/datasets/2021_4_CGAP_Symbiotics_COVID_Briefing.pdf" target="_blank" rel="noopener noreferrer">relatively well</a>.
<blockquote class="pullquote--right">For the inclusive finance sector’s target clients, the pandemic was, after all, not “the crisis” but rather “one more crisis.”</blockquote>
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 <a href="https://www.centerforfinancialinclusion.org/climate-change-adds-to-challenges-for-msmes-recovering-from-covid-three-takeaways-from-cfi-surveys">exacerbated by climate change</a>. Thus, for the inclusive finance sector’s target clients, the pandemic was, after all, not “the crisis” but rather “one more crisis.”
<h1>Three Rs of Digitalization</h1>
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 <a href="https://blogs.worldbank.org/latinamerica/rise-digital-financial-inclusion-during-covid-19-pandemic" target="_blank" rel="noopener noreferrer">renewed push</a> 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.
<blockquote>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.</blockquote>
Specifically, any digitalization plan should take into account the three Rs: a) Reason—why is more digitalization needed (e.g., reduce costs, improve client services)?; b) Resources—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) Return—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.

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.
<h1>Focus Forward</h1>
The workshop highlighted several areas for the inclusive finance sector to focus on moving forward:
<h4>1. Digitalization</h4>
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 <a href="https://www.centerforfinancialinclusion.org/digitally-reshaping-inclusive-financial-services-in-the-wake-of-covid-19">previous blog in this CFI series</a>.)

<h4>2. Consolidation</h4>
Expectations had been that a severe crisis, such as the one associated with the COVID pandemic, would precipitate <a href="https://www.jstor.org/stable/10.7864/j.ctvbnm3hx.12" target="_blank" rel="noopener noreferrer">industry consolidation</a>. 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. 
<h4>3. Governance</h4>
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.
<h4>4. Subsidies</h4>
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.

&nbsp;

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.

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.

CFI is focused on understanding how COVID-19 is impacting MSMEs and conducted a <a href="https://www.centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact">longitudinal survey</a> 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.

&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>Percentage of Borrowers Reporting Worsened Family Financial Situation</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>Changes in Family Financial Situation by Poverty Status in Peru</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>Lesson #2: The Formal Sector Only Forms Part of the Larger Resilience Picture</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>Percentage of ‘Crisis Borrowers’ Who Borrowed from a Bank or MFI</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;

This blog post is based on data collected for the report “<a href="https://triplejump.eu/tj_coping_covid19_effects_sep2022/" target="_blank" rel="noopener noreferrer">Coping with long-lasting effects of the pandemic: How financial institutions supported borrowers affected by Covid</a>,” 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. This article was commissioned by Triple Jump.

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

Howard Miller

Jayshree Venkatesan

The intersection of consumer protection and climate is a relatively new area of research and brings together two of CFI’s key research themes. Exploring this intersection, CFI considers how we can contribute towards a new perspective on responsible finance that looks ahead to emerging challenges and the needs of customers.

Global development has not just stalled. <a class="Hyperlink SCXW87520962 BCX0" href="https://www.undp.org/papua-new-guinea/blog/human-development-index-reverse-why-are-we-ignoring-world-breaking-point" target="_blank" rel="noreferrer noopener">UNDP’s Human Development Report 2022</a> showed that the global Human Development Index (HDI), which measures three dimensions of human development (life expectancy, access to education, and standard of living), has been falling since 2020 for the first time since 1991. The <a class="Hyperlink SCXW87520962 BCX0" href="https://www.climate.gov/news-features/understanding-climate/climate-change-probably-increasing-intensity-tropical-cyclones" target="_blank" rel="noreferrer noopener">increasing frequency and intensity</a> of climate shocks and changing weather patterns are a key driver for this negative HDI trend. We know that the world’s developing countries and lowest-income people face the highest risks and vulnerabilities due to climate change. At CFI, we have developed a <a class="Hyperlink SCXW87520962 BCX0" href="https://www.centerforfinancialinclusion.org/green-inclusive-finance-a-framework-for-understanding-how-financial-services-can-help-low-income-people-weather-climate-related-risks" rel="noreferrer noopener">framework for Green Inclusive Finance</a> to help understand the role of inclusive finance in building resilience by helping people reduce their vulnerability and increase their ability to respond to climatic shocks and stresses.
<h4>"I had nearly Rs100,000 [about $1,176] in cash buried in an earthen jar under the mud floor of my home. There was confusion as we fled and I thought my wife had retrieved it. But we both failed to do so, and now the money has gone." – <a href="https://reliefweb.int/report/pakistan/pakistan-flood-survivors-savings-washed-away" target="_blank" rel="noopener noreferrer">Pakistani flood survivor, 2010</a></h4>
Ensuring that vulnerable consumers are protected and treated fairly and with dignity is a crucial but overlooked aspect of resilience. Financial products such as insurance, savings, and payments can play a very important role in building household resilience before, during, and after climate shocks. However, there are challenges with financial products and services related to climate change. Insurance policies can be slow to pay out, and the money often is not accessible when people need it most. Viable models of weather-indexed insurance for low-income and vulnerable communities have also been difficult to develop, and <a href="https://www.theguardian.com/environment/2019/mar/21/climate-change-could-make-insurance-too-expensive-for-ordinary-people-report" target="_blank" rel="noopener noreferrer">climate change will only make such policies more expensive</a>. Savings held informally risk being destroyed. For instance, during the major floods in Pakistan in 2010, there were reports of <a href="https://reliefweb.int/report/pakistan/pakistan-flood-survivors-savings-washed-away" target="_blank" rel="noopener noreferrer">hundred-rupee notes carried downstream</a> with the floodwaters; families’ savings lost forever.
<blockquote class="pullquote--right">Is mobile money any more useful with mobile networks down, absent agents, and nowhere to charge your phone?</blockquote>
There are challenges with savings held in formal accounts as well. We know from the <a href="https://www.worldbank.org/en/publication/globalfindex" target="_blank" rel="noopener noreferrer">2021 Global Findex</a>, that the proportion of Pakistanis with any form of financial account increased from 10 percent in 2011 to 21 percent in 2021. In the latest devastating floods to hit the country, more people will have their savings at a financial institution. But with power infrastructure out, ATMs flooded, <a href="https://www.telegraphindia.com/world/pakistans-flood-victims-forced-to-put-rebuilding-on-hold/cid/1893463" target="_blank" rel="noopener noreferrer">bank branches shut down</a>, how accessible is that money? Is mobile money any more useful with mobile networks down, absent agents, and nowhere to charge your phone? To help respond, the Pakistan government has established “<a href="https://www.bisp.gov.pk/Detail/NDhjOWU5ZmQtZTNiMi00OWJiLTlhMmEtZjhlYTU0MDMzNWZh" target="_blank" rel="noopener noreferrer">payment campsites</a>”, where Rs. 25,000 (approximately $112) in cash are distributed to families in affected provinces as part of the Benazir Income Support Program (BISP). But people need more than emergency relief. After floods devastated a region in Australia earlier this year, a group of five local credit unions <a href="https://www.afr.com/companies/financial-services/choppers-fly-cash-in-to-devastated-lismore-flood-zone-20220307-p5a2i5" target="_blank" rel="noopener noreferrer">helicoptered in cash and an ATM</a> to help savers access their money, but with natural disasters occurring <a href="https://news.un.org/en/story/2021/03/1087702" target="_blank" rel="noopener noreferrer">three times more often than 50 years ago</a>, and affecting developing countries the most, such solutions may be out of reach for low- and middle-income countries.

Social networks and remittances are valuable tools for resilience and there is plenty of evidence that friends and family are critical sources of emergency funds. <a href="https://www.cgap.org/blog/era-urgent-climate-risk-does-financial-inclusion-matter" target="_blank" rel="noopener noreferrer">CGAP documented</a> how mobile money transfers in Mozambique spiked after the floods in January 2013. However, the covariant nature of climatic risks means that if you are impacted, there’s a good chance that everyone around you is as well. This diminishes the value of social networks that act as a proxy insurance. <a href="https://fordschool.umich.edu/rsie/workingpapers/Papers526-550/r535.pdf" target="_blank" rel="noopener noreferrer">Evidence from the Philippines</a> found that remittances served as effective insurance to a rainfall shock only for households that had a family member overseas who was not affected by the shock.

There is good evidence that formal financial services can help improve people’s resilience when faced with shocks. However, the issue of consumer protection in light of weather events is less researched.

Consumer protection risks arise due to vulnerabilities caused by:
<ol>
 	<li>The inability to access financial services in a climate emergency</li>
 	<li>The inability to negotiate fair terms for products and services</li>
</ol>
Each of these factors is also interrelated and can exacerbate consumer stress.
<h1>Consumer Protection Risks Arising from the Inability to Access Financial Services</h1>
<h4>“Hurricane Jeanne took all that I had…my job and my home are gone. I used to have food: Now I beg in the market.” – <a href="https://sarpn.org/documents/d0002915/5-HDR_2007-2008.pdf" target="_blank" rel="noopener noreferrer">Consumer in Haiti, 2005</a></h4>
This quote from an individual in Haiti in 2005 is eerily similar to <a href="https://karandaazmain.wpenginepowered.com/wp-content/uploads/2022/09/Flood-Report-2.pdf" target="_blank" rel="noopener noreferrer">stories from Pakistan</a> in the aftermath of the July 2022 floods. Even when it is possible to access formal financial services, disruptions can take place due to failure in infrastructure or lack of physical access to banks, agents, and ATMs, which in turn impacts liquidity of these channels as well as the ability to serve consumers. The inability to access up-to-date information, and the absence of channels that could provide this information, paves the path for exploitation.

In our interviews with stakeholders from Pakistan, anecdotes emerged about middlemen who charged a higher fee to enable access to government-to-person (G2P) payments. Government response to deliver emergency relief through G2P payments can be disrupted unless telecom operators and financial service providers have business continuity plans to deal with climate shocks. And, as with most emergencies, targeting can be an issue. Experiences from the <a href="https://odihpn.org/publication/are-cash-transfers-the-%c2%91new-normal%c2%92-in-the-philippines-challenges-and-opportunities-from-typhoon-haiyan/" target="_blank" rel="noopener noreferrer">Philippines in the aftermath of Typhoon Haiyan</a> show that standardized indicators may not reflect the nuances of debt and vulnerabilities. For instance, a community member in the Philippines was excluded from benefits since she had used credit to buy fish cages before the Typhoon struck. However, the typhoon had destroyed her boat, leaving her to deal with income loss and the need to service debt, and she was excluded from relief funding. Finally, women tend to be disproportionately impacted due to information gaps. <a href="https://vidhilegalpolicy.in/research/financial-inclusion-of-women-during-the-pandemic-the-role-of-jan-dhan-accounts-and-cash-transfers/" target="_blank" rel="noopener noreferrer">Evidence from India during the COVID-19 pandemic</a> showed that women are impacted more by information gaps. This can be even worse during a climate-induced disaster.

Some solutions have emerged to mitigate the information gap challenge. In floods that impacted both Chennai and <a href="https://www.bbc.co.uk/news/world-asia-india-45218556" target="_blank" rel="noopener noreferrer">Kerala</a>, social media has emerged as a crucial tool for coordination between citizens and civil society organizations to inform affected people about which ATMs have cash and other critical information. However, ensuring that this information is accessed by low-income households, and women within these households can still be a challenge. The National Payments Corporation of India (NPCI) is <a href="https://www.cioinsiderindia.com/news/npci-tests-a-solution-to-allow-payment-without-internet-nwid-3696.html" target="_blank" rel="noopener noreferrer">testing solutions</a> that allow Unified Payments Interface (UPI)-based digital payments without active internet connections. This can allow G2P payments even when infrastructure is disrupted in the immediate aftermath of a climate shock.
<h1>Consumer Protection Risks Arising from the Inability to Negotiate Fair Terms</h1>
<h4>“During those days (with the Brahmaputra floods), my husband goes to Dhaka to work as a rickshaw puller and we struggle. To start cultivating again after the floods we would borrow from a mohajon (local money lender).” – <a href="https://www.brac.net/program/finance-for-flood-hit-families-reducing-risk-and-raising-resilience/" target="_blank" rel="noopener noreferrer">BRAC customer</a></h4>
It is common to see a rise in informal borrowing at high interest rates as a response to cope with climate disasters. Desperate times and the lack of formal channels make it hard for people to negotiate fair terms, which often leads to overindebtedness. Recent reports from the <a href="https://tribune.com.pk/story/2381326/rights-activists-fear-spike-in-bonded-labour" target="_blank" rel="noopener noreferrer">flood hit province of Sindh</a> in Pakistan speak of informal loan agreements in exchange for work, resulting in debt bondage.

Those with access to formal loans can also be impacted adversely. For instance, <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3934688" target="_blank" rel="noopener noreferrer">a study in Mexico</a> found that exposure to extreme temperatures even for a day can increase delinquency rates of small business borrowers by 0.012 percentage points.
<blockquote class="pullquote--left">Desperate times and the lack of formal channels make it hard for people to negotiate fair terms, which often leads to overindebtedness.</blockquote>
Agent fraud or charging excessive fees are common complaints when consumers are desperate for access to relief. In Pakistan, we heard anecdotes of <a href="https://www.biometricupdate.com/202209/pakistan-arrests-suspects-over-digital-id-fraud-in-floods-cash-relief-program" target="_blank" rel="noopener noreferrer">agents charging between $4 – $12 for cash withdrawal,</a> a steep premium over the usual fees of $0.10. With increasing digital financial services, there are also reports of <a href="https://www.biometricupdate.com/202209/pakistan-arrests-suspects-over-digital-id-fraud-in-floods-cash-relief-program" target="_blank" rel="noopener noreferrer">cyber frauds</a> in Pakistan. The lack of complaint mechanisms makes grievance redressal difficult. Credit reporting mechanisms and the absence of policies that allow formal financial institutions to restructure these loans can result in further exclusion of consumers. Our research revealed that people who are unable to repay their loans in the aftermath of floods and other climate shocks in Nepal get blacklisted.

Providing emergency loans to people in areas that are prone to climate risks can help address the challenge of overindebtedness and informal borrowing at high interest rates. BRAC piloted an <a href="https://www.brac.net/program/finance-for-flood-hit-families-reducing-risk-and-raising-resilience/" target="_blank" rel="noopener noreferrer">emergency loan product</a> in partnership with the University of California, Berkeley and found a much lower incidence of missed payments among those who took the emergency loan. BRAC also observed a 5 percent increase in savings deposits among the emergency loan borrowers, compared to just 1 percent for non-borrowers. In southern Nepal, a region prone to floods, the World Food Programme (WFP) distributes <a href="https://www.wfp.org/stories/nepal-wfp-un-climate-summit-cas-2021-floods-monsoon" target="_blank" rel="noopener noreferrer">cash support</a> in anticipation of floods. Forecast-based financing (FbF) uses early warning forecasts to catalyze early actions and humanitarian funding ahead of an extreme weather event. Funds are distributed in the short window between the forecast trigger and the disaster and must give sufficient time to people to use the funds for evacuation, fortifying their houses, purchasing necessary materials, and other mitigation measures.
<h1>Call to Action</h1>
Policy responses are emerging to help financial institutions and consumers deal with emergency crisis situations. In the United States, the President can declare supervisory guidance during a disaster or emergency, which includes climate disasters. Some of these responses include waiving ATM fees, increasing ATM withdrawal limits, waiving penalties on early withdrawal of time deposits, expanding the availability of short-term unsecured credit, and offering payment accommodations. However, these measures, while useful, must be systematically embedded into the business continuity plans of financial institutions to ensure low-income consumers do not bear these event costs.

The intersection of consumer protection and climate is a relatively new area of research and brings together two of CFI’s key research themes. Consumer protection risks in the context of climate change presents a <a href="https://www.stonybrook.edu/commcms/wicked-problem/about/What-is-a-wicked-problem" target="_blank" rel="noopener noreferrer">wicked problem</a> and cannot be addressed without the effort and collaboration of multiple stakeholder groups. Our hope is that by exploring this intersection, and how low-income and vulnerable people can be effectively protected in the context of climatic risks, we can contribute towards a new perspective on responsible finance – one that looks ahead to emerging challenges with the needs of customers at its core.

&nbsp;

Special thanks to colleagues from <a href="https://karandaaz.com.pk/" target="_blank" rel="noopener noreferrer">Karandaaz, Pakistan</a>, <a href="https://www.dvarakgfs.com/" target="_blank" rel="noopener noreferrer">Dvara KGFS India</a>, and <a href="https://www.nabilbank.com/individual" target="_blank" rel="noopener noreferrer">Nabil Bank, Nepal</a> for their support with this blog post.

Climate Change and Rising Consumer Risks: The two go hand-in-hand

Latest Blog Posts

Moving Beyond Access Toward Improving Outcomes

#strategyvideo

Shannon Mudd

Todd A. Watkins

Digital adoption has been transforming the inclusive finance ecosystem for years. Innovation is robust, digital service providers for the industry are expanding, the competition to roll out digital financial services to clients is fierce, and up and down the value chain companies are excising physical offices and field staffs. As a result, clients’ digital access is broadening across the globe. Arriving mid-metamorphosis, the COVID-19 crisis altered the dynamic considerably. How has the pandemic affected the shift to digital finance? How are inclusive financial service providers incorporating digital tools? Can digitalization revitalize the inclusive finance sector? What challenges need sustained attention?

These were among the questions considered by a gathering of two dozen microfinance organization leaders, impact investors, and analysts from around the world 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>. Sharing views on how financial inclusion interacted with the socio-economic crises of the pandemic, participants built on the success of a previous workshop that resulted in 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.
<h1>Pandemic as Accelerant</h1>
Workshop participants across every region confirmed the pandemic accelerated digital adoption across client populations and inclusive financial service providers (iFSPs). For clients, digital payments—e.g., mobile money, government transfers, access to savings, remittances, loan distributions—were most visible and provided liquidity, especially during shutdowns. Simultaneously, digital loan repayments helped sustain iFSP liquidity. Yet digitalization extends far beyond payments, from back-office operations and new digital products to automated decision-making algorithms and platforms for onboarding clients and fulfilling regulatory mandates.

Faster. Cheaper. Easier. More scalable. More accessible. Compelling stuff. What’s not to like? The workshop discussion centered around three broad areas of concern: formidable capital requirements, big barriers to technology management capacity building, and consequences of market and firm structural changes.
<h1>Capital is the Principal, Partners are Capital</h1>
Digitalization of the inclusive finance sector will require substantial investment. Progress has been facilitated by investments from governments and development financial institutions (DFIs). Examples include electronic payment systems in Papua New Guinea and Fiji, Tonga’s remittance corridor to global payment systems through partner banks in New Zealand and Australia, and India’s digital bank accounts for all citizens linked to national ID numbers and mobile phones. 

Nonetheless, participants agreed that access to capital for expanding digitalization remains largely limited to large, professionally managed institutions (i.e., Tier 1, assets &gt;$100M) which attract global investors by rigorous attention to risk, sophisticated portfolio management, and superior, transparent governance. However, even that top tier, as discussed in another <a href="https://www.centerforfinancialinclusion.org/slow-motion-extinction-or-can-impact-investors-reinvigorate-pro-poor-financial-inclusion">CFI blog from the workshop</a>, is having difficulty recapitalizing in the wake of COVID-19. Moreover, any funding is unlikely to be accompanied by the technical assistance grants so critical to previous capacity building in the sector.
<blockquote class="pullquote--left">Despite limited funding, iFSPs are proving resourceful.</blockquote>
Despite limited funding, iFSPs are proving resourceful. To reduce development and implementation costs, some have looked to partnerships. For example, Pierette Kouakou, Managing Director of Fin‘Elle (Cote d’Ivoire), reported that bank partnerships forged during COVID expanded her clients' access from five branches to over 200 branches within a banking network. In Indonesia, iFSPs leverage clients’ embrace of social media platforms like WhatsApp to facilitate communications and payments.

Similarly, many fintech companies are playing roles that are more complementary than competitive with more traditional microfinance institutions (MFIs). A recent <a href="https://assets.kpmg/content/dam/kpmg/in/pdf/2021/03/microfinance-digital-fintech-mfi-technology-finance.pdf" target="_blank" rel="noopener noreferrer">survey by KPMG in India</a> indicated that nearly 75 percent of surveyed MFIs have alliances with fintechs, and the rest are exploring forming such alliances. Partnerships can serve as a learning tool before attempting a new venture alone. However, Edgardo Perez, CEO of Fundación Génesis Empresarial (Guatemala), reported moving away from partnerships as Génesis developed its own digital capabilities, which raises a question for iFSPs around what is the balance and path for developing internal capabilities versus partnering to obtain them?
<h1>Capacity Building and Clear-eyed Leadership</h1>
A second main theme at the workshop was the importance of capacity building for managing these technologies. Workshop participants agreed that while funding and digital infrastructure are necessary, they are not sufficient for success. Thoughtful and prudent leadership is crucial for implementing digitalization. Yet a lack of management capacity within institutions is slowing adoption. The management challenges are many, even at the basic level: setting up a tech team requires significant hiring, talent development and, crucially, managerial time to oversee the team and its integration into the organization.

Providing strategic focus is also essential. Alex Silva, Executive Director of Calmeadow, emphasized the need for clear and well understood reasons for digital adoption and for persistent organizational support. Leadership and staff must regularly reassess the reasons underlying digital adoption. Silva pointed out that all three Latin American MFI CEOs at the workshop had led successful implementations of a range of digital processes and services—success driven by client-centric foci and clear understanding of client needs and capabilities. However, the experience of a small MFI that accepted an unsolicited grant to digitize, but ended with little to show for its efforts, serves as a cautionary tale that digitalization is not a silver bullet.
<blockquote class="pullquote--right">Digitalization requires culture change, within and without the iFSP, over long time horizons.</blockquote>
Participants further agreed that digitalization requires culture change, within and without the iFSP, over long time horizons. Executives must navigate the narrow path between moving too fast and outpacing abilities and moving too slow and losing relevance. Given the existing demands on management, there was serious lament about the lack of capacity building grants that had for decades effectively propelled microfinance.
<h1>Potential Within Existing Resources</h1>
While building managerial capacity and new resources can catalyze change, some participants highlighted the potential of existing capabilities and relationships. Mercedes Canalda, CEO of Banco Adopem (Dominican Republic), pointed out that a core strength of many iFSPs is educating clients and onboarding them to new technology, providing the iFSP advantages over fintech competitors. Additionally, many institutions invest heavily in their client communities. Iwan Nazirwan, Chairman of KRAF (Indonesia), reported that MFI lending groups in Bali are spreading digital literacy by helping each other learn to use digital services on their phones. 

And, of course, digitalization has greater impact when integrated across whole organizations. Ralph Guerra, CEO of Compartamos Financiera (Peru), advocated for starting digitalization with existing staff so that digitized staff will in turn push further adoption—as most front-line staff are from the same populations as their clients, they are best situated to mentor clients.

The extensive client data already in the hands of iFSPs are another key resource. Once digitized, client data can help inform product design to better meet client needs, reduce risk, and track impact. For example, Fundación Génesis Empresarial segments clients to understand group needs and business cash flow rhythms and then tailors services accordingly (e.g., matching loan disbursements to prevalent cash flow patterns). Génesis is also using technology to make onboarding easier. 
<h1>Unintended Consequences</h1>
The third broad theme emerging from the workshop was the challenges and consequences that arise when changing trajectory and moving away from long-standing structures that have supported operations and clients. Many have raised concerns of the impacts of digitalization on inclusion arising from low digital literacy, limited connectivity, or a lack of trust (warranted given data security risks) among certain parts of targeted populations. Increased digital adoption challenges existing modes of operating such as group lending. When payments are digital, what is the remaining value of group meetings, in-person meetings, and their staffing?

Some MFIs may shift away from field officers toward remote communications in the hope that costs will fall with increased productivity. But seeking such savings, which may or may not appear, will also alter the recruitment of staff in type and location. This shift of staff recruitment may jeopardize an important external benefit of the industry: the training and professionalization of a segment of rural labor. Field officer jobs have often been first steps in career paths within or beyond MFIs. What are its implications for rural development?
<blockquote>Will the quest for scale and scope efficiencies drive further standardization to the detriment of clients?</blockquote>
Questions arise too about industry structure. Currently iFSPs come in a wide array of organizational sizes, types, and missions. Digital adoption will upend the competitive structure of the sector. Critics characterize the industry as achieving scale with low-cost, standardized products that may not meet client needs. While the customer-centric focus of the participants at the Lehigh workshop belied this characterization, will the quest for scale and scope efficiencies drive further standardization to the detriment of clients? And will we see further consolidation or will the balance of competitive advantage tilt back towards smaller niche players? Even with fintech advances in penetration, certain population segments remain out of reach. Will smaller iFSPs have better business models for serving these populations with needed, potentially, specialized service? Can they survive independently without capital and/or partnerships?
<h1>Enhancing the Narrative</h1>
One of the central questions framing the Lehigh workshop was: What challenges need sustained attention in inclusive financial services? Perhaps the most pressing is the need for a compelling narrative to enhance support for digitization capacity building. Microfinance was the north star of impact investing for decades, attracting the majority of funding. Yet, attention among investors and funders has waned compared to its fast-growing neighbor fintech.

What might re-attract funders’ attention?
<ul>
 	<li data-leveltext="" data-font="Symbol" data-listid="8" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Emphasizing microfinance’s hard-earned lessons of what creates success? These lessons include:
<ul>
 	<li data-leveltext="" data-font="Symbol" data-listid="8" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Disciplined patient capital for capacity building and experimentation;</li>
 	<li data-leveltext="" data-font="Symbol" data-listid="8" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Proven self-sustainability and scalability;</li>
 	<li data-leveltext="" data-font="Symbol" data-listid="8" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Multi-layered ecosystem development;</li>
 	<li data-leveltext="" data-font="Symbol" data-listid="8" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Fostering of staff and management talent;</li>
 	<li data-leveltext="" data-font="Symbol" data-listid="8" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Customer-centric product tailoring;</li>
 	<li data-leveltext="" data-font="Symbol" data-listid="8" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Transparency in pricing and in governance; and</li>
 	<li data-leveltext="" data-font="Symbol" data-listid="8" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Collaborative information sharing.</li>
</ul>
</li>
 	<li data-leveltext="" data-font="Symbol" data-listid="8" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Further creating opportunities for complementarity with fintech to garner more attention?</li>
 	<li data-leveltext="" data-font="Symbol" data-listid="8" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Collaborating with fintech to spur mission focus?</li>
</ul>
Regardless, digitalization will not come without pain, steadfast commitment, and vision by both leadership and the impact investing community. Inclusive finance institutions too tied to well-worn methodologies will be at risk, with underperforming investments and suboptimal, lower impact services to the communities they seek to serve.

Digitally Reshaping Inclusive Financial Services in the Wake of COVID-19

Paul DiLeo

This blog post is the first 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. 

Slow-Motion Extinction? Or Can Impact Investors Reinvigorate Pro-Poor Financial Inclusion?

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