Mr. Silva has more than 25 years of experience in international finance with expertise in the evaluation of financial intermediaries, financial engineering, strategic planning and corporate finance. He has in-depth knowledge of the Latin American and Caribbean financial markets and maintains regular contact with prominent bi/multilateral institutions in the region. In addition, he has high-level contacts within the Latin American business community as well as financial institutions. Mr. Silva was the manager of the Antares Fund, a for-profit equity participation fund aiming to develop a secondary market for equity participations in microfinance institutions (MFIs), financial institutions specializing in serving small and micro entrepreneurs. He is also the Executive Director of Calmeadow and represents this Canadian NGO on the Board of Africap, a fund specialized in providing equity and long-term funding to African MFIs. Prior to establishing Omtrix, Mr. Silva worked for the Inter-American Investment Corporation (IIC), a multilateral financial institution, as the head of its Central American office. He was the Executive Director of ProFund Internacional, where he was responsible for the management of a regional investment fund specializing in equity investments in MFIs in Latin America and the Caribbean. Mr. Silva has served as a board member of numerous MFIs in countries such as Nicaragua, Haiti, Venezuela, Mexico, Colombia, Ecuador, Peru and Bolivia.
Mr. Silva, who has taught at Brandeis and UCA Universities has also served as a faculty member of CFI’s executive education programs, including the Board Leadership for Impact Program and the <a href="https://www.centerforfinancialinclusion.org/about/what-we-do/africa-board-fellowship-program/">Africa Board Fellowship Program</a>.

Founding Partner, Omtrix

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.

Blog Post

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

Jeffrey Riecke

Things to consider when an exit is at hand

&gt; Posted by Alex Silva, Executive Director, Calmeadow, and Jeffrey Riecke, Senior Communications Specialist, CFI

<img class="alignright wp-image-23248" style="border: .5px solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/03/keys-1317391_1920.jpg" alt="" width="245" height="228" />Impact investors, social investors, responsible investors…regardless of name, they claim to serve the greater good. In the world of financial inclusion, impact investors are supporting the development of financial markets that have inadequately served the base of the economic pyramid.

What happens when social investors exit from their financial inclusion investments?

Some exits are non-controversial, but what if responsible investors sell their stake to an investor that doesn’t place priority on the social mission? The risk of mission drift or abandonment is real, and responsible investors must consider it as they make their exit decisions. With financial inclusion sector trends suggesting that impact investing exits are going to become more frequent, it’s worth examining the topic in greater detail.
<h3>Investors exit for many reasons </h3>
It’s important, especially for critics of impact investors, to recognize that a decision to exit may arise from any number of factors, including factors internal to the investor.
<ul>
 	<li>When a market has been proven viable and starts to attract fully-commercial capital, investors might “declare victory and go home”. Many financial inclusion investors are doing just this.</li>
 	<li>In other cases, an investor’s strategy might change. Perhaps an investor decides to focus on a different region or sector.</li>
 	<li>The investor is thirsty for money, for any number of reasons. Perhaps it is experiencing internal financial challenges or increased capital requirements, or it has a higher priority investment opportunity to pursue.</li>
 	<li>Markets can become risky. The enabling environment of particular countries can change. For instance, isolationist policies might spur opposition to foreign-owned businesses.</li>
</ul>
<h3>Exiting responsibly </h3>
Responsible exits support the preservation of the investee’s social mission, and they take place at a time that’s best for the industry.

A good lens for considering whether an exit is responsible is the reason for the investment in the first place. If the investment was initially socially motivated, then investors should not simply be motivated by financial returns when they exit. Financial return (the price offered) is important, but it shouldn’t be the only criteria. For example:

The Multilateral Investment Fund (MIF) of the Inter-American Development Bank (IDB) has been a long-time investor in microfinance organizations. Generally, they’ve been diligent about every stage of investing, including thinking about their exit strategies up front, when they invest. They have normally exited to similarly socially-minded organizations. This enables continuity in the investee organizations for the treatment of clients, and also continuity for staff. When the MIF sold its investment in CALPIA, a microfinance institution in El Salvador, it sold to responsible buyers committed to financial inclusion.
<h3>Exiting irresponsibly</h3>
Let’s contrast this with not-so-responsible exits where the values or missions of the original investor and the new buyer are not matched. If an investor sells its stake in a microfinance institution to an entity that has no experience or demonstrated interest in financial inclusion, this presents the heightened possibility that the buyer will not continue the practice. It may raise prices, reduce service quality, or move upmarket, among other things. Not-so-responsible-exiting can entail selling investment stakes to the highest bidder across a variety of stakeholder types. We have seen instances of investments sold to entities like consumer lenders with reputations for profit-first practices. We have also seen instances of sales to governments, with the result that the newly government-owned institution damages a market by offering highly-subsidized interest rates, making it difficult for other institutions to compete on a level playing field.
<h3>When investors hold investments too long</h3>
We’ve also seen instances where impact investors hold investments in markets where local commercial banks or bona-fide investors are interested. In these cases the impact investors’ money would be better used elsewhere. Why don’t these investors sell?

Often, they simply do not want to reduce their portfolios. For example, many development finance institutions (DFIs) and microfinance investment vehicles (MIVs) are measured and rewarded by the size of their portfolios. It’s not necessarily about the return (financial or social). This is especially true if the investors are paid a percentage fee based on how much they have invested, which creates a perverse incentive against selling assets.

In Colombia, where commercial banks are increasingly interested in microfinance, an NGO owned a controlling stake in an MFI. A potential buyer bid to buy the entire bank from the NGO and merge it with the bank’s operations. Onlookers might have speculated that this presented a risk of mission drift. Maybe the buyer just wanted the banking license. Maybe it just wanted the savings deposits. Both concerns were easily set aside: the buyer was already a licensed commercial bank and the NGO-owned bank had few depositors. In fact, the commercial bank was positively interested in entering the microfinance market and serving Colombian micro-entrepreneurs. For its part, the commercial bank had a lower cost of funding and better IT systems. It had the resources to make the MFI and its services better than the NGO could. Accordingly, the NGO could have declared victory, taken its money, and done other things in Colombia, like support microfinance in rural areas or advance public health. Unfortunately, the NGO was not able to see the benefits of the possible transaction and opted not to sell.
<h3>Impact investing trends</h3>
The financial inclusion industry is evolving. There is an increasing diversity of inclusive finance providers and investors, from commercial banks to fintech companies. At the same time, for many of the impact investing vehicles created in the last decade, their investment horizons are coming to a close. We can expect to see more exits and more variety in those exits. Until now, most of the inclusive finance impact investment exits have involved DFIs or microfinance networks selling to MIVs or vice versa. Suddenly, other types of players are coming in, including those with little history with microfinance, and this may rattle many participants in the industry. This trend will increase, and there is nothing inherently wrong with that. We might even see an influx of players who are better able to eliminate financial exclusion! What is potentially wrong would be misplaced motivation. “The fundamental things apply”: if you exit to a buyer that has a questionable history, you are not acting responsibly.
<h3>Greater industry action</h3>
More attention needs to be brought to this subject. Organizations like the <a href="http://fiecouncil.com/">Financial Inclusion Equity Council (FIEC)</a> work continuously to facilitate discussion in this space and move the industry forward. A few years ago CFI and CGAP produced a paper, <a href="http://www.cgap.org/publications/art-responsible-exit-microfinance-equity-sales">The Art of the Responsible Exit in Microfinance Equity Sales</a>. We’re seeing groups like the European Microfinance Platform regularly convening conversations at seminars and events. These are important contributions, but much more attention needs to be paid among investors and industry players. Surely some exiting investors are simply happy that someone is buying, and they aren’t necessarily thinking about the consequences.

And for those who are thinking about the consequences and considering the best path forward, pragmatism is key. Investors have responsibilities to their own funders, both financial responsibilities and responsibilities to uphold any social mission that attracted those funders. They should not sell to the high-priced but questionable offer, and neither should they opt for capital-starved social investors. Perhaps the pragmatic and social course is to work harder and find a buyer “in the middle”.

Have you read?

<a href="https://cfi-blog.org/2013/03/20/four-challenges-for-impact-investing/" target="_blank" rel="noopener">Four Challenges for Impact Investing</a>

<a href="https://cfi-blog.org/2015/03/03/what-impact-investors-could-learn-from-microfinance/">What Impact Investors Could Learn from Microfinance</a>

<a href="https://cfi-blog.org/2016/01/27/the-impact-investing-landscape-in-west-africa/">The Impact Investing Landscape in West Africa</a>

Alex Silva

Latest by Alex Silva

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