Shradha worked with CFI from 2020 to 2022 leading research and insights on projects across CFI’s portfolio. In 2022, Shradha transitioned to a role in Accion&#8217;s finance department. Previously, Shradha was a budget and strategic planning manager with Accion, where she worked closely with senior management in stewarding Accion’s resources. Before Accion, she worked with a clean energy investor supporting their investment and portfolio management activities.
Shradha holds an MBA in finance from Bentley University. She speaks English and Hindi.

Former Research Director

Shradha Modi

How businesses navigated the challenges of COVID-19 and what we can do to help support their resilience.

Report

The use of digital payments surged during the pandemic, forcing many MSMEs to turn to a range of digital tools for their businesses, including payments via mobile money, marketing products on social media, and selling on e-commerce platforms. Digital tools helped many MSMEs address challenges in the wake of the pandemic and ongoing economic conditions, but digital adoption among MSMEs has been slow and uneven.

In this report, CFI explores how MSMEs used digital products during the pandemic, what barriers they faced with digital adoption, and what can be done to support the growth of MSMEs in the digital economy.

Digital Adoption of MSMEs During COVID-19

And as climate change makes the business models of some MSMEs no longer viable, financial services will be necessary to help business owners transition to new business models and livelihoods.
Forward-looking recommendations and actions should also consider that MSMEs are still struggling to recover from the COVID-19 crisis. There are lessons to learn about supporting MSMEs in preparing for the next crisis, and we must keep current struggles in mind while continuing to listen to their needs.

CFI’s research on MSMEs in emerging markets revealed 3 key takeaways that can help us better support MSMEs in building resilience.

Blog Post

Imagine a woman, Rita, who owns a food shop in Delhi. She lives in a small home with her husband and two children. The incomes from her business and her husband’s job cover the rent for their small apartment, household essentials, and school expenses, while also allowing them to send money to their family in the village and save for future expenses. Climate change has intensified the monsoon season in the past few years, and two years ago, a record-setting flood caused damage to Rita’s shop and all her business supplies. She has been working hard to rebuild her business, but a lack of capital has prevented her from operating at full capacity. <a href="https://www.washingtonpost.com/weather/2022/04/28/india-pakistan-heat-wave-records/" target="_blank" rel="noopener noreferrer">An intense heatwave now is affecting Delhi</a> and posing new hurdles to Rita’s business. 

Rita’s situation is not unique and many small businesses around the world face similar challenges. Climate change disproportionately impacts low-income and vulnerable people and climate-related shocks are drastically altering the livelihoods and living conditions for many. Globally, MSMEs make up over <a href="https://www.un.org/en/observances/micro-small-medium-businesses-day" target="_blank" rel="noopener noreferrer">90 percent of firms and provide 70 percent of employment</a>, and many are struggling with intensifying climate risks. As part of CFI’s <a href="https://www.centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact">longitudinal</a> research on the impact of COVID-19 on MSMEs in four different markets (Colombia, India, Indonesia, and Nigeria), we conducted a dipstick survey in 2021 to understand the consequences of climate shocks on MSMEs and the ways they are preparing to adapt to climate change.

Our research revealed three takeaways:
<h1>1  Climate Change is Impacting MSMEs and Hindering Their Recovery from COVID-19 Financial Impacts </h1>
Thirty-two percent of survey respondents reported that at least one climate shock – including flooding, sea level increase, heat wave, or drought – has impacted their business within the past five years. The types of climate shocks and their impact varied by country (see graph below).

<img class="size-full wp-image-44468 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/05/MSME-Climate-Graph1-1.png" alt="" width="2696" height="1308" />

While climate change impacts all people, women bear the brunt of the escalating climate risks. <a href="https://www.unwomen.org/en/news/in-focus/csw61/women-in-informal-economy" target="_blank" rel="noopener noreferrer">Women make up much of the informal economy</a> and their <a href="https://www.un.org/en/chronicle/article/womenin-shadow-climate-change" target="_blank" rel="noopener noreferrer">livelihoods are more likely to be impacted by climate risks</a>. CFI’s data indicates that women show a higher level of concern than men that climate change will affect their ability to operate their business and maintain their quality of life – 61 percent of women business owners were concerned about this compared to 52 percent of men.

Additionally, among the MSME respondents who had been impacted by a climate shock, <a href="https://www.centerforfinancialinclusion.org/the-precarious-state-of-msmes-understanding-the-impact-of-covid-19-and-opportunities-to-support-their-recovery">recovery from the financial impacts of the pandemic appears to be slower</a> than those who had not faced a climate-related shock (see graph below).

<img class="size-full wp-image-44469 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/05/MSME-Climate-Graph2.png" alt="" width="2766" height="1394" />
<h1>2  MSMEs Are Unable to Actively Prepare for the Accelerated Effects of Climate Change</h1>
Extreme climate events are becoming a more frequent phenomenon around the world. And for MSME owners with limited resources and time, preparing for climate change can be a challenge. Across all survey respondents, only 47 percent reported that they had an operating plan in place for business continuity (see graph below).

Sixty-two percent said they are confident in their ability to get a loan to rebuild their business following a climate disaster, and 53 percent said they had friends and family who could provide financial support in the event of a climate shock. During the COVID-19 crisis, help from friends and family was essential to the ability of MSMEs to survive. In the immediate aftermath of the pandemic, 44 percent of business owners in Colombia said they borrowed from friends and family compared to 11 percent who borrowed from a financial service provider. This demonstrates the importance of both formal financial services and informal networks in supporting climate resilience.

Only 23 percent reported that they had an insurance plan for climate disasters, and 38 percent said they had savings set aside to cope with climate disasters. While there were variations among countries in the strategies employed to combat a future climate shock, data suggests that MSME owners are more likely to rely on reactionary strategies than preventative ones.

<img class="wp-image-44470 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/05/MSME-Climate-Graph3.png" alt="" width="1022" height="881" />
<h1>3  MSMEs Need Support From Governments and Financial Services Providers to Adapt Their Businesses to Increasing Climate Risks</h1>
<a href="https://www.centerforfinancialinclusion.org/green-inclusive-finance-a-framework-for-understanding-how-financial-services-can-help-low-income-people-weather-climate-related-risks">CFI’s green inclusive finance framework</a> outlines four pathways – Mitigation, Resilience, Adaptation, and Transition – that help to understand how inclusive finance can support low-income and vulnerable populations prepare for climate-related impacts. Financial services can help MSMEs build resiliency and respond to the disastrous effects of climate change. For example, access to savings products and emergency loans can help MSME owners carry out cost-intensive efforts to rebuild their business after an extreme weather event.

Our survey data indicates that MSMEs need support from governments and financial services providers to build resilience and adapt to climate change. In some cases, such as insurance products, governments and financial service providers will need to work together to ensure MSMEs have access to appropriate and affordable financial services.

A significant share of MSME owners who experienced a climate shock faced damage to their shop or inventory (see graph below). To manage the impacts of climate disasters on their business operations, MSMEs need financing to make upgrades to their business location or inventory storage. Governments can provide grants or low-cost loans to MSMEs for making upgrades that would help avoid more drastic consequences of a climate emergency.

Climate Change Adds to Challenges for MSMEs Recovering from COVID: Three Takeaways from CFI Surveys

Lucciana Alvarez Ruiz

Throughout March – in honor of International Women’s Day and Women’s History Month – CFI is shedding light on the barriers that disproportionately impact women. CFI applies a gender lens across all its research, working to understand and address issues around women’s financial inclusion and economic empowerment.

As we look back at the last two years of the pandemic, the disproportionate impact on women is striking. Because of COVID-19, many women left the workforce and shut down their businesses. As schools and care facilities closed, women took on additional responsibilities related to childcare, eldercare, and household chores. The World Economic Forum estimated that the global gender gap – as measured by the gap in health, education, economic and political attainments – <a href="https://www.weforum.org/press/2021/03/pandemic-pushes-back-gender-parity-by-a-generation-report-finds/" target="_blank" rel="noopener noreferrer">increased by 36 years in 2021</a> as the burdens of the pandemic took a toll on women.
<blockquote class="pullquote--right">We must first understand how women were impacted by the pandemic to support a gender-inclusive recovery.</blockquote>
Now, as we rebuild from the effects of COVID-19, we must remember that women are not a homogenous group. Women MSME owners have unique needs when it comes to financial products and services. We have a unique opportunity to build more equitable systems, but to do so, we must first understand how women were impacted by the pandemic to support a gender-inclusive recovery.

<a href="https://www.centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact">Data from CFI's longitudinal surveys</a> in Colombia, India, Indonesia, and Nigeria, illustrates how women-owned businesses have struggled to recover and rebuild – even more so when compared to those owned by men. This research is part of our partnership with the <a href="https://www.mastercardcenter.org/" target="_blank" rel="noopener noreferrer">Mastercard Center for Inclusive Growth</a>.

From our data, we see the following three trends:
<h1>1   Women-Owned Businesses Were Disproportionately Affected</h1>
<a href="https://www.centerforfinancialinclusion.org/the-precarious-state-of-msmes-understanding-the-impact-of-covid-19-and-opportunities-to-support-their-recovery">MSMEs in emerging markets</a> – particularly micro and small businesses – bore the brunt of the economic slowdown. Many businesses struggled to keep their doors open as consumer spending declined. Reduced business income severely impacted many business owners' household finances and dramatically affected their ability to respond to challenges. But the economic fallout was particularly drastic for women business owners.

In the first wave of surveys CFI conducted in the early months of the pandemic, 18 percent of women reported having closed their businesses, 6 percentage points higher than men. While both men and women respondents reported a decline in business profits and an inability to cover business expenses using revenue at similar rates in wave 1, in the latest survey conducted a year after the first wave, women reported declining profits and inability to cover expenses at a higher rate than men, highlighting the uneven nature of the recovery (see “Profit Trends” table).

<img class="wp-image-44192 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/03/Picture1.png" alt="" width="1064" height="659" />

Women business owners also experienced a greater impact on household resilience and higher rates of food insecurity than their male counterparts. Twenty percent of women business owners said someone in their household had eaten fewer or smaller meals compared to 13 percent of men business owners, according to data collected in the second half of 2021.
<h1>2   Women Owners Are Less Likely to Transact Digitally</h1>
Digital platforms allowed many business owners to continue operating during COVID-19 and enabled them to reach new customers despite movement restrictions. Data from CFI’s surveys shows that the use of mobile money was an effective tool in supporting the resilience of many MSME businesses. From our data, business owners who used mobile money were more likely to cover business expenses with revenue and to report increased profit levels.

But our data also shows that women are less likely to conduct financial transactions via a mobile phone, use mobile money, or own a mobile money account (see “Mobile Money by Gender”). Women are also less likely to know the benefits of mobile money or to know what a mobile money account is (see “Reasons for Not Owning a Mobile Money Account”).

&nbsp;

<img class="wp-image-44193 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/03/Picture3.png" alt="" width="921" height="506" />

&nbsp;

<img class="wp-image-44194 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/03/Picture4.png" alt="" width="941" height="678" />

&nbsp;

Globally, a significant gender gap in smartphone ownership and access to mobile internet remains. In 2020, <a href="https://www.gsma.com/r/wp-content/uploads/2021/07/The-Mobile-Gender-Gap-Report-2021.pdf" target="_blank" rel="noopener noreferrer">women were 7 percent less likely to own a mobile phone and 15 percent less likely to use mobile internet than men</a>. CFI's sample has little to no gender gap in smartphone ownership, yet there is a substantial gap in the use of mobile money between men and women, indicating that there may be other barriers to digital adoption beyond access.

One of the barriers for lower levels of digital adoption among women could be a lack of knowledge of digital tools and the <a href="https://www.centerforfinancialinclusion.org/if-you-see-something-say-something">available protection mechanisms</a> for digital transactions. Our survey data suggests that women were less likely to know the fees associated with mobile money accounts and less likely to understand how to report suspicious activity using mobile money.
<h1>3   Women Saved More, But Informally</h1>
We also saw a difference among men and women in their level of trust in formal financial institutions. A higher proportion of women reported saving during the pandemic (see “Savings Activity”) but preferred to save via informal means over formal bank or mobile money accounts (see “Savings Instruments”) as compared to men. Additionally, women revealed a high level of concern with financial institutions collecting their personal data. These findings support the hypothesis that the lack of trust in formal institutions and data privacy concerns can hinder the adoption of formal financial services and digital tools among women.

<img class="size-full wp-image-44236 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/03/MSME-graphs-5-and-6.png" alt="" width="1500" height="872" />
<h1>Pushing for Gender Inclusive Recovery</h1>
As we prepare for the post-pandemic world, we have an opportunity to build more equitable products, services, and systems. Donors and market facilitators must invest in building women's financial health and digital skills. Governments must prioritize policies related to childcare and education that support women’s participation in the economy. Financial service providers and digital platforms must integrate gender norms into their products and services. A gender-inclusive recovery can finally bring about a sustainable change by eliminating barriers to women's empowerment.

An Equitable Rebuilding: Learnings from Women-Owned MSMEs

Katia Huayta Zapata

Lauren Braniff

Aeriel Emig

What's the scale of the pandemic's impact and how are MSMEs coping? Dive deeper into CFI’s data dashboards and analysis on Nigeria, Indonesia, Columbia, and India.

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

Brief

The Precarious State of MSMEs: Understanding the Impact of COVID-19  and Opportunities to Support their Recovery

The CFI Advisory Council member and MetLife Foundation leader also comments on CFI’s new strategic pillars for financial inclusion.

Evelyn Stark is assistant vice president at MetLife Foundation and a CFI Advisory Council Member. She leads MetLife Foundation’s financial health strategy which seeks to improve outcomes for low- and moderate-income people by advancing the use of high-quality financial services. Before joining MetLife Foundation, she held leadership roles at the Gates Foundation, USAID, and the World Bank. Before that, she spent several years implementing financial inclusion programs in East Africa.
<h2>Responding to COVID-19</h2>
When COVID-19 emerged in early 2020, the foundation worked quickly to commit $25 million to support partners with urgent needs and longer-term relief efforts. For projects such as <a href="https://bfaglobal.com/finnsalud/insights/covid-19-y-las-microempresas-mexicanas/" target="_blank" rel="noopener noreferrer">FinnSalud</a>, this meant a shift in research focus to understanding how people were coping as the crisis deepened and became the new normal. For financial institutions, such as credit unions, this meant stress testing and managing risks to survive the crisis. And for the foundation’s early-stage fintech partners, the focus was on helping manage their funds and hold onto savings, and pivoting their products and services to meet changing needs and the inability to meet customers in-person.

A common trend for many of the foundation’s partners was a shift to digital. Stark credits the existing partnerships in the industry between microfinance institutions and credit unions, for instance, and nonprofit partners such as Accion and BFA, in helping institutions adapt. These trusted partnerships fostered knowledge sharing and allowed institutions to learn from others in the industry. Many funders, like MetLife Foundation, also worked closely with grant partners to adjust grant agreements to determine how funds could be most effective in the changed context.

“The pandemic demystified things for microfinance institutions and traditional banks that have been cautious to get on board with digital. Boards and senior management were already thinking about digital, but COVID brought with it a sense of urgency,” Stark notes.
<h2>Behavioral Science and the Promise of Digital</h2>
Stark was an early proponent of behavioral science in financial health and believes that understanding how people make decisions is key to improving outcomes. One of the Foundation’s current partners, <a href="https://advanced-hindsight.com/commoncents-lab/" target="_blank" rel="noopener noreferrer">Common Cents Lab</a> at Duke University, leverages behavioral science to increase the financial well-being of low-income people in the US, Mexico, China, and Turkey. Common Cents Lab has been working closely with fintechs, nonprofits, and credit unions to design innovative products that incorporate behavioral insights to improve financial health.

The combination of behavioral science, fintech, and digital services has the potential to be highly effective at improving the financial health of low-income consumers. Keeping the customer at the center is essential to make sure that the industry doesn’t get caught up in the "cool stuff” that technology can deliver, but remains focused on what low-income people want and need to improve their financial lives, Stark points out.
<blockquote class="pullquote--right">Together, behavioral science, fintech, and digital services can improve the financial health of low-income consumers.</blockquote>
“We need to think of behavioral science as much more than automation or nudging. Identifying the real issues that make saving money difficult, or that make digital funds susceptible to less optimal spending decisions, is how we’ll be able to create the right fintech environment to encourage the behaviors that enable individuals and families to succeed in reaching their financial goals.”

Likewise, Stark is concerned about the over-hype of what data can deliver, especially where most transactions still happen in cash. The data available to the institutions about their customers is often only a sliver of their financial information; cash transactions and transactions from other institutions are not visible.

“We have a long way to go in making the data useful for our customers while making sure that we protect customers now.”
<h2>Financial Health Through the Lens of Jobs</h2>
Income is a significant driver of financial health; without living wages, the ability to save, repay debts, and plan for the future is much more difficult. Stark is working with the foundation’s grant partners, who are focused on jobs and employment to embed financial services at the source of income.

“Whether people earn their jobs through formal employment or through gig work, there are opportunities to leverage the ‘paycheck’ (even if there is no actual paycheck). Opportunities to designate income – before or when it’s received – toward emergency, education or retirement savings, to debt repayment, or to purchase insurance or other benefits – enables people to take more control over their financial health.”
<blockquote class="pullquote--left">Working with grant partners in the jobs and workforce space has helped the foundation focus on financial lives of different kinds of workers.</blockquote>
Several of the foundation’s partners focused on tech jobs. Whether they are based in Chile or New York City, tech jobs offer decent wages and don’t necessarily require a college degree. Partners have historically focused on the hard and soft skills, and on working with employers to ensure a hiring pipeline, but they hadn’t considered the students’ financial health. After the partners started talking to the students about their financial health using structured interviews, they realized not only how indebted many of their young people were when they entered the classes, but also that they did not have plans for how they would manage their significantly larger incomes once they obtained full-time tech work. With that knowledge, these partners are incorporating planning and money management discussions with their students, and with the employers who will hire them.

“Working with grant partners in the jobs and workforce space has really helped us -- and them -- focus on the financial lives of different kinds of workers, and seek to tailor financial solutions for them.”
<h2>Looking Ahead: CFI’s New Strategy</h2>
The COVID crisis has prompted Stark to think about how we create solutions for bigger problems in our markets – the income gap, food insecurity, education, and health care. Being truly cross-sectoral in focus is essential.

Stark believes CFI’s new strategy is right for the moment. CFI’s newer focus areas -- <a href="https://centerforfinancialinclusion.org/about/what-we-do/financial-inclusion-week/financial-services-for-mitigating-and-adapting-to-climate-risk/" target="_blank" rel="noopener noreferrer">climate change</a>, <a href="https://centerforfinancialinclusion.org/rethinking-financial-inclusion-at-the-data-margins/" target="_blank" rel="noopener noreferrer">data for inclusive finance</a>, and <a href="https://centerforfinancialinclusion.org/about/what-we-do/womens-financial-inclusion/" target="_blank" rel="noopener noreferrer">women’s financial inclusion</a> – will help inform how the inclusive finance community navigates the post-pandemic world.

“COVID has made all of us even more aware that there are roles for players in the public and private sectors and for nonprofits, and there are benefits to forging partnerships. COVID has made it even more clear that there are systemic issues that cannot be resolved by a single product and require systemic change.”

Behavioral Science for Financial Health in a Digital World: An Interview With Evelyn Stark

<h2>Client (and Lender) Centricity</h2>
<img class="wp-image-40562 alignright" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-3-2-237x300.png" alt="" width="237" height="300" srcset="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-3-2-237x300.png 237w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-3-2-768x973.png 768w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-3-2-809x1024.png 809w" sizes="(max-width: 237px) 100vw, 237px" />Prior to the crisis, Vitas Palestine had the lowest PAR 30 in the Palestinian microfinance sector, partly because of its attention to preventing client over-indebtedness. Vitas provided loans for housing, businesses, and consumption. For all the product offerings, the company&#8217;s credit analysis process ensured that the borrower had a margin to make a loan payment, even if their income or sales declined temporarily. After disruptive violence in the territory, loan officers and supervisors would contact each client, find out if they needed any additional support, and referred them to NGOs or other local programs, if required. The staff avoided asking about payments in the first call but assessed their situation during their conversations and segmented the clients based on the ability to pay. In some cases, Vitas would enter short-term informal arrangements that resolved loan delinquency without having to take their clients through the court system. Sisalem and his team relied on the same client-centric approach while dealing with non-payments during the salary crisis.
In addition to client centricity, Vitas had built strong relationships with its lenders over the years. Sisalem and his management team prioritized communicating early and often with the investors to keep them updated on the situation. Many of Vitas&#8217; existing lenders had been with the company through many crises over the years, and the company&#8217;s proactive communication gave them the confidence to agree to waivers in the event of breaches of covenants. Vitas took a long-term view and continued to forge lender relationships during the crisis, anticipating the demand for loans once the economic conditions improved.
When the board met again in September 2018, they reviewed the measures implemented since the last meeting. As predicted, the portfolio quality had deteriorated, with PAR 30 at 9.3 percent in July. The PAR 30 for the portfolio in Gaza had risen to 27.3 percent (see graph below). There was a significant drop in loan disbursements in Gaza, but the higher demand in West Bank in 2018 had offset the lower disbursements in Gaza (see table below). After reviewing the results, the board asked the management to continue its focus on portfolio quality, especially in Gaza.
<h2><img class="size-full wp-image-40563 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/vitas-palestine-par30portfolio.png" alt="vitas palestine par 30 portfolio table" width="766" height="493" srcset="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/vitas-palestine-par30portfolio.png 766w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/vitas-palestine-par30portfolio-300x193.png 300w" sizes="(max-width: 766px) 100vw, 766px" /></h2>
<h2>Digital Readiness</h2>
The board also recognized that the company needed to refocus its digital transformation efforts to effectively serve its clients after the crisis. The Vitas Group began digital transformation efforts in 2018, and as part of the network-wide initiative, Vitas Palestine underwent a digital transformation readiness exercise. The exercise highlighted the opportunity to improve the utilization of its assets and increase market share by leveraging data and technology. Vitas Palestine&#8217;s operations had traditionally been high touch, but consumer behavior was changing, and about <a href="https://databank.worldbank.org/Palestine---Internet-Access/id/9bb3ec63" target="_blank" rel="noopener">65 percent</a> of Palestinians used the internet in 2018. The company had a strong social media presence, with over 250,000 followers on Facebook, but the data was being analyzed manually for lead generation. Sisalem and his team bought into the digital strategy vision and saw it as an opportunity to rejuvenate the growth of its portfolio. A report published in 2017 estimated the microfinance market in Palestine to have between 245,000 and 345,000 unserved clients with a potential market between $630 million and $900 million. <img class="alignright wp-image-40564" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-6-2-1024x611.png" alt="line graph" width="499" height="298" srcset="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-6-2-1024x611.png 1024w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-6-2-300x179.png 300w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-6-2-768x458.png 768w" sizes="(max-width: 499px) 100vw, 499px" />The company&#8217;s digital readiness assessment, and subsequent strategic plan, would provide a path to reaching the underserved market while lowering cost.
Following the digital readiness assessment, the first set of initiatives aimed to modernize Vitas Palestine&#8217;s existing processes to increase efficiency and improve customer experience. The Vitas Group leveraged partnerships to reposition its technology architecture. The Vitas Group also planned to establish Vitas Lab to manage innovative digital projects at all its subsidiaries and encourage internal knowledge sharing. Vitas Palestine relied on these digital transformation efforts to emerge stronger after the crisis.
<blockquote class="pullquote--left">Sisalem and his team bought into the digital strategy vision and saw it as an opportunity to rejuvenate growth.</blockquote>
In March 2019, in order to take a stand against the deductions carried out by Israel, the PA refused to accept the transfer of tax revenues. The absence of the tax revenue caused severe strain on the economy until September 2019, when the PA started accepting the revenues again. During that period, the local banks in Palestine had to lend to the government, prompting Vitas Palestine to look at international lenders. Vitas leveraged its long-standing history of working in the region to cultivate new relationships with international lenders. In 2019, Vitas Palestine faced a temporary decline in collections. Still, its early focus on portfolio quality and client relationships and a conservative approach to loan loss provisioning, helped the company maintain a strong position in the microfinance sector.
Vitas made numerous strides in its digitalization journey that allowed the company to improve operations in 2019. In April 2019, Vitas Palestine introduced simple digital loans through the Facebook interface for faster lending decisions and a better customer experience. Although it was not an end-to-end digital lending product, because Palestine does not allow electronic signatures, Vitas had taken a significant step towards integrating digital channels into its product offering. Vitas Group hired a chief digital officer to accelerate the implementation of its digital strategy in November 2019. Later in December 2019, Vitas Palestine introduced an app for clients to apply for loans, and track their loan status and payments. By the end of 2019, Vitas Palestine had completed the digital transformation road map by digitizing internal processes and offering digital products.
<blockquote class="pullquote--left">By the end of 2019, Vitas Palestine had completed the digital transformation road map by digitizing internal processes and offering digital products.</blockquote>
By the end of 2018, Vitas managed to improve the PAR 30 to 3.1 percent (9.5 percent in Gaza), with 9.3 percent rescheduled and 0.71 percent of the portfolio written off (see graph below). The improvement in portfolio quality was encouraging, but Sisalem and his management team remained wary of the possibility of the economic crisis seeping into the West Bank following the deductions in tax revenues transferred from Israel to the PA. The loan portfolio growth slowed down in 2018 and 2019, while Vitas invested in building strong internal structures. The company&#8217;s outstanding loan portfolio shrunk slightly in 2019 to $51.8 million from the $53.5 million at the end of 2018 due to the economic crisis. Even though the outstanding portfolio shrunk in 2019, the number of active clients grew by 6 percent due to the shift of the disbursement strategy towards micro businesses. With its continued efforts to manage delinquency, Vitas Palestine ended 2019 with a strong PAR 30 of 3.1 percent.
<img class="aligncenter wp-image-40566" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-7-2-1024x410.png" alt="bar graph" width="800" height="320" srcset="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-7-2-1024x410.png 1024w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-7-2-300x120.png 300w, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-7-2-768x307.png 768w" sizes="(max-width: 800px) 100vw, 800px" />
In 2020, Palestine&#8217;s economic crisis was far from over, but Vitas Palestine has managed to take control of its portfolio and has built a robust digital infrastructure. Vitas Palestine&#8217;s resiliency, digital strategy, and improved portfolio quality have allowed the company to secure new lending relationships with development financial institutions, FMO and Proparco. Sisalem and Vitas remain committed to serving their clients in Palestine, even when the future remains uncertain.
What are some of the dos and don’ts and key success factors that the microfinance sector can learn from the Vitas case? CFI’s forthcoming report, Weathering the Storm II, will draw on lessons from Vitas and cases from microfinance institutions in four other markets – <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-viator-azerbaijan/" target="_blank" rel="noopener noreferrer">Azerbaijan</a>, Bosnia, <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-spandana/" target="_blank" rel="noopener">India</a> and Nicaragua. See the original Weathering the Storm report from 2011 <a href="https://centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there/" target="_blank" rel="noopener noreferrer">here</a>.

Past crises have taught the microfinance sector a lot about weathering storms. Microfinance institutions (MFIs) are once again facing challenging times. This case study is part of a series that CFI, in partnership with the European Microfinance Platform (e-MFP) and the Mastercard Center for Inclusive Growth, is publishing to (re)visit tales of tough times and resiliency in five markets – <a href="https://www.centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-viator-azerbaijan/" target="_blank" rel="noopener noreferrer">Azerbaijan</a>, Bosnia and Herzegovina, <a href="https://www.centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-spandana/" target="_blank" rel="noopener noreferrer">India</a>, Nicaragua and Palestine – and discuss how MFIs, with the help of their investors and other stakeholders, emerged and thrived. The lessons learned from these cases will be compiled and examined in a forthcoming report, Weathering the Storm II, a follow up to the <a href="https://www.centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there/" target="_blank" rel="noopener noreferrer">first edition</a> published in the aftermath of the global financial crisis a decade ago. The hope is that these lessons will be applicable to not only the COVID-19 response, but to future crisis responses as well.

In the spring of 2018, Alaa Sisalem, the general manager of Vitas Palestine, was reviewing the materials prepared for an upcoming board meeting. In the first quarter of 2018, Vitas Palestine – part of <a href="https://www.vitasgroup.com/" target="_blank" rel="noopener noreferrer">Vitas Group</a>, a holding company that operates non-bank financial services companies in the Middle East and Eastern Europe – achieved 95 percent of projected portfolio growth while maintaining a PAR 30 (loans in arrears for over 30 days) of 2.1 percent. As Sisalem looked through the growth projections for the year, he glanced outside his window at the bustling streets of Ramallah. He thought about Vitas Palestine's clients and their ability to pay in the current economic conditions, and he realized that while the financials didn't show it yet, a major storm was coming.

A few weeks earlier, in April 2018, the salaries for about 38,000 civil servants in the Gaza Strip were delayed. The following month, the Palestinian Authority (PA) <a href="https://www.reuters.com/article/us-palestinians-gaza-salaries/anger-as-palestinian-authority-cuts-gaza-salaries-and-pays-late-idUSKBN1I41LM" target="_blank" rel="noopener noreferrer">cut staff salaries</a> by 20 percent. This marked the beginning of a crisis for Vitas Palestine. The civil servant salaries were unpaid or delayed multiple times, especially in Gaza, which took a toll on the local economy. Gaza's economy was already under severe stress because of movement restrictions brought about by the conflict between Hamas and Israel. Hamas gained control of Gaza in the 2006 elections, but the PA continued to administer payroll in the region, causing tensions between Hamas and the PA.<img class="alignright wp-image-40560" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-1-4-1024x678.png" alt="chart " width="400" height="265" />

Civil servant salaries significantly impact the Palestinian economy because of the low rates of private investment and a low labor force participation rate of <a href="https://databank.worldbank.org/Palestine---Labor-Force/id/ecae3350" target="_blank" rel="noopener noreferrer">44 percent</a>. The territory has one of the highest unemployment rates in the world, with a quarter of the working-age population unemployed. The situation is even more dire in Gaza, which accounted for 29 percent of Vitas' 2018 gross loan portfolio and has an unemployment rate close to <a href="https://databank.worldbank.org/Unemployment/id/2a6c0966" target="_blank" rel="noopener noreferrer">45 percent</a>. In Gaza, 37 percent of the employed individuals worked in the public sector, and therefore, interruptions to civil servant salaries tend to have a cascading effect on consumer spending and the local economy.

The West Bank economy is more diversified than Gaza, with <a href="http://www.pcbs.gov.ps/pcbs_2012/Publications.aspx" target="_blank" rel="noopener noreferrer">16 percent</a> of all employed individuals working in the public sector. Yet, there were concerns that the crisis would seep into the West Bank after the Israeli government passed a law in 2018 that allowed unilateral deductions from the tax revenues it transfers to the PA. The deductions are equivalent to the amount paid by the PA to families of Palestinians killed or put in jail due to the conflict with Israel (about $12 million per month). The tax revenues transferred from Israel represent more than 60 percent of PA's total revenues, and the deductions would further strain PA's budget.
<h2>The Board Moves to Head Off Crisis</h2>
Vitas Palestine began in the early years of the microfinance sector as a USAID project. The incorporation of Vitas Palestine as a for-profit company in 2014 made it easier for the company to borrow from local and international lenders. This ease of access to funding contributed to the rapid growth of Vitas' loan portfolio (see graph below).

<img class="wp-image-40561 alignleft" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Vitas-Chart-2-2-1024x487.png" alt="bar graph" width="600" height="285" />

But when the Vitas Palestine's board met in May 2018, the region's worsening economic conditions dominated their discussion. Following the salary interruptions in early 2018, Vitas Palestine began to experience declining portfolio quality, with a 10 percent drop in the collection rate, resulting in a PAR 30 of 6 percent for the total portfolio in May, and a PAR 30 of 16 percent in Gaza. This was a significant increase from the December 2017 PAR 30 of 1.32 percent. Vitas Palestine had a strong debt to equity ratio of 1.81 at the end of 2017, but in 2018, the declining portfolio quality led to a breach of delinquency covenants.

The board and the management agreed that Vitas needed to prepare for further challenges due to the political instability. After deliberations with management, the Vitas board advised against aggressive growth targets and counseled the management to prioritize three areas: managing liquidity, improving portfolio quality, and controlling operational costs.
<blockquote class="pullquote--right">Managing liquidity, improving portfolio quality, and controlling operational costs were three priorities for the board.</blockquote>
Sisalem had been through numerous crises at the company, ever since CHF Ryada, Vitas Palestine's predecessor, disbursed its first housing loan in 1995. As Sisalem was formulating the plan of action to tackle the salary crisis, he knew from experience that maintaining strong relationships with clients, investors, and staff would be crucial to Vitas' survival. The management team at Vitas ensured open communication with its staff and investors. The management also recognized that the front-line staff plays an essential role in deepening client relationships and continued its investment in client relationship officer training to prepare staff to handle difficult conversations with clients.

In order to control operational costs, the management team performed a detailed analysis of its expenses and identified ways to optimize operations. Their analysis showed that there was sufficient liquidity to tackle the next six to nine months without exploring drastic measures to reduce costs. Further, the loan officers' incentives were based in part on portfolio quality, and the increase in PAR 30 during the crisis led to lower incentives paid by the company. This variable component of the compensation structure led to lower staffing expenses and aided the management efforts to lower costs.

Shradha Modi

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