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The European Investment Bank Group, which includes the <a href="https://www.eib.org/en/" target="_blank" rel="noopener noreferrer">European Investment Bank</a> (EIB) -- aka “The EU Bank” -- and the <a href="https://www.eif.org/" target="_blank" rel="noopener noreferrer">European Investment Fund</a> (EIF), promotes development in Europe and supports its policies in more than 140 countries outside the continent. Shortly after the pandemic was declared, the EIB Group <a href="https://www.eib.org/en/press/all/2020-126-eib-board-approves-eur-25-billion-pan-european-guarantee-fund-to-respond-to-covid-19-crisis.htm" target="_blank" rel="noopener noreferrer">established</a> the 25 billion euro Pan-European Guarantee Fund, primarily for SMEs. Outside the eurozone, the EIB has set aside up to 6.7 billion euros to <a href="https://www.eib.org/en/about/initiatives/covid-19-response/index.htm" target="_blank" rel="noopener noreferrer">support health and private sector investment</a> in more than 100 countries, with a focus on Africa, Asia, Latin America and EU neighbors in the MENA region and Eastern Europe.

EIF has been involved in the European microfinance sector since 2000, providing funding (equity, quasi-equity and loans) and portfolio guarantees to a broad range of financial intermediaries, under various programs, aiming to make microfinance a fully-fledged segment of the European financial sector.

To gain insights into how the organization is supporting financial inclusion in the COVID era, CFI sat down with Cristina Dumitrescu, senior investment manager at the EIF’s inclusive finance division and Olivier Edelman, head of the EIB’s microfinance unit, to discuss support priorities during the pandemic, short and longer-term risks, instruments deployed, and what the inclusive finance community can do to support EIB Group’s priorities.
<h3><a href="https://www.centerforfinancialinclusion.org/how-should-investors-coordinate-when-time-is-of-the-essence" target="_blank" rel="noopener noreferrer">CFI</a>, the <a href="https://www.centerforfinancialinclusion.org/microfinance-coalition-call-to-action-for-investors" target="_blank" rel="noopener noreferrer">Microfinance Coalition</a> and others have framed the COVID-19 investor response in terms of short and medium-term needs. How is EIB supporting microfinance institutions now, and what is coming further down the road?</h3>
The EIB Group immediately reacted to the economic impact of the coronavirus crisis by setting up specific measures to support its clients, including MFIs. The first and immediate need from the sector was liquidity. Lockdowns and regulatory moratoriums on loan repayments, together with a drop in business activity, were expected to put rapid and serious constraints on MFIs’ liquidity position.

To ensure effective solutions to these needs, the EIB Group played its countercyclical role by supporting existing clients in getting funds disbursed quicker and obtaining top-ups on their existing loans. In addition, the EIB Group continued to appraise new operations, with existing but also new clients, almost as if we were in “normal” times.

Since the start of the COVID-19 crisis, the EIB Group has approved 20.1 billion euros to enable public and private partners around the world to better tackle health, social and economic challenges.
<h3>Liquidity has been talked about as the biggest immediate problem for many microfinance institutions. Is this what you are observing among your investees or are there more pressing risks? If liquidity is a major constraint, what is EIB doing with its investees to address this constraint (e.g. new lending, moratoriums on existing loans, etc.)?</h3>
Indeed, liquidity was immediately perceived as being the major constraint that MFIs would encounter as a first and pressing risk.

Eight months after the start of the crisis, many MFIs, in particular the largest ones, were able to handle the liquidity crisis by taking rapid and efficient actions. This was partially achieved by securing new credit lines from their microfinance financiers. However, MFIs also built up liquidity cushions by not renewing maturing loans granted to microentrepreneurs and by retaining cash from those repayments. This way, MFIs absorbed the first wave of the economic crisis; however, at the cost of a partial credit draw down. To respond to the overall liquidity crisis, the EIB Group stepped up to support existing and new clients in providing them financial support. However, EIB Group credit lines have to be allocated by MFIs to further finance microentrepreneurs.
<blockquote>To respond to the overall liquidity crisis, the EIB Group stepped up to support existing and new clients.</blockquote>
This way, we try to provide a countercyclical answer to the developing credit crunch that both microentrepreneurs and MFIs are facing.

Specifically in the EU and accession countries, by enhancing the technical parameters of the <a href="https://www.eif.org/what_we_do/microfinance/easi/easi-guarantee-instrument/index.htm" target="_blank" rel="noopener noreferrer">EaSI Guarantee Instrument</a>, financial intermediaries were incentivized to continue providing financing to microborrowers, microenterprises and social enterprises hit by the economic consequences of the pandemic.
<h3>Once the liquidity crisis is over its peak, what's next? Loan guarantees?</h3>
The overall economic situation is expected to translate to increased non-performing loan rates, delinquencies and, hence, future retained losses that will affect the capitalization of MFIs in the medium to long term; at the same time, liquidity shortage will remain a challenge. Therefore, financial solutions that maintain or restore the financial standing of MFIs, in particular their leverage and risk taking capacity, will be crucial going forward. These solutions might indeed come from loan guarantees, but also more traditional capital instruments as straight equity injections and subordinated loans. In addition to these financial solutions, redirecting the purpose of technical assistance facilities should also help MFIs increase their capacity to overcome the crisis. This may take many different forms depending on the countries, local context and the structure of our counterparts.
<h3>Besides direct investees, what other stakeholders has EIB engaged with in support of the microfinance industry? Are you engaging with MIVs, national associations, or any other industry stakeholders? What’s the nature of that engagement?</h3>
We always remain in contact with several microfinance stakeholders, in particular the European Commission and EU Member States, but also specialist funds, network associations and local authorities and associations. We listen to what they observe in the market and the associated needs on the ground. We also share our knowledge and views on the sector via working groups and information sharing session. The EIB Group is also participating in CGAP information sharing discussions.
<h3>The EIB has a broad geographical reach in its support of microfinance institutions, with a portfolio that is roughly split between overseas countries (Africa, the Caribbean and the Pacific) and EU/accession countries? Are there any specific countries or regions you are prioritizing in your COVID response?</h3>
The EIB Group indeed supports microfinance in a large number of countries, we are active in dozens of them around the world.
<blockquote class="pullquote--right">The EIF is on the frontline in the EU and accession countries, while the EIB focuses its actions on the MENA region and Africa.</blockquote>
Typically, for microfinance operations, the EIF is on the frontline in the EU and accession countries, while the EIB focuses its actions on the MENA region and Africa, the Caribbean, and the Pacific regions. Within these regions, there are no specific priorities other than concentrating our actions on providing support to poor microentrepreneurs to facilitate and improve their capacity to access financing. We try to support all countries equally, while taking into consideration local specificities and needs, which might differ, sometimes substantially.
<h3>With regards to the crisis at home, all 27 EU countries have been “invited” to contribute to the Pan-European Guarantee Fund (EGF), the centerpiece of your COVID-19 response, with member states’ shares of the 25 billion euros equal to their share of EIB capital. Can you clarify how that works in practice? Will support to MSMEs be delivered through MFIs and/or banks?</h3>
Through EGF, the EIB Group will deploy a number of equity, debt funds and guarantee products in cooperation with selected financial intermediaries, including MFIs, for the benefit of primarily SMEs but also mid-caps, large corporations, and public sector entities related to health across the EU. The objective of the EGF is to provide banks and national promotional institutions with guarantees and counter-guarantees to unlock lending to firms that are healthy but suffer from liquidity problems because of the fallout from COVID-19.
<h3>What are the main instruments that EIB is deploying in its work with MFIs and with other stakeholders that support the microfinance industry? Are you deploying any new instruments like blended finance vehicles, public-private-partnerships, etc.?</h3>
In principle, the EIB Group can offer a large set of products to MFIs. Investments in equity, typically operated via funds, aim at providing capital to MFIs and reaching the smaller and more risky institutions in need of funding. In addition, lending, often denominated in local currency, can be granted to larger MFIs in the region the EIB Group operates. Finally, loan portfolio guarantees can be deployed in order to support MFIs in financing more vulnerable groups of clients and hence further strengthen financial inclusion. While portfolio guarantee is a standard product for the EIF, the EIB intends to develop such a solution for its operations outside the EU in the near future.
<blockquote class="pullquote--left">Blending will remain a source of product development in the microfinance sector.</blockquote>
In addition, blending will remain a source of product development in the microfinance sector. Indeed, the combination of different sources and types of capital (i.e. from public donors to private investors) allows for provision of more customized solutions to the microfinance sector and generate double bottom line targets: financial and social impact. The EIB Group is already actively deploying such solutions, notably via layered funds. Other alternative uses of blended finance are constantly considered in order to further support the sector, which could take the form of loan portfolio guarantees.

A concrete example of blending instruments is the grant embedded in the EaSI Guarantee instrument, which covers the costs of the business development services offered by the MFI to a migrant or refugee entrepreneur.
<h3>Finally, how can the rest of us help? What can the inclusive finance community do to support the work of DFIs in research, for example, or in the <a href="https://centerforfinancialinclusion.org/how-should-investors-coordinate-when-time-is-of-the-essence/" target="_blank" rel="noopener noreferrer">coordination</a> of actors?</h3>
Communication and exchanges of knowledge and information is already quite strong in the microfinance community, which is well organized and able to coordinate among its various stakeholders. This has led to rapid actions, e.g. as shown by the <a href="http://www.incofin.com/wp-content/uploads/2020-04-24-MIV-Covid-19-coordination-MoU.pdf" target="_blank" rel="noopener noreferrer">memorandum of understanding</a> among MIVs. This is particularly true within each type of microfinance investor groups (e.g. MIVs, DFIs, private donors, etc.) and sometimes less across those groups due to their specificities. The COVID-19 crisis future development will require further coordination and, more importantly, actions from the microfinance community. Delivering solutions to MFIs in order to help them navigate the crisis ahead of us will be crucial to support the sector.

Blending solutions might be required, notably to restore MFIs capital and lending capacity. This will necessitate a coordination among and across different type of microfinance investors to deliver adapted financial answers to respond to the crisis MFIs will face, and hence to continue support to vulnerable microentrepreneurs.

Questions for EIB Group: DFIs, Financial Inclusion and the COVID-19 Response

Report

This report, the third in a <a href="https://www.centerforfinancialinclusion.org/series/municipal-cash-transfer-programs-design-ids-and-data-protection">series</a> on municipal cash transfers in the U.S., focuses on data protection for undocumented or mixed-status beneficiary households. In the context of cash-based assistance (CBA) programs, poor data protection practices could add additional risks for low-risk individuals by providing data trails that could pave the way for unauthorized access to applicant or beneficiary data or leakage of personally identifiable information. These could leave a digital footprint that can make it easier for law enforcement to target undocumented individuals.

Considering these risks, we have identified and detailed approaches and strategies used to protect applicant and beneficiary data through four programmatic phases: targeting beneficiaries, outreach and onboarding, disbursement and distribution, and ongoing monitoring and data storage/retention. Insights in this report are gleaned from CFI interviews with cities, community-based organizations (CBOs), debit card providers, and privacy advocates.

This report and the others in this series are intended to guide municipal officials and CBOs considering or developing programs to support undocumented or mixed-status households. The insights may also be of interest to organizations advocating for and supporting the rights of undocumented populations, students and academics, and anyone <span data-contrast="auto">interested in </span><span data-contrast="auto">access to financial and</span> <span data-contrast="auto">public</span> <span data-contrast="auto">services</span><span data-contrast="auto"> for all members of U.S. communities. </span>

Protecting Beneficiary Data: Guidance for Municipal Cash Transfer Programs Responding to COVID-19

Though U.S. citizens and residents received economic support following passage of the CARES Act in spring of 2020, undocumented and mixed-status households were left behind. To bridge this assistance gap, state and local governments across the U.S. have partnered with community-based organizations (CBOs) to establish cash transfer programs to support these populations during the pandemic.

This report, part of a three-part <a href="https://www.centerforfinancialinclusion.org/series/municipal-cash-transfer-programs-design-ids-and-data-protection">series</a>, provides practical guidance to municipalities considering or currently operating direct cash assistance programs. It is based on insights from in-depth, semi-structured interviews conducted by CFI with 12 program administrators representing seven cash assistance programs.

We identify and detail practices for defining target beneficiaries, establishing eligibility criteria, conducting outreach, onboarding recipients, and disbursing funds. This report also highlights the relative advantages and disadvantages of different approaches at each step of the process.

The insights here may also be of interest to organizations advocating for and supporting the rights of undocumented populations, students and academics, and anyone <span data-contrast="auto">interested in </span><span data-contrast="auto">access to financial and</span> <span data-contrast="auto">public</span> <span data-contrast="auto">services</span><span data-contrast="auto"> for all members of U.S. communities. </span>

Designing Municipal Cash Transfer Programs to Mitigate the Economic Impact of COVID-19

Brief

<em>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.</em>

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.

Weathering the Storm II: A Case Study of Vitas Palestine

Rebuilding the post-COVID economy will mean more than preserving powerful players in global and national economies; it will mean saving the small businesses and ensuring employment for workers in the informal and formal sectors. The Global Microscope, which assesses the enabling environment for financial inclusion across five categories and 55 countries, explores the role that financial inclusion has played in policymakers’ crisis response, providing data on how the 55 countries have leveraged their financial infrastructures to support vulnerable individuals, small businesses, and the financial providers that serve poor households.

Below are some key takeaways from the 2020 edition:
<ul>
 	<li>The overall enabling environment for financial inclusion improved as a result of governments’ efforts to reach unbanked populations during the pandemic. Colombia, Peru, Uruguay, Argentina and Mexico lead the global ranking.</li>
 	<li>Investments in digital infrastructure have paid off, with 44 of the 55 countries in scope having used cash transfers to support vulnerable parts of the population</li>
 	<li>Digital IDs can facilitate verification for cash transfers, data integration is needed to target beneficiaries and ensure that marginalized segments of the population are not excluded</li>
 	<li>The pandemic necessitated changes in regulations around remote banking, with several countries relaxing e-KYC rules to facilitate remote account opening, paving the road to the development of a digital, inclusive financial system</li>
 	<li>Financial institutions that serve the poor face liquidity constraints impacting credit availability for the poor, as not all governments were able to address them while rolling out economic stimulus packages</li>
 	<li>Financial authorities should adapt to protect consumers from emerging risks, such as ones posed by the onset of the pandemic and the associated rise in cases of financial fraud</li>
</ul>
The Global Microscope is produced with support from EIU’s partnerships with CFI, the Bill &amp; Melinda Gates Foundation, IDB LAB and IDB Invest.

Global Microscope 2020

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Cristina Dumitrescu

Olivier Edelman

CFI recently spoke with the European Investment Bank Group about priorities during the pandemic, risks, instruments deployed, and what the inclusive finance community can do to support the organization's priorities. This is the fourth in an occasional series of interviews with professionals from development finance institutions, international financial institutions, and donor agencies supporting inclusive finance during these challenging times.

Madeleine Longwell

Alexandra Rizzi

Eric Noggle

Tess Johnson

Shradha Modi

<h2>Client (and Lender) Centricity</h2>
<p><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.</p>
<p>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.</p>
<p>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.</p>
<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>
<p>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.</p>
<p>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.</p>
<blockquote class="pullquote--left"><p>Sisalem and his team bought into the digital strategy vision and saw it as an opportunity to rejuvenate growth.</p></blockquote>
<p>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.</p>
<p>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.</p>
<blockquote class="pullquote--left"><p>By the end of 2019, Vitas Palestine had completed the digital transformation road map by digitizing internal processes and offering digital products.</p></blockquote>
<p>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.</p>
<p><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" /></p>
<p>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.</p>
<p><em>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, </em>Weathering the Storm II<em>, 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>.</em></p>


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