<h4>“When an institution finds itself in severe crisis, it’s normal to panic. As delinquencies mount, staff morale declines, and investors start calling and demanding answers, managers can be forgiven if they pine for the simplicity of the OMS — the Ostrich Management System. There is nothing quite so calming as sticking one’s head in the sand while the world goes crazy…”</h4>
Weathering the Storm II – conducted as part of our partnership with the Mastercard Center for Inclusive Growth and produced with the <a href="https://www.e-mfp.eu/" target="_blank" rel="noopener noreferrer">European Microfinance Platform</a> – is a follow-up to the <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">original report and case studies</a>, published in the aftermath of the financial crisis. This updated Weathering the Storm synthesizes experiences and lessons from 16 institutions in 14 countries on four continents over 15-year period (including five new case studies from <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-viator-azerbaijan/" target="_blank" rel="noopener noreferrer">Azerbaijan</a>, <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-partner/" target="_blank" rel="noopener noreferrer">Bosnia and Herzegovina</a>, <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-spandana/" target="_blank" rel="noopener noreferrer">India</a>, <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-financiera-fama/" target="_blank" rel="noopener noreferrer">Nicaragua</a>, and <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-vitas-palestine/" target="_blank" rel="noopener noreferrer">Palestine</a>). Nearly every type of institution – from NGO to bank – is included.

The goal is to inform best practices for triaging the critical and the merely very important in order to survive and thrive. Content is organized by a hierarchy of needs for survival: liquidity, confidence, portfolio, and capital. Readers will come away with a better understanding of how leaders – with the support of investors and ecosystem actors -- stabilized their financial institutions and embarked on a full recovery. The hope is that no one reading this will go through a similar crisis, but if so, Weathering the Storm II will be a useful guide in addition to a history lesson.

Weathering the Storm II: Tales of Survival from Microfinance Crises Past

<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

Daniel Rozas

Shradha Modi

Azerbaijan

Benin

Bosnia and Herzegovina

East Asia and Pacific

Europe and Central Asia

Ghana

India

Indonesia

Kazakhstan

Latin America and The Caribbean

Middle East and North Africa

Morocco

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North America

Pakistan

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Sub-Saharan Africa

United States

West Bank and Gaza

Challenges and Crises

Credit

Enabling Environment

Microfinance

Microfinance Institutions

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Digital Financial Services

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Policy, Regulation and Government Initiatives

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Brief

India is a global leader in financial inclusion. For over a decade, Accion has worked with and learned from India’s innovators, investors, and policymakers to expand economic opportunity for its people and businesses.

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Weathering the Storm II: Tales of Survival from Microfinance Crises Past

Weathering the Storm II: A Case Study of Vitas Palestine