About two dozen leaders of inclusive finance organizations, impact investors, and analysts from around the world convened recently at a workshop hosted by Lehigh University’s <a href="https://business.lehigh.edu/centers/martindale-center/about" target="_blank" rel="noopener noreferrer">Martindale Center</a> to share views on how financial inclusion interacted with the socio-economic crises of the COVID-19 pandemic. The event built on the success of a previous similar workshop that resulted in the publication of <a href="https://www.brookings.edu/book/the-future-of-microfinance/" target="_blank" rel="noopener noreferrer">The Future of Microfinance</a> by Brookings Institution Press in 2020.

Participants included practitioners working, building, promoting, advocating, and leading commercial financial inclusion providers in Africa from a private sector perspective. As such, they are close to the reality of the people they are serving or invest in and their insights are anchored in the on-the-ground dynamics of the African market in the wake of COVID. Here is what they are telling us.
<h1>Impact of COVID on African MFIs, Banks, and Clients</h1>
<blockquote class="pullquote--right">Ongoing crises in Africa are not uniquely due to COVID-19, but rather are a conjunction of many crises during the last several years.</blockquote>
The CEOs of leading African inclusive financial services organizations participating at the Lehigh workshop uniformly agreed that ongoing crises in Africa are not uniquely due to COVID-19, but rather are a conjunction of many crises during the last several years. COVID, in fact, did not affect the continent much health-wise; instead, the impact came more from restrictions on domestic and cross-border mobility, which caused substantial economic downturns, especially in countries and regions dependent on imports and exports. At the same time, climate change effects such as droughts, floods, and ruined crops have created substantial <a href="https://www.fao.org/3/cb0258en/CB0258EN.pdf" target="_blank" rel="noopener noreferrer">threats to food security</a> and increased social unrest in many parts of Africa. Compounding the turmoil, security crises fueled by terrorism, refugees, and displaced populations (<a href="https://www.unrefugees.org/emergencies/sahel/" target="_blank" rel="noopener noreferrer">millions in the Sahelian countries</a>) have also significantly destabilized Sub-Saharan Africa.

Aiming to alleviate rapid <a href="https://www.ada-microfinance.org/sites/default/files/inline-files/Synthesis_Microfinance%20Clients%20Facing%20the%20COVID-19%20Crisis_EN_1.pdf" target="_blank" rel="noopener noreferrer">deterioration in household financial positions</a> during the pandemic, governments and central banks across Africa issued loan repayment moratoriums, which squeezed lenders’ liquidity, including mainstream commercial banks but especially microfinance institutions (MFIs). Nevertheless, even though the rate of late or restructured loan repayments from clients—the credit risk ratio—<a href="https://www.mf-rating.com/wp-content/uploads/2021/10/COVID-19-Impact-on-FSPs.pdf" target="_blank" rel="noopener noreferrer">increased everywhere</a>, debt write-offs among African MFIs have not been as bad as feared. Overall, the sector has shown <a href="https://www.suerf.org/suer-policy-brief/38105/africa-and-covid-19-can-the-financial-sector-stay-on-course-for-a-green-and-digital-future" target="_blank" rel="noopener noreferrer">substantial resilience in Africa</a>, although the situation remains tenuous; “seriously fragilized” is how one CEO at the workshop described it.

As for impacts on MFI clients, a stark distinction is apparent between urban and rural settings. Urban clients have suffered most due to lockdowns affecting micro and small enterprises. Many rural clients, by contrast, fell back into an agricultural self-subsistence economy during a season or two, as there were no markets to sell to. Low-income households in both settings saved as much as they could during the pandemic and reduced spending. Workshop participants at Lehigh uniformly agreed that African MFIs’ clients, especially the most vulnerable ones, were—perhaps more than ever—remarkably resilient and able to cope.
<h1>Crisis Begets Opportunities</h1>
As is often true in times of crises, opportunities appear. Workshop participants pointed out that in Africa, new opportunities for MFIs and lower-income clients came directly from constraints dictated by lockdowns. Logistical barriers <a href="https://cdn.odi.org/media/documents/Africa_trade_and_Covid19_the_supply_chain_dimension.pdf" target="_blank" rel="noopener noreferrer">hindered possibilities for exporting goods</a>, including agricultural products, and for importing things like fertilizer and animal feed. Trade in services plummeted as people stopped moving and spending, and tourism collapsed in countries like Kenya where incomes are especially dependent on spending by tourists.

However, from these difficulties, layered on top of effects from climate change, new behaviors are emerging in various parts of Africa. Some farmers have decided to shift to organic production practices like agroecology and raising chicken and pigs using only farm-produced feed and farm waste, saving on expensive imported inputs. Similarly, farmers unable to export have increased selling locally in neighboring towns, expanded direct selling along major roads, or began selling <a href="https://blogs.lse.ac.uk/africaatlse/2020/06/19/what-strategies-do-traders-use-food-survive-covid19-lockdown-kampala/" target="_blank" rel="noopener noreferrer">door-to-door</a> where possible. Others are leveraging <a href="http://www.xinhuanet.com/english/2020-05/27/c_139092514.htm" target="_blank" rel="noopener noreferrer">digital approaches</a>, including e-commerce platforms, social media, and mobile payments. In short, because of COVID restrictions, many farmers in Africa adopted organic, sustainable, and digital agriculture practices.
<blockquote>Because of COVID restrictions, many farmers in Africa adopted organic, sustainable, and digital agriculture practices.</blockquote>
Many people in Africa also changed their consumption habits, switching to local producers for vegetables, meats, and other staples. Circular economy trends <a href="https://www3.weforum.org/docs/WEF_Five_Big_Bets_for_the_Circular_Economy_in_Africa_2021.pdf" target="_blank" rel="noopener noreferrer">appeared in a wide range of sectors</a> – including agri-food, textiles, fashion, electronics – and also in packaging. Consumers are also <a href="https://www.africa.com/covid-19-increases-brand-sustainability-awareness-shifts-consumer-behaviour-in-sub-saharan-africa/" target="_blank" rel="noopener noreferrer">moving towards sustainable brands</a>, thanks both to heightened awareness of climate effects and to experiences in lockdowns. Surprisingly, the African response to COVID has been to adopt more sustainable norms and practices in agriculture and consumption – a fascinating resilience outcome.

Another substantial trend evident in these times of security crises and risks is <a href="http://cdn-odi-production.s3-website-eu-west-1.amazonaws.com/media/documents/ODI-YFLP-Youth-led_digital_innovation_and_resilience_during_Covid-19-13AugFinal.pdf" target="_blank" rel="noopener noreferrer">high rates of youth entrepreneurship</a>. This is occurring across the social spectrum –among youth from both rural and urban communities, as well as those with diplomas and those who did not finish school. Youth are choosing not to migrate and instead are staying put and creating non-traditional businesses and entering new types of apprenticeships, such as small enterprises in agriculture transforming crops or raw materials, and in <a href="https://www.forbes.com/sites/davidrvetter/2021/12/14/meet-the-african-green-entrepreneurs-showing-the-west-how-its-done/?sh=7b03d50551cb" target="_blank" rel="noopener noreferrer">green economy enterprises</a> such as renewable energy, recycling, utilizing waste, or addressing pollution. This trend is strongly supported by national and local governments, as well as by civil society and corporate social responsibility initiatives, which are promoting and funding incubators and seed capital investments, as well as—in collaboration with MFIs and banks—credit guarantee mechanisms, all aimed at fostering the startup and scaling phases of the young enterprises of Africa’s increasingly entrepreneurial youth.

Africa has the world’s largest population share of youth and the potential is enormous. Often discussed, enhancing youth entrepreneurship has unfortunately seemed a somewhat quixotic policy quest for decades in Africa. But remarkably, the consensus at the Lehigh workshop was that this time the initiatives seem to be working and helping fulfill the aspirations of many young people to be autonomous and contribute to their communities and local economies. Additionally, many African <a href="https://www.afdb.org/en/news-and-events/press-releases/lionesses-business-confidence-report-speaks-high-levels-resilience-africas-leading-women-entrepreneurs-despite-covid-19-49847" target="_blank" rel="noopener noreferrer">women entrepreneurs</a> have proven to be very resilient and are growing their businesses due to COVID.
<h1>Acceleration of Digital Inclusive Finance in Response to COVID</h1>
The <a href="https://www.centerforfinancialinclusion.org/digitally-reshaping-inclusive-financial-services-in-the-wake-of-covid-19">digital revolution in inclusive financial services</a> is unquestionably progressing quickly throughout Africa in the wake of COVID, including West and Francophone Africa and rural areas that have been neglected until recently.

While financial access in Africa remains low, mobile penetration is high, <a href="https://data.worldbank.org/indicator/IT.CEL.SETS.P2?locations=ZG" target="_blank" rel="noopener noreferrer">exceeding 90 percent</a>. Due to COVID restrictions on mobility, mobile phones have been indispensable not only for communication but also for domestic and international remittances. Facing limited access to markets coupled with security risks in using cash for transactions, farmers, cooperatives, and food processing companies accelerated their embrace of <a href="https://www.brookings.edu/blog/africa-in-focus/2021/08/16/digital-technology-and-african-smallholder-agriculture-implications-for-public-policy/" target="_blank" rel="noopener noreferrer">digital marketplace platforms</a>. Survey evidence suggests that most African micro and small enterprises did too which <a href="https://fbj.springeropen.com/articles/10.1186/s43093-022-00154-4" target="_blank" rel="noopener noreferrer">improved their financial resilience</a>. Banks and MFIs throughout Africa also are going digital and embracing “<a href="https://thecalabashnewspaper.com/afrimoney-gtbank-launch-bank-to-wallet-wallet-to-bank-promotion/" target="_blank" rel="noopener noreferrer">bank to wallet, and wallet to bank</a>” transactions and agency banking. Many banks and MFIs are teaming up to deliver financial services jointly or as agents to <a href="https://www.brookings.edu/blog/africa-in-focus/2021/12/14/mobile-financial-services-can-increase-impacts-of-microfinance-organizations-but-the-story-is-more-complicated-than-we-think/" target="_blank" rel="noopener noreferrer">deepen outreach to clients and improve cost efficiency</a> – for example by reducing the need to operate separate branches everywhere. Governments have also gone more digital by ramping up <a href="https://www.worldbank.org/en/results/2021/04/13/prioritizing-the-poorest-and-most-vulnerable-in-west-africa-togo-s-novissi-platform-for-social-protection-uses-machine-l" target="_blank" rel="noopener noreferrer">mobile money transfers from social protection programs</a> during COVID.

Moving beyond financial services, agricultural value chains are rapidly leveraging the high mobile penetration by also digitizing delivery services, distribution channels, electronic learning, and messaging at scale to reach out to remote populations (e.g., for health, financial education, agricultural practices, prices, weather warnings), enhancing inclusion and informed decision making.
<h1>Financial Inclusion’s Green Future in Africa</h1>
The African MFI leaders at the workshop reflected on how their clients fared through the pandemic and other recent crises. Uniformly, they agreed clients responded with <a href="https://www.centerforfinancialinclusion.org/does-financial-inclusion-boost-borrowers-resilience-three-lessons-from-the-pandemic">resilience</a>, innovative abilities to adapt, and incredible capacities to seize opportunities to not just recover but even advance. As such, African MFIs must follow the dynamics of their clients and deliver products and services that fit customers’ new needs. Client centricity is essential to meet client needs but is also a key element of client protection in light of <a href="https://www.cgap.org/sites/default/files/publications/slidedeck/2022_02_Slide_Deck_DFS_Consumer_Risks.pdf" target="_blank" rel="noopener noreferrer">heightened risks for digital finance consumers</a>.

Financial institutions also need to better understand the market intricacies and client opportunities in the green (micro)economy and develop financial products accordingly, partnering with those who can deliver services and technical advice to assist the transformation. Working towards an ecosystem approach to deliver <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">green inclusive financial services</a> in an efficient, secured, synergetic, and sustainable manner will be the way forward.
<blockquote class="pullquote--left">Working towards an ecosystem approach to deliver green inclusive financial services in an efficient, secured, synergetic, and sustainable manner will be the way forward.</blockquote>
Green inclusive finance ecosystem platforms will surely develop in Africa. However for that to happen, the impact investing sector and climate finance will need to collaborate, which would be a giant step forward as the two sectors have largely ignored the other for the last decade. Impact investors will need to learn how to invest in the green microeconomy as a mainstream target. In parallel, climate finance—so far largely directed elsewhere—will have to understand that unless communities, especially the most vulnerable among them, benefit significantly from environmental rehabilitation, preservation, and protection of biodiversity, sustainable development is not possible.

In Africa, impact investment remains an emerging sector, focused—rightly so—on financial inclusion and agriculture. Climate finance and green inclusive finance are at infant stages. Supporting, from the funding side, post-COVID initiatives from youth and local communities in climate adaptation, will be the next challenge and opportunity for Africa. And inclusive finance stakeholders should play significant roles in close partnership with others in that ecosystem.

The African inclusive finance leaders at the Lehigh workshop collectively sent a very positive and energetic message to their peers. During these crisis times, clients in Africa have shown high levels of resilience and of capacity to overcome. They have developed innovative strategies in the green economy. Financial institutions should accompany them by being client centric in product and service development, in using digital delivery channels, and in working as a collaborative ecosystem to manage new digital risks and protect customers. Africa is a vulnerable continent in the face of climate change, but it can be the most resilient one if we act together.

&nbsp;

The authors were panelists at the Lehigh University workshop and this note is the result of workshop discussions and subsequent analysis. Participating leaders from African MFIs included Anne Marie Chidzero, Chief Investment Officer at FSD Africa Investements, Kimanthi Mutua, founder of KREP, the first microfinance institution in Africa to be transformed into a full-fledged commercial bank, now named SIDIAN Bank where Kimanthi has been CEO and remains a board member, and Pierrette Kouakou, Managing Director of FIN’ELLE in Cote D’Ivoire. Views expressed are the authors’ and not necessarily those of other participants.

Post-COVID Crisis & Opportunity in African Inclusive Finance

COVID-19 created extraordinary challenges for Indian households, businesses, and the economy. Lockdowns triggered economic contractions vastly surpassing the initial trade shocks, travel restrictions, and other measures. Millions of people migrated from urban to rural areas. The downturn rapidly reduced working hours and raised unemployment. The consequences and survival tactics for households and businesses varied by sector and state, exacerbating existing disparities for low-income and rural households.

These were among the challenges discussed by about two dozen leaders of microfinance organizations, impact investors, and analysts from around the world who convened recently at a workshop hosted by Lehigh University’s <a href="https://business.lehigh.edu/centers/martindale-center/about" target="_blank" rel="noopener noreferrer">Martindale Center</a> to share views on how financial inclusion interacted with the socio-economic crises of the pandemic. The event built on the success of a previous similar workshop that resulted in the publication of The Future of Microfinance by Brookings Institution Press in 2020.

This blog post is extracted from a <a href="https://business.lehigh.edu/sites/default/files/2022-11/Martindale%20Policy%20Brief%20Indian%20Financial%20Inclusion%20Sept%202022.pdf" target="_blank" rel="noopener noreferrer">more detailed Policy Brief</a>.
<h1>Shock for Clients and MFIs </h1>
The pandemic triggered new challenges for both clients and microfinance institutions (MFIs). <a href="https://www.dvara.com/research/wp-content/uploads/2020/06/COVID-19-Impact-on-Daily-Life-CIDL-Survey.pdf" target="_blank" rel="noopener noreferrer">Evidence</a> points to clients’ precipitous loss of income, depletion of meager savings, increasing indebtedness, and difficult coping strategies that risk pushing millions back into poverty. MFIs had to quickly adapt, which accelerated trends toward digitalization and virtual connectivity with clients. Households struggled to understand the implications of MFIs’ loan repayment moratoriums and confronted hard choices between daily needs, repaying loans, and conserving cash for an uncertain future.

Early in the outbreak, MFIs were hit hard. The microfinance model relies on frequent physical interaction with customers. Lockdowns brought operations to a standstill and repayments came under pressure, creating liquidity issues, particularly for non-bank (NBFC) MFIs.

The impact was stark:
<ul>
 	<li>Disbursements from April to June 2020 fell to Rs 61.9 billion (~$800 million) compared to where they had been pre-COVID at Rs 711.9 billion (~$9.2 billion).</li>
 	<li>Portfolio at risk (PAR) rose; PAR&gt;30 days peaked at 22 percent in June 2021 and has improved considerably since.</li>
 	<li>Unemployment jumped to 24 percent in 2021.</li>
 	<li><a href="https://mospi.gov.in/documents/213904/416359/3_Draft_press_note_Migration_PLFS_2020_21.docx1655189017846.pdf/c85c0fe3-6b5a-b704-7683-7db7acd9fa42" target="_blank" rel="noopener noreferrer">The Periodic Labour Force Survey from July 2020–June 2021</a> showed a migration rate of 48 percent among urban women in India and 23 percent among urban males, more than half of whom returned to their rural homes; possibly the country’s worst reverse migration.</li>
</ul>
<h1>Policy Responses</h1>
The public sector led crisis response, mitigating damage and helping relaunch the economy. Since 2020, both the Reserve Bank of India (RBI) and the Government of India have taken critical actions for microfinance clients and institutions.

RBI’s twin approach included liquidity injection and restructuring. RBI allowed lenders to offer moratoriums on loan repayments and directed maintaining an account’s status in credit bureau reporting while in moratorium to protect customers’ credit histories and access to credit in the future. The moratorium severely stressed NBFC-MFIs. A survey amongst Microfinance Institutions Network (MFIN) members in June 2021 found NBFC-MFIs had moratorium for approximately one-third of repayment installments—creating tremendous pressure to manage liquidity given that NBFC-MFIs rely on customer repayments to repay their own debt obligations. And with fixed salary and infrastructure costs, most MFIs have little leeway to quickly change operational costs.
<blockquote class="pullquote--right">Non-bank MFIs had moratorium for approximately 1/3 of repayment installments, creating tremendous pressure to manage liquidity.</blockquote>
Additionally, the RBI’s August 2020 "<a href="https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11941&amp;Mode=0" target="_blank" rel="noopener noreferrer">Resolution Framework for COVID-19 Related Stress</a>" was a one-time resolution for loans not in default beyond 30 days. And later, RBI allowed lenders to restructure individual and small business loans. Both resolutions provided much-needed relief to microfinance customers.

For MFIs, RBI also launched special liquidity de-stressing schemes and relaxed loan provisioning requirements. The Ministry of Finance supplemented the efforts with partial credit guarantees, an “ex-gratia” scheme to pay the difference between compound and simple interest for six months for specified loan types, and the <a href="https://www.india.gov.in/spotlight/pm-street-vendors-atmanirbhar-nidhi-pm-svanidhi" target="_blank" rel="noopener noreferrer">PM Svanidhi scheme</a> of lending and credit guarantees to assist street vendors. However, while helpful, these measures could not fully relieve lenders’ liquidity challenges.

The situation improved in September 2020 as customers’ repayments resumed. In parallel, policymakers recognized the significance of microfinance for inclusive growth, giving a strong recovery signal to the market.

But the microfinance sector entered the 2021–2022 financial year facing an uncertain and unprecedented impact of COVID-19: a second wave of infections and partial lockdowns again hurt customers’ livelihoods and limited lenders’ operational mobility. The government developed <a href="https://www.ncgtc.in/en/products-n-services/cgsmfi" target="_blank" rel="noopener noreferrer">another credit guarantee scheme</a> for a yet broader array of MFIs, building on suggestions from MFIN, which worked closely with the Ministry of Finance.

The government also implemented additional fiscal measures, such as:
<h3>Relief for households, including:</h3>
<ul>
 	<li>In-kind (food and cooking gas) and cash transfers to senior citizens, widows, disabled, farmers, and women Jan Dhan Account holders (a national savings scheme for previously unbanked)</li>
 	<li>Insurance coverage for healthcare workers</li>
 	<li>Wage increases for those working under the <a href="https://nrega.nic.in/netnrega/mgnrega_new/NREGA_home.aspx" target="_blank" rel="noopener noreferrer">Mahatma Gandhi National Rural Employment Guarantee Act</a> and support for building and construction workers</li>
 	<li>Collateral-free loans to self-help groups</li>
 	<li>Reduced retirement fund contributions</li>
 	<li>Employment opportunities for migrant workers</li>
</ul>
<h3>Relief for micro, small and medium enterprises (MSMEs), including:</h3>
<ul>
 	<li>Collateral-free loans with a 100 percent guarantee</li>
 	<li>Subordinate debt for stressed MSMEs with partial guarantee</li>
 	<li>Partial guarantees for public sector banks on loans to NBFCs, housing finance companies, and MFIs</li>
 	<li>A fund of funds for equity infusion into MSMEs</li>
 	<li>Additional support to farmers via concessional credit</li>
</ul>
<h3>Regulatory and compliance measures, including: </h3>
<ul>
 	<li>Postponing tax-filing and other compliance deadlines</li>
 	<li>Reduced penalties for overdue goods and services tax filings</li>
 	<li>Modified government procurement rules</li>
 	<li>Faster clearing of MSME dues</li>
 	<li>Insolvency and bankruptcy code-related relaxations for MSMEs</li>
</ul>
The combination of these extraordinary fiscal and monetary measures, backed by the world’s largest vaccination program, helped the Indian economy mitigate the COVID meltdown. By March 2022, the microfinance industry showed clear signs of recovery: loan disbursements returning to pre-COVID levels; repayments above 95 percent; and no MFIs declaring default during the pandemic’s two years.
<h1>Financial Institution Responses</h1>
In parallel, lenders faced daunting challenges in managing ongoing connections with customers, continuing operations amidst re­strictions, ensuring employee safety, managing liquidity to cover operational costs and debt obligations, and adapting operations to accelerate the use of mobile phones and digital pay­ments. Lenders needed to balance ex­pectations among customers, employees, and investors, while continuously weighing multiple and rapidly changing variables around the unpredictable pandemic, lock­downs, and economic recovery.
<blockquote class="pullquote--right">While the RBI’s loan repayment moratorium gave immediate relief, related calculations were confusing.</blockquote>
While the RBI’s loan repayment moratorium gave immediate relief, related calculations were confusing. Customers found it difficult to understand how the moratorium would impact their repayments and costs and struggled to make informed choices. Restrictions on mobility and group meetings made explaining even harder for lenders. Customers also questioned—rightly so—the logic and ethics of accrued interest; they felt repayment delays were beyond their control, entirely attributable to the pandemic. Varied approaches amongst the lenders, for example about interest accrual, revising loan tenure, and installment amounts, and timing of interest collection during the moratorium, further confounded the issue. Lenders and MFIN made several efforts such as <a href="https://mfinindia.org/Resources/videos" target="_blank" rel="noopener noreferrer">audio-visuals</a>, direct calling to customers, awareness campaigns, and dedicated mobile apps catering to specific customer needs. Nevertheless, an found that one-fifth of respondents reported not fully understanding the moratorium. In any case, given customers’ uncertainty, lack of safety nets, and need to preserve cash for essential expenses, more than 90 percent opted for a moratorium.

Another critical challenge was ensuring fair and respectful interaction with customers. Higher delinquencies, pressure for collections on the lenders' side, customer hardships, and confusion about loan information created stressful interactions. In an MFIN survey in March 2021, 9 percent of customers reported experiencing employee misbehavior within the previous six months related to loan recovery. Handling such tensions required a balanced approach combining transparency, patience, and empathy. This meant educating customers about the moratorium and implications of their choices and using objective criteria for assessing stressed customers.
<blockquote>Handling tensions between employees and customers required a balanced approach combining transparency, patience, and empathy.</blockquote>
Maintaining microfinance’s classic close and frequent interaction with customers while following COVID protocols re­quired new approaches. Lenders ex­tensively turned to live or automated phone calls. To ensure employ­ees interacted appropriately with customers, lend­ers organized special training on customer interac­tions and phone etiquette. MFIN also developed a learning video for field-level employees focusing on best-practice interactions considering COVID. For field interactions, lenders split groups and met smaller subgroups in larger open spaces. Further, many MFIs supported customers with emergency aid for health, food, and essential supplies. In parallel, at the employee level, MFIs added controls to monitor repayments, aiming to avoid misinformation, misbehavior, forced collections, and embezzlement by field-level employees.

Lenders also expanded mechanisms for informing customers and addressing queries and grievances, including <a href="https://mfinindia.org/ourwork/clientprotection" target="_blank" rel="noopener noreferrer">MFIN's Customer Grievance Redressal Mechanism (CGRM)</a>, which supports customers in resolving complaints. Both MFIN and member NBFC-MFIs leveraged the CGRM to take customer feedback, understand specific risks, and do topical surveys. The major reasons for complaints included insurance claims settlements, disputes with credit reports, and loan repayments or disbursements. MFIN then used these customer voices to design awareness videos to address common queries and concerns. Customers also have access to regulatory mechanisms and the RBI’s newly expanded <a href="https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11546&amp;Mode=0" target="_blank" rel="noopener noreferrer">Ombudsman program</a> for grievance escalation.
<h1>Addressing Over-indebtedness</h1>
Over the years, customer over-indebtedness has been a paramount challenge for the industry. Regulatory and industry standards set explicit norms to address indebtedness through caps on multiple lending and total level of customer indebtedness. However, the scale and prognosis of the problem are complex and imprecise. Guestimates of over-indebtedness in India vary from 2 to 25 percent. Measurement challenges include lack of evidence on income (due to assessment challenges), unknown actual indebtedness levels given informal and formal credit reporting that silos different types of lending, and high levels of loan repayments. <a href="https://www.dvara.com/research/wp-content/uploads/2017/01/When-is-Microcredit-Unsuitable-Guidelines-for-Lending.pdf" target="_blank" rel="noopener noreferrer">Research</a> and anecdotal evidence suggest low-income households take loans and adjust expenses to repay existing loans. Group liability can also mask customer repayment stress. As such, over-indebtedness remains a core issue, and brings reputational, political, regulatory, and credit risks to the industry, undermining trust in microcredit providers and increasing risks for customers.

Despite these challenges, in recent years, the industry in India has maintained satisfactory performance in meeting regulatory standards on indebtedness. Equifax data for March 2021, on over 60 million customers with active microcredit loans, showed that 70 percent had a relationship with only a single lender, and 74 percent had loans outstanding of Rs 50,000 or less (~$650).
<h1>Conclusions</h1>
Five overarching lessons can be taken from the COVID crisis in the Indian microfinance sector:
<ol>
 	<li>Severe shock cannot be met by institutions on their own and requires both monetary and fiscal support to avoid systemic instability. Support was provided swiftly and decisively by the RBI and Government of India, working closely with self-regulatory organizations and microfinance lenders.</li>
 	<li>Capacity building for MFI customers and employees is critical. Customers demonstrated tremendous adaptability to new conditions, including lockdowns, digital payments, and lenders’ new customer service approaches. However, lenders needed sustained efforts in capacity building for customers and employees to help them adjust.</li>
 	<li>Customers maintained resilience to economic shocks. Microfinance clients’ activities are typically integral to community life, like selling vegetables, groceries, or other core consumption items, so they are less affected by macroeconomic shocks.</li>
 	<li>Customers value MFIs that are dependable, support clients, and provide responsible financial services. During the crisis, customers worked carefully with microfinance providers to avoid triggering adverse repayment records that would jeopardize future access to financial services.</li>
 	<li>MFIs and their investors need to set realistic expectations for institutional performance amid unprecedented crises. During the pandemic, institutions that were responsive to individual client situations balanced institutional needs with client realities through repayment delays, extending loan tenures, and providing new loans. Institutions in India that responded with empathy during the crisis have been rewarded with higher client retention, loyalty, and overall improved recovery post-pandemic.</li>
</ol>

Indian Financial Inclusion during COVID and Recovery: Public Policy to the Rescue

Throughout the COVID-19 pandemic, people, businesses, and governments across Asia were able to access a wide array of financial services, which proved to be a critical resource. Lockdowns accelerated the shift towards digital payments. Households relied on financial services to stay resilient, access their savings, pay bills, conduct their business, receive social payments, and pay government fees. Many financial institutions across Asia responded quickly to the socio-economic challenges facing their clients and their own institutional survival.

Perspectives and lessons learned from Asia, by far the largest regional market for inclusive financial services, were of central interest for about two dozen leaders of microfinance organizations, impact investors, and analysts from around the world who convened recently at a workshop hosted by Lehigh University’s <a href="https://business.lehigh.edu/centers/martindale-center/about" target="_blank" rel="noopener noreferrer">Martindale Center</a> to share views on how financial inclusion interacted with the socio-economic crises of the pandemic. The event built on the success of a previous similar workshop that resulted in the publication of <a href="https://www.brookings.edu/book/the-future-of-microfinance/" target="_blank" rel="noopener noreferrer">The Future of Microfinance</a> by Brookings Institution Press in 2020.

This blog post is excerpted from a more <a href="https://business.lehigh.edu/sites/default/files/2022-11/Martindale%20Policy%20Brief%20Perspectives%20from%20Asia%20Aug%202022_0.pdf" target="_blank" rel="noopener noreferrer">detailed policy brief</a>.
<h1>Cross-regional Commonalities</h1>
Clients demonstrated agility and resiliency. However, recovery is uneven across Asia and globally. Many households face greater vulnerability, with the World Bank estimating 50 million to 200 million people falling back into poverty of less than $2 per day. <a href="https://cdn.finca.org/wp-content/uploads/20220804185511/Profiling-the-Most-Vulnerable_Data-Summary.pdf" target="_blank" rel="noopener noreferrer">Research by FINCA International</a> shows that 50 percent of their clients skipped meals to cope.

Discussion among workshop participants identified several cross-cutting takeaways from the Asian financial institutions that successfully helped their clients weather the pandemic.

Product offerings that support consumers:
<ul>
 	<li>Financial service providers (FSPs) that focused on their clients and tailored solutions rebounded faster. This required dynamic leadership, team cohesion, quick decisions, and clear communications to adapt to fast-changing realities.</li>
 	<li>FSPs offering diverse ranges of services—especially payments, deposits, loans, and in some cases insurance—fared better.</li>
 	<li>Lockdowns accelerated digital financial services. Digital payments provided lifelines for buying and selling essential goods and services. In parallel, combining physical and digital outreach enabled FSPs to engage with clients, monitor lending and liquidity, and manage costs.</li>
 	<li>Despite predictions that households would deplete savings, in some countries deposit levels stabilized and even increased while remittances and government-to-person payments increased.</li>
 	<li>Embedded finance—e.g., lending for agricultural value chains, wholesale-retail businesses, consumer purchases, and elsewhere throughout the supply chain—is resilient and growing.</li>
</ul>
Managing funding:
<ul>
 	<li>Managing liquidity and avoiding over lending were critical for FSPs to stay solvent. Deposit-taking institutions proved more resilient, with deeper liquidity. Recognizing the threat, multiple central banks and governments provided liquidity measures across Asia and the Pacific.</li>
 	<li>International investors and lenders restructured funding and provided new lines of credit or equity infusions to their FSP partners in the region, easing liquidity constraints.</li>
</ul>
Role of government:
<ul>
 	<li>Across the region, central banks and governments played key roles. Successful interventions include liquidity programs for banks and clients, expanded government-to-person payments, consumer protection and data privacy measures, loan restructuring, and fraud prevention especially for the growing online lending sector.</li>
</ul>
<h1>Perspectives from China</h1>
Micro, small, and medium-sized enterprises (MSMEs), especially in services, were hit hardest by lockdowns in China, resulting in bankruptcies and job losses. The government supported MSMEs mainly via tax reduction and financial regulators directing Chinese banks to increase lending to MSMEs. According to the People’s Bank of China, as of May 2022, MSME lending grew <a href="https://www.tellerreport.com/business/2022-05-26-central-bank--promote-the-establishment-of-a-long-term-mechanism-for-financial-services-for-small-and-micro-enterprises-who-dare-to-lend--willing-to-lend--and-will-lend.BkxyEO2Dc.html" target="_blank" rel="noopener noreferrer">20 percent</a> year-on-year for 24 consecutive months from April 2020.

However, expansion by Chinese banks might have a devastating effect on traditional non-banking lenders to MSMEs, including microfinance institutions (MFIs). With non-bank lenders’ costs of funding (around <a href="http://www.pbc.gov.cn/en/3688006/index.html" target="_blank" rel="noopener noreferrer">6–7 percent annually</a>) higher than banks (averaging 5.24 percent in April 2022) they will struggle to compete and become more vulnerable to shocks. Already, many non-bank lenders are confronting governance issues and rising non-performing loans. As government policies on MSME lending ease with pandemic recovery, banks are expected to slash MSME lending.

Banks withdrawing and non-bank lenders being more vulnerable portends a looming credit crunch. Institutional reforms for struggling FSPs, including upgrading fintech capacity, will be crucial to maintain a competitive MSME financing market. In parallel, support could include subsidies directed towards MSMEs and their employees, and extending low cost on-lending from China's central bank for agricultural and MSME financing to non-banking financial institutions.

Recovering from the pandemic, China is well placed to continue impressive financial inclusion growth given rapid development of internet infrastructure, expanding use of big data, and widespread adoption of new credit risk models incorporating broader sets of factors in lending decisions. Combining online and offline client interaction can be a potent strategy to reach MSME clients, especially in remote or rural areas. Further, insurance could be expanded, as could value chain financing, given the growth of the agriculture sector and consumer food value chains.
<h1>Perspectives from India</h1>
In India, evidence points to precipitous loss of income, depletion of savings, increasing indebtedness, and difficult coping strategies that may bring millions back to poverty. The public sector led the crisis response; both the Reserve Bank of India (RBI) and the government undertook critical actions, mitigating damage to MFIs, their clients, and the economy. Examples include RBI’s swift injection of new liquidity, rules to restructure loans and ease provisioning requirements, and a moratorium on loan repayments and interest payments.

Even so, loan repayments faltered, creating liquidity issues, particularly for non-bank MFIs (NBFC-MFIs) that did not receive moratorium on their own loans from lenders. A survey of Microfinance Institutions Network (MFIN) members in June 2021 found that just over a third of NBFC-MFIs received moratoriums. In response, the RBI and other government entities issued new lines of credit, guarantee programs, and other financial support, often designed in close collaboration with finance sector organizations like MFIN.

Nonetheless, MFIs faced daunting, even existential, challenges: operating amidst lockdowns and sustaining connections with customers; ensuring employee safety; managing liquidity to cover operational costs and debt obligations; and accelerating use of mobile phones and digital payments. MFIs also combatted misinformation on social media and scaled-up mechanisms to respond to client queries and grievances. Many supported customers with emergency aid for health, food, and essential supplies.

By March 2022, as the crisis eased, the RBI opened a new chapter and revised regulations. Now, all entities doing microfinance lending­—whether bank or NBFC-MFI—will operate under similar regulation, a welcome shift from micro-rules to principles-based policy. Key pillars include a debt repayment threshold at 50 percent of client income, pricing deregulation, and enhanced client protection. Building on resilience demonstrated during the pandemic and efficiency from expanded digital processing, the sector is well positioned. MFIs currently serve approximately 60 million people; the estimated inclusive finance market across India is <a href="https://mfinindia.org/Resources/studyreport" target="_blank" rel="noopener noreferrer">221 million people</a>. The sector needs to expand responsibly in areas hitherto underserved due to earlier rigid price controls, launch innovative products, and demonstrate clear impact.
<h1>Perspectives from Indonesia</h1>
The range of inclusive FSPs in Indonesia is diverse and includes banks, rural banks, non-bank financial institutions (NBFI), cooperatives, and other community-based lenders; each segment operates under specialized laws and regulations. The sector is distinguished by following both conventional and Islamic-based principles (sharia).

Pandemic-induced increases in non-performing loans and in costs of loan reserves, exacerbated by depositors withdrawing funds for household needs and emergency spending, fueled dire shortages of cashflow and liquidity—particularly for smaller and rural institutions. Management and staff were deeply affected and risked their own safety in working and providing services to clients.

FSPs struggled to manage loan collections. In some cases, clients faced surprise late payment penalties, coercive collections, improper collateral seizure, and other behavior that put clients at risk. Women experienced greater challenges. Rising domestic and homeschooling responsibilities during the lockdowns meant less time for their businesses. Some MSMEs adopted new business models such online marketing and transactions and/or adding health-related products in high demand during the pandemic. However, many businesses failed and people migrated from cities back to home villages, seeking lower costs of living and job alternatives in the (less-affected) agricultural sector.

Of note, during the pandemic, cross-border online lending platforms increased activity in Indonesia, despite being illegal and unregulated. These platforms provide quick cash but charge very high prices, and many of the more serious consumer harassment cases have been tied to them. Belatedly, the national police started taking action to curb illegal online lenders.

In response to these challenges, the Indonesian government introduced low-income household safety nets including direct cash transfers, non-monetary grants and subsidies, new regulations on FSP loan rescheduling, and liquidity support for businesses via new or expanded credit programs. Helpful too, private lenders offered FSPs to reschedule loans and assistance in digitalizing loan origination and disbursement.

MFIs that are further advanced in digitalizing operations have been able to survive and grow and are well positioned to shift millions of MSMEs to online financial services, supply chains, and other services. The Ministry of Cooperatives and SMEs reports that <a href="https://www.g20.org/digitization-encourages-msmes-to-be-higher-quality/" target="_blank" rel="noopener noreferrer">19.5 million MSEMs are already active online</a>; the government aims to have 30 million MSMEs <a href="https://www.g20.org/digitization-encourages-msmes-to-be-higher-quality/" target="_blank" rel="noopener noreferrer">online by 2024</a>. Deepening digital operations would improve operational efficiency, client satisfaction, credit risk mitigation, and business profitability.
<h1>Perspectives from the Pacific Island Countries</h1>
Many Pacific Island countries were spared severe health effects of COVID-19. However, socio-economic effects were dramatic given plummeting tourism and other commerce. The region’s reliance on overseas migrant workers makes remittances and digital payments critical, and they became even more so during the pandemic. Tonga, Fiji, and Samoa lead the region in receiving remittances. In fact, <a href="https://pressroom.ifc.org/all/pages/PressDetail.aspx?ID=26060" target="_blank" rel="noopener noreferrer">Tonga is the top recipient in the region</a>, with remittances close to 40 percent of GDP.

Yet, estimates suggest that only about 30 percent of adults across the region (excluding Fiji) have access to financial services. Hence, governments and private sector institutions have launched several initiatives to boost financial inclusion.

Core regional challenges include bank de-risking and the high cost of remittances. Even before the pandemic, many banks sought to lower risks by ceasing services to money transfer operators (MTOs) due to concerns about anti-money laundering and know-your-customer regulatory compliance. Multiple MTOs were forced to close. Service availability fell and costs to send money home rose. Across the Pacific region, <a href="https://blogs.worldbank.org/peoplemove/global-remittance-flows-2021-year-recovery-and-surprises" target="_blank" rel="noopener noreferrer">average fees exceed 10 percent</a> compared to 6.38 percent globally, a gap widened during the pandemic by further reduction in providers.

For several years, the World Bank and IFC have supported Pacific countries to strengthen regulatory frameworks and payment system infrastructures. For example, the <a href="https://pressroom.ifc.org/all/pages/PressDetail.aspx?ID=26060" target="_blank" rel="noopener noreferrer">IFC supported Tonga Development Bank</a> to establish new digital remittances corridors with New Zealand and Australia, enabling Tongans to send money at a much lower cost of about 5 percent. The program now covers 95 percent of Tongan seasonal workers in New Zealand. The corridor between Australia and Tonga launched at a crucial time, in November 2020. As people under lockdown sought online solutions, usage surged, seeing a significant increase in financial inclusion.

Digital financial services will continue to grow in the Pacific countries, with central banks progressing in operationalizing the national electronic payment systems in Fiji, Samoa, Solomon Islands, and Vanuatu. In parallel and building on these efforts, commercial banks and telecom companies are offering new digital payment and remittance products. Households and small businesses in Pacific countries stand to benefit from national payment system reforms that will help modernize national and regional financial architecture, in turn driving inclusive economic development and making every day financial transactions easier.

Rebuilding After COVID: Financial Inclusion Across Asia

COVID-19 has had outsized impact on global poverty, especially in Latin America where the shockwave from the pandemic generated major headwinds for the inclusive finance sector. How have the sector and its clients navigated the storm? What lessons can we draw from how inclusive finance providers, such as microfinance institutions, managed to maintain sustainability and foster resilience among their clients? How different among global regions have responses, impacts, and future focal challenges been, and why?

These were among the questions for about two dozen leaders of microfinance organizations, impact investors, and analysts from around the world who convened recently at a workshop hosted by Lehigh University’s <a href="https://business.lehigh.edu/centers/martindale-center/about" target="_blank" rel="noopener noreferrer">Martindale Center</a> to share views on how financial inclusion interacted with the socio-economic crises of the pandemic. The event built on the success of a previous similar workshop that resulted in the publication of <a href="https://www.brookings.edu/book/the-future-of-microfinance/" target="_blank" rel="noopener noreferrer">The Future of Microfinance</a> by Brookings Institution Press in 2020.
<h1>Focus, Focus, Focus on Clients and Staff</h1>
A major part of the Lehigh workshop discussion, led by CEOs of three leading Latin American microfinance institutions (MFIs), focused on experiences of institutions in Latin America and the Caribbean (LAC). One of the central areas of agreement about lessons learned was that client-centricity was key to minimizing the impact of the COVID-19 crisis on Latin American MFIs. Lockdowns throughout the region were quite strict and prolonged (on average six-plus months). Not only were the respective economies badly hurt—with GNP drops of about 7 percent to 9 percent <a href="https://www.oecd.org/coronavirus/policy-responses/covid-19-in-latin-america-and-the-caribbean-regional-socio-economic-implications-and-policy-priorities-93a64fde/" target="_blank" rel="noopener noreferrer">according to the OECD</a>—but also, probably more importantly, target clientele, who live day to day and need to go out to generate income, were particularly hard hit.
<blockquote class="pullquote--left">Client-centricity was key to minimizing the impact of the COVID-19 crisis on Latin American MFIs.</blockquote>
Being client-centric during the worst of the pandemic meant being constantly in touch with clients and being flexible and able to adapt to changing needs. Further, participating leaders of Latin American MFIs uniformly agreed that beyond considering the needs of an organization’s external clients it was also equally important for MFIs to listen and adapt, internally, to the needs of their employees. Only through ensuring staff’s commitment and loyalty have MFIs in the LAC region been able to maintain adequate communication and contact with their clients through the pandemic. Given how the prevailing “high-touch” MFI operating methodologies heavily rely on proximity and constant follow-up with clients, regular and transparent client communications became critical under the crisis’ rapidly evolving enabling environments.

Workshop participants stressed the importance of MFIs remaining flexible and quickly reacting to changing circumstances, such as providing client-specific, case-by-case restructuring and/or increases in loan sizes, as well as seeking cost reduction through improved efficiency and productivity, notably increasing the use of digital tools wherever feasible. On the flip side, practices that practitioners agreed did not work well included: blanket or indiscriminate across-the-board restructuring and refinancing; generalized increases in loan amounts; and indiscriminate down-to-the-bone cost cutting.
<h1>Crisis Management by MFIs and Clients</h1>
It’s important to highlight factors that normally would have had a material negative impact on MFIs and their clients but, in the case of LAC, ended up having minimal effect. Specifically: liquidity. Because of people’s inability to leave their dwellings due to strict lockdowns, coupled with government sanctioned system-wide loan repayment moratoriums, microentrepreneurs were for the most part not repaying their loans. Under those circumstances, one might have anticipated that MFIs’ liquidity would rapidly deteriorate and reach crisis levels. However, MFIs largely managed to avoid liquidity issues through a combination of extended grace periods implemented by host country governments and international funders, coupled with enhanced liquidity management by the MFIs. As severe and long-lasting as the COVID crisis has been, most well-managed MFIs appear to have survived <a href="https://www.cgap.org/sites/default/files/datasets/2021_4_CGAP_Symbiotics_COVID_Briefing.pdf" target="_blank" rel="noopener noreferrer">relatively well</a>.
<blockquote class="pullquote--right">For the inclusive finance sector’s target clients, the pandemic was, after all, not “the crisis” but rather “one more crisis.”</blockquote>
Beyond palliative measures implemented by governments and funders, and the rapid and seemingly appropriate responses of most organizations, it is important to note just how resilient microentrepreneurs are. Beyond the imperative need to “sink-or-swim” for those that live so precariously—and without taking away from how severe the COVID crisis was for low-income people across the globe—Lehigh workshop participants noted that microentrepreneurs, in fact, are always operating under duress. Workshop participants agreed that the target population lives in an essentially permanent state of crisis. Indeed, in most of the corresponding enabling environments, MFI clients deal daily with everchanging rules of the game, shifting regulations and market dynamics, violence and insecurity, and nature-related external shocks (such as, but not limited to, hurricanes, earthquakes, floods, droughts) that are being <a href="https://www.centerforfinancialinclusion.org/climate-change-adds-to-challenges-for-msmes-recovering-from-covid-three-takeaways-from-cfi-surveys">exacerbated by climate change</a>. Thus, for the inclusive finance sector’s target clients, the pandemic was, after all, not “the crisis” but rather “one more crisis.”
<h1>Three Rs of Digitalization</h1>
The need for and convenience of having available digital mechanisms through which MFIs could interact with their clients became very evident during the pandemic. Accordingly, digitalization efforts received a <a href="https://blogs.worldbank.org/latinamerica/rise-digital-financial-inclusion-during-covid-19-pandemic" target="_blank" rel="noopener noreferrer">renewed push</a> throughout the LAC region. Overall, organizations that were ahead-of-the-curve in the digitalization process before the pandemic were able to better cope with the new challenges of interacting virtually with clients. Nevertheless, participants at the Lehigh workshop emphasized that for MFIs digitalization is not a silver bullet that will solve all their problems but is rather one more tool for which levels and speed of implementation need to be clearly defined based on an MFI’s resources.
<blockquote>MFIs digitalization is not a silver bullet that will solve all their problems but is rather one more tool for which levels and speed of implementation need to be clearly defined.</blockquote>
Specifically, any digitalization plan should take into account the three Rs: a) Reason—why is more digitalization needed (e.g., reduce costs, improve client services)?; b) Resources—what is available to the MFI not only in terms of financial resources to cover implementation expenses, but also in terms of human resources, local telecom infrastructure, etc.?; and c) Return—what are the expected returns from implementing the process? Further, given that only what is measured gets done, it is important to clearly define how each of the relevant variables (better service, lower costs, etc.) will get measured, reported, and assessed.

The Latin American MFIs participating at the Lehigh workshop prioritized distribution processes (e.g., data collection, disbursements, collections) over analytics, algorithms, or artificial intelligence (AI). Participating practitioners frequently mentioned current limitations of AI as an ongoing challenge; specifically that low levels of existing actuarial data limit the ability to build AI tools. Moreover, compounding that existing barrier, in the wake of the crisis, most pre-pandemic data trends became less dependable as elements to predict future behavior.
<h1>Focus Forward</h1>
The workshop highlighted several areas for the inclusive finance sector to focus on moving forward:
<h4>1. Digitalization</h4>
This is an area most providers of inclusive financial services need to work on and for which appropriate guidance and capacity building support at the industry level could have substantial benefits. (For more workshop takeaways on digitalization, see <a href="https://www.centerforfinancialinclusion.org/digitally-reshaping-inclusive-financial-services-in-the-wake-of-covid-19">previous blog in this CFI series</a>.)

<h4>2. Consolidation</h4>
Expectations had been that a severe crisis, such as the one associated with the COVID pandemic, would precipitate <a href="https://www.jstor.org/stable/10.7864/j.ctvbnm3hx.12" target="_blank" rel="noopener noreferrer">industry consolidation</a>. Somewhat surprisingly, it appears that overall, this has not been the case. While it might be too early to come to definitive conclusions— circumstances could still change and regional or national variations may emerge—so far, the extreme duress of smaller and weaker MFIs that could have triggered consolidation processes has been less than anticipated. At most, the crisis might have accelerated consolidation trends in a small subset of places where such developments were already underway. 
<h4>3. Governance</h4>
The MFIs that have been the most severely affected by the COVID crisis have common management and governance weaknesses. Thus, the topic of building strong governance practices surfaced as a key area where leaders and proponents of the financial inclusion sector would be well advised to concentrate their efforts.
<h4>4. Subsidies</h4>
The noticeable trend among international donors and aid agencies to diminish subsidized support for microfinance is probably appropriate given that, overall, the industry seems to have matured and continues to evolve in healthy directions in terms of financial sustainability and social impact. Moving forward, the substantial support provided to the microfinance industry—including technical assistance, direct funding, and soft resources—might not be as transformational as it was in the past. Nevertheless, while the sector’s self-sufficient maturity might be true overall, there are specific instances in which support is still justified, for example, support for remote and rural inclusion efforts, digitalization guidance and capacity building, governance, and specific focus on regions or countries affected by climate change or other exogenous shocks.

&nbsp;

Participants of the Lehigh University workshop included Mercedes Canalda, CEO, Banco Adopem, Dominican Republic, Edgardo Perez, CEO, Fundación Génesis Empresarial, Guatemala, and Ralph Guerra, CEO, Compartamos Financiera, Peru. This note represents the author’s views, not necessarily those of other participants.

Client-Centricity Leads the Way in Latin American Inclusive Finance Reponses to COVID-19

Digital adoption has been transforming the inclusive finance ecosystem for years. Innovation is robust, digital service providers for the industry are expanding, the competition to roll out digital financial services to clients is fierce, and up and down the value chain companies are excising physical offices and field staffs. As a result, clients’ digital access is broadening across the globe. Arriving mid-metamorphosis, the COVID-19 crisis altered the dynamic considerably. How has the pandemic affected the shift to digital finance? How are inclusive financial service providers incorporating digital tools? Can digitalization revitalize the inclusive finance sector? What challenges need sustained attention?

These were among the questions considered by a gathering of two dozen microfinance organization leaders, impact investors, and analysts from around the world at a workshop hosted by Lehigh University’s <a href="https://business.lehigh.edu/centers/martindale-center/about" target="_blank" rel="noopener noreferrer">Martindale Center</a>. Sharing views on how financial inclusion interacted with the socio-economic crises of the pandemic, participants built on the success of a previous workshop that resulted in publication of <a href="https://www.brookings.edu/book/the-future-of-microfinance/" target="_blank" rel="noopener noreferrer">The Future of Microfinance</a> by Brookings Institution Press in 2020.
<h1>Pandemic as Accelerant</h1>
Workshop participants across every region confirmed the pandemic accelerated digital adoption across client populations and inclusive financial service providers (iFSPs). For clients, digital payments—e.g., mobile money, government transfers, access to savings, remittances, loan distributions—were most visible and provided liquidity, especially during shutdowns. Simultaneously, digital loan repayments helped sustain iFSP liquidity. Yet digitalization extends far beyond payments, from back-office operations and new digital products to automated decision-making algorithms and platforms for onboarding clients and fulfilling regulatory mandates.

Faster. Cheaper. Easier. More scalable. More accessible. Compelling stuff. What’s not to like? The workshop discussion centered around three broad areas of concern: formidable capital requirements, big barriers to technology management capacity building, and consequences of market and firm structural changes.
<h1>Capital is the Principal, Partners are Capital</h1>
Digitalization of the inclusive finance sector will require substantial investment. Progress has been facilitated by investments from governments and development financial institutions (DFIs). Examples include electronic payment systems in Papua New Guinea and Fiji, Tonga’s remittance corridor to global payment systems through partner banks in New Zealand and Australia, and India’s digital bank accounts for all citizens linked to national ID numbers and mobile phones. 

Nonetheless, participants agreed that access to capital for expanding digitalization remains largely limited to large, professionally managed institutions (i.e., Tier 1, assets &gt;$100M) which attract global investors by rigorous attention to risk, sophisticated portfolio management, and superior, transparent governance. However, even that top tier, as discussed in another <a href="https://www.centerforfinancialinclusion.org/slow-motion-extinction-or-can-impact-investors-reinvigorate-pro-poor-financial-inclusion">CFI blog from the workshop</a>, is having difficulty recapitalizing in the wake of COVID-19. Moreover, any funding is unlikely to be accompanied by the technical assistance grants so critical to previous capacity building in the sector.
<blockquote class="pullquote--left">Despite limited funding, iFSPs are proving resourceful.</blockquote>
Despite limited funding, iFSPs are proving resourceful. To reduce development and implementation costs, some have looked to partnerships. For example, Pierette Kouakou, Managing Director of Fin‘Elle (Cote d’Ivoire), reported that bank partnerships forged during COVID expanded her clients' access from five branches to over 200 branches within a banking network. In Indonesia, iFSPs leverage clients’ embrace of social media platforms like WhatsApp to facilitate communications and payments.

Similarly, many fintech companies are playing roles that are more complementary than competitive with more traditional microfinance institutions (MFIs). A recent <a href="https://assets.kpmg/content/dam/kpmg/in/pdf/2021/03/microfinance-digital-fintech-mfi-technology-finance.pdf" target="_blank" rel="noopener noreferrer">survey by KPMG in India</a> indicated that nearly 75 percent of surveyed MFIs have alliances with fintechs, and the rest are exploring forming such alliances. Partnerships can serve as a learning tool before attempting a new venture alone. However, Edgardo Perez, CEO of Fundación Génesis Empresarial (Guatemala), reported moving away from partnerships as Génesis developed its own digital capabilities, which raises a question for iFSPs around what is the balance and path for developing internal capabilities versus partnering to obtain them?
<h1>Capacity Building and Clear-eyed Leadership</h1>
A second main theme at the workshop was the importance of capacity building for managing these technologies. Workshop participants agreed that while funding and digital infrastructure are necessary, they are not sufficient for success. Thoughtful and prudent leadership is crucial for implementing digitalization. Yet a lack of management capacity within institutions is slowing adoption. The management challenges are many, even at the basic level: setting up a tech team requires significant hiring, talent development and, crucially, managerial time to oversee the team and its integration into the organization.

Providing strategic focus is also essential. Alex Silva, Executive Director of Calmeadow, emphasized the need for clear and well understood reasons for digital adoption and for persistent organizational support. Leadership and staff must regularly reassess the reasons underlying digital adoption. Silva pointed out that all three Latin American MFI CEOs at the workshop had led successful implementations of a range of digital processes and services—success driven by client-centric foci and clear understanding of client needs and capabilities. However, the experience of a small MFI that accepted an unsolicited grant to digitize, but ended with little to show for its efforts, serves as a cautionary tale that digitalization is not a silver bullet.
<blockquote class="pullquote--right">Digitalization requires culture change, within and without the iFSP, over long time horizons.</blockquote>
Participants further agreed that digitalization requires culture change, within and without the iFSP, over long time horizons. Executives must navigate the narrow path between moving too fast and outpacing abilities and moving too slow and losing relevance. Given the existing demands on management, there was serious lament about the lack of capacity building grants that had for decades effectively propelled microfinance.
<h1>Potential Within Existing Resources</h1>
While building managerial capacity and new resources can catalyze change, some participants highlighted the potential of existing capabilities and relationships. Mercedes Canalda, CEO of Banco Adopem (Dominican Republic), pointed out that a core strength of many iFSPs is educating clients and onboarding them to new technology, providing the iFSP advantages over fintech competitors. Additionally, many institutions invest heavily in their client communities. Iwan Nazirwan, Chairman of KRAF (Indonesia), reported that MFI lending groups in Bali are spreading digital literacy by helping each other learn to use digital services on their phones. 

And, of course, digitalization has greater impact when integrated across whole organizations. Ralph Guerra, CEO of Compartamos Financiera (Peru), advocated for starting digitalization with existing staff so that digitized staff will in turn push further adoption—as most front-line staff are from the same populations as their clients, they are best situated to mentor clients.

The extensive client data already in the hands of iFSPs are another key resource. Once digitized, client data can help inform product design to better meet client needs, reduce risk, and track impact. For example, Fundación Génesis Empresarial segments clients to understand group needs and business cash flow rhythms and then tailors services accordingly (e.g., matching loan disbursements to prevalent cash flow patterns). Génesis is also using technology to make onboarding easier. 
<h1>Unintended Consequences</h1>
The third broad theme emerging from the workshop was the challenges and consequences that arise when changing trajectory and moving away from long-standing structures that have supported operations and clients. Many have raised concerns of the impacts of digitalization on inclusion arising from low digital literacy, limited connectivity, or a lack of trust (warranted given data security risks) among certain parts of targeted populations. Increased digital adoption challenges existing modes of operating such as group lending. When payments are digital, what is the remaining value of group meetings, in-person meetings, and their staffing?

Some MFIs may shift away from field officers toward remote communications in the hope that costs will fall with increased productivity. But seeking such savings, which may or may not appear, will also alter the recruitment of staff in type and location. This shift of staff recruitment may jeopardize an important external benefit of the industry: the training and professionalization of a segment of rural labor. Field officer jobs have often been first steps in career paths within or beyond MFIs. What are its implications for rural development?
<blockquote>Will the quest for scale and scope efficiencies drive further standardization to the detriment of clients?</blockquote>
Questions arise too about industry structure. Currently iFSPs come in a wide array of organizational sizes, types, and missions. Digital adoption will upend the competitive structure of the sector. Critics characterize the industry as achieving scale with low-cost, standardized products that may not meet client needs. While the customer-centric focus of the participants at the Lehigh workshop belied this characterization, will the quest for scale and scope efficiencies drive further standardization to the detriment of clients? And will we see further consolidation or will the balance of competitive advantage tilt back towards smaller niche players? Even with fintech advances in penetration, certain population segments remain out of reach. Will smaller iFSPs have better business models for serving these populations with needed, potentially, specialized service? Can they survive independently without capital and/or partnerships?
<h1>Enhancing the Narrative</h1>
One of the central questions framing the Lehigh workshop was: What challenges need sustained attention in inclusive financial services? Perhaps the most pressing is the need for a compelling narrative to enhance support for digitization capacity building. Microfinance was the north star of impact investing for decades, attracting the majority of funding. Yet, attention among investors and funders has waned compared to its fast-growing neighbor fintech.

What might re-attract funders’ attention?
<ul>
 	<li data-leveltext="" data-font="Symbol" data-listid="8" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Emphasizing microfinance’s hard-earned lessons of what creates success? These lessons include:
<ul>
 	<li data-leveltext="" data-font="Symbol" data-listid="8" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Disciplined patient capital for capacity building and experimentation;</li>
 	<li data-leveltext="" data-font="Symbol" data-listid="8" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Proven self-sustainability and scalability;</li>
 	<li data-leveltext="" data-font="Symbol" data-listid="8" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Multi-layered ecosystem development;</li>
 	<li data-leveltext="" data-font="Symbol" data-listid="8" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Fostering of staff and management talent;</li>
 	<li data-leveltext="" data-font="Symbol" data-listid="8" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Customer-centric product tailoring;</li>
 	<li data-leveltext="" data-font="Symbol" data-listid="8" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Transparency in pricing and in governance; and</li>
 	<li data-leveltext="" data-font="Symbol" data-listid="8" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Collaborative information sharing.</li>
</ul>
</li>
 	<li data-leveltext="" data-font="Symbol" data-listid="8" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Further creating opportunities for complementarity with fintech to garner more attention?</li>
 	<li data-leveltext="" data-font="Symbol" data-listid="8" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Collaborating with fintech to spur mission focus?</li>
</ul>
Regardless, digitalization will not come without pain, steadfast commitment, and vision by both leadership and the impact investing community. Inclusive finance institutions too tied to well-worn methodologies will be at risk, with underperforming investments and suboptimal, lower impact services to the communities they seek to serve.

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

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

Fintech is a shiny attractor for impact investors. Emerging financial technologies shimmer with disruptive potential for the delivery of a wide array of financial, educational, health, and social services for the poor. While microfinance still makes up a major share of impact investing portfolios, many investors <a href="https://cfi-blog.org/2017/04/20/microfinance-is-dead-long-live-microfinance/">appear to have moved on</a> to fintech, the next wave of creative destruction. Rather than be toppled by it, microfinance institutions (MFIs) look to ride that wave too, to extend reach, reduce costs and prices, improve and deepen client services, and improve risk management.

Fintech, whether new digital services or proprietary software used to evaluate and underwrite credit, brings glittery potential for MFIs, no question. But in fairy tales unicorns glitter too. Are MFIs chasing something equally illusory? Microfinance has decades of success growing and strengthening a high-touch business model. As growth slows, should MFIs now abandon that approach and use high-tech to go low-touch for cost efficiency? If MFIs stay their course, will they be overtaken by new entrants with new models, like Chinese online peer-to-peer lender Yirendai, which <a href="https://www.wsj.com/articles/yirendai-ipo-could-pave-way-for-more-fintech-listings-1450435842">went IPO</a> on the New York Stock Exchange last year? Or instead, will MFIs find innovative high-tech ways to further leverage their deep relationships with clients and understanding of client needs?

These were among the questions for 32 microfinance and impact investing participants and analysts from around the world who convened last month, hosted by Lehigh University’s <a href="http://cbe.lehigh.edu/martindale">Martindale Center</a>, with support from the <a href="http://calmeadow.com/">Calmeadow Foundation</a> and the <a href="http://fiecouncil.com/">Financial Inclusion Equity Council</a> (of which CFI is the secretariat).

The group broadly agreed that sticking with core competencies is very often sound advice. Additionally, several participants challenged the group by asking: has anyone yet seen a scalable, investible, high-tech, and high-touch financial inclusion unicorn? Mobile payments networks like M-Pesa and BiM are high-tech, but decidedly low-touch delivery channels. Low-touch too are big data algorithms like those of Yirendai and its corporate parent CreditEase used for automated credit scoring and risk management. However, as digital financial technologies like these mature, will base of pyramid (BoP) financial customers still need high-touch MFIs? As fintech-driven models become more sophisticated, can MFIs hope to deliver anything that technology sophisticated telecoms and global commercial banks can’t?

Turns out MFIs, clients, and even global banks themselves demonstrably think the answer is Yes, plenty. For example, the large Spanish multinational bank BBVA acquired and consolidated a number of MFIs in Peru and elsewhere in Latin America. Recognizing that as a global bank they had limited understanding of BoP client needs—and that, as one board member put it, “relationships matter”—BBVA keep their microfinance group administratively separate. They are, however, bringing the tech depth of the global bank to bear in the microfinance segment. For example, they have put forth a major push to bring things like handheld mobile connectivity, big data algorithms, and split second automation to roving microfinance field officers for use during meetings with clients. One key aim is to enable hyper-personalized product design, instantly tailored to widely diverse needs and situations of individual clients and their families. The vision: technology as a complement to high-touch relationships, not a substitute. The goal is to use both technology and the relationship to deliver greater value to the client—improving financial literacy, building a financial life beyond credit, providing investment and business-strengthening advice, and pointing the client towards relevant non-financial services like health, agriculture extension, or business planning.

Clients, voting with their feet and wallets, also clearly value high-touch. A <a href="http://www.themix.org/mixmarket/publications/measuring-performance-alternative-delivery-channels">recent study</a> by the Microfinance Information Exchange (MIX) on alternative financial services delivery channels found that even where tech, like mobile banking and ATMs, had expanded clients’ access to financial services, the fraction of active clients actually using those services is below 10 percent. It appears that people prefer dealing with people. Clients use banking agents—often non-staff individuals under contract in their communities—more than any other alternative delivery channel. And it’s a virtuous cycle: agents create the largest number of new touchpoints that become available to clients. In part this reflects the fact that fully automated transactions are a blunt instrument: ATMs are great at dispensing cash, but not so good at answering questions or responding to individual circumstances.

Similarly indicative, the value of client transactions at physical branches remains 30 to 60 times greater than at any other kind of point of service. High-tech may facilitate routine tiny transactions, lubricating the cash flows of daily life, but can’t substitute for client preferences for high-touch on big ticket transactions. Designing and creating superior options for these latter big ticket needs—saving for weddings and school fees, enabling microenterprise capital investments, weathering long illnesses, paying for funerals and solar lamps—is fundamentally at the core of microfinance’s value to the poor.

Despite broad agreement among workshop participants on the potential of fintech in microfinance, there was also significant unease about many MFIs’ abilities to effectively embrace it. It took decades of iteration and experience for leading MFIs to scale and achieve operational sustainability with their low-tech, high-touch model. Committing to high-tech introduces an entirely different set of skill requirements and partners for MFIs, and undoubtedly will bring a host of unforeseen new problems requiring experimentation to overcome. Yet given the pace at which new entrants are flocking into BoP financial services—thanks to MFIs proving the profit potential­—MFIs don’t have the luxury of decades to work out kinks this time around.

Are MFI budgets, or innovation management skills, or staff recruiting and training systems, or supply chains, up to the task? Are MFI leaders and governance boards fully on-board, and are they knowledgeable enough to drive tech-embracing changes? Will impact investors—tempted by shiny new things elsewhere—see their way to funding the experimentation, infrastructure, and institutional capacity-building needed? Are these critical actors – management, directors, investors – able to keep their heads and take the time to think through how their MFI business model can uniquely deliver value to the client, and what elements can be restructured or ceded in the face of new technologies and new entrants?

Another area of concern centered around the potential for fintech to exacerbate the digital divide. Cheap 2G/SMS mobile is everywhere, and mobile payments are already ubiquitous in some places. Yet it’s also clear, <a href="http://www.centerforfinancialinclusion.org/storage/CFI_MFS_Tech_FINAL.pdf">as outlined in the recent paper from CFI Fellow Leon Perlman</a>, that the infrastructure needed for smart phone-based (and hence more elaborate) digital financial services is not. Deep penetration of smartphones or reliable broadband internet remain a long way off for most of the world’s poor. In this context, it is well worth noting that compared to disruptive but infrastructure-reliant low-touch fintech entrants, MFIs are much better positioned to deliver high-tech services while mitigating the digital divide. Yirendai’s automated credit decisions scour the web and other sources to dig up information to score borrowers and enable direct peer-to-peer transactions, but they require digital footprints and robust digital access on both sides. Kiva’s main quasi-peer-to-peer lending model still relies on MFI relationships with clients. <a href="http://blog.microsave.net/key-new-year-resolutions-for-the-success-of-digital-financial-services/">As some observers have noted</a>, when the digital footprint is light, as is often the case with BoP clients, one-size-fits-all underwriting results in collateral damage with a high incidence of borrowers blacklisted after failing to repay a small “tester” loan.

High-touch MFIs also have a significant advantage as last mile <a href="https://cfi-blog.org/2017/05/04/can-mfis-deliver-what-poor-people-need/">delivery channels</a> for complementary services like health services, empowerment training, or sale and distribution of cookstoves. Pro Mujer in Latin America did <a href="https://promujer.org/2015/12/18/pro-mujer-featured-in-duke-paper-for-its-innovations-in-health-care/">half a million chronic illness screenings</a> for clients in the same places they go for microfinance services. Kenya’s impact-venture-capital-backed BURN Manufacturing partners with MFIs to finance and distribute cookstoves that save poor clients $200 annually in charcoal, improve their health, and cut carbon emissions.

Most importantly, long-term proximity to clients affords MFIs a window into the lives, needs, and dreams of the hundreds of millions of poor individuals they serve. Without that understanding, better designed, more tailored, higher impact products and services won’t come, no matter the tech. Commodified products will always be the driver behind fintech, but also will exclude as much as include. Microfinance first succeeded by devoting decades to exploring ways to deliver credit with a priority on inclusion. Some would argue that this has at times gone too far, but the revolutionary innovation remains: most poor people, like everyone else, can use credit productively and responsibly.

Exploiting fintech opportunities in microfinance won’t come easy, but MFIs that fail to search for the unicorn risk succumbing to nimbler competitors, or at minimum, will offer their clients suboptimal, lower impact services. At the same time, impact investors need to restrain their infatuation with the latest Bright Shiny Object and have the patience and discipline to help fuel the same sort of experimentation and capacity building that brought microfinance to the forefront of impact investing to begin with. This thoroughbred, horned or otherwise, has the pedigree and legs for the long haul. Bet on it.

Todd A. Watkins is Professor of Economics, and Executive Director of the Martindale Center for the Study of Private Enterprise at Lehigh University. Anna Kanze and Paul DiLeo are Investment Managers at Grassroots Capital Management, PBC. Ira Lieberman is President of LIPAM International.

Also check out the other blogs in this series: “<a href="https://cfi-blog.org/2017/04/20/microfinance-is-dead-long-live-microfinance/">Microfinance Is Dead; Long Live Microfinance!</a>” and “<a href="https://cfi-blog.org/2017/04/27/time-to-ditch-impact-investings-unproductive-self-analysis/">Time to Ditch Impact Investing’s Unproductive Self-Analysis</a>” and ”<a href="https://cfi-blog.org/2017/05/04/can-mfis-deliver-what-poor-people-need/">Can MFIs Deliver What Poor People Need</a>?”

For video recordings of the Martindale Center event discussions, <a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_6gzZfFsSeOrSqntz90KSNR">click here</a>.

Have you read?

<a href="https://cfi-blog.org/2017/04/19/alternative-delivery-channels-not-all-are-created-equal/">Alternative Delivery Channels: Not All Are Created Equal</a>

<a href="https://cfi-blog.org/2015/03/03/what-impact-investors-could-learn-from-microfinance/">What Impact Investors Could Learn from Microfinance</a>

<a href="https://cfi-blog.org/2014/06/18/impact-investing-landscape-trends-to-watch/">Impact Investing Landscape: Trends to Watch</a>

Fintech in Microfinance: In Search of the High-Tech High-Touch Unicorn?

<img class="alignright wp-image-23576" style="border: 0 solid #000000;" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/05/eb-accion_march-2011_kiki-flavien_fisherman_72-1.jpg" alt="" width="330" height="220" />We’ve identified the problem: Microfinance is no longer sexy. It’s old news. It can’t deliver “impact,” and its effect on alleviating poverty was oversold and has underwhelmed. It’s well and good to offer working capital loans, but at the end of the day, the poor need education, health care, water for drinking and irrigation, roofs, and electricity together with a wide variety of financial services. It’s time for investors seeking real innovation to move on to the next big thing that will transform the lives of poor people and save our planet. Never mind microfinance’s decades-long track record of listening to the poor and underserved clients and effectively developing products and services based on their needs.

Of course, we issue these statements with considerable sarcasm. But, all joking aside, industry trends and shifting sentiments are presenting investors with a real question: Should they abandon the reliable and successful platforms and infrastructure that microfinance institutions (MFIs) have built? In turn, MFIs are saddled with the question of whether to stick to what they know best, or instead, to use their platforms to deliver expanded product offerings that increase access to other essential services.

These were among the questions regarding the future of microfinance addressed by 32 microfinance and impact investing participants and analysts from around the world who convened last month, hosted by <a href="http://cbe.lehigh.edu/martindale">Lehigh University’s Martindale Center</a>, and sponsored by the <a href="http://calmeadow.com/">Calmeadow Foundation</a> and the <a href="http://fiecouncil.com/">Financial Inclusion Equity Council</a> (of which CFI is the secretariat).

In those discussions, there was wide agreement that even as MFIs have commercialized and scaled, they've listened to their clients. MFIs have hard-earned advantages in accessing the poor, understanding their needs, and serving as distributors. The path forward is clear: a wider array of services is beneficial to clients, and product diversification remains the siren call of future growth and profitability.

But that widening diversification, while long anticipated, has for the most part been sluggish. Though product data is scarce, services beyond working capital loans and savings products remain a stubbornly small percent of portfolios of large MFIs – no more than 10 to 15 percent. Microinsurance also has enormous growth potential for MFIs, either in partnership or directly, to address the needs of the underserved: the demand is huge, as the vast majority of poor people still lacks access, and commercial insurers tend to be short of good delivery channels to reach most low-income informal sector markets. However, uptake of microinsurance still remains slow.

In short, the waves of diversification into multiple products notwithstanding, microfinance remains at core, credit. A key challenge for the industry, as the conversations at Lehigh highlighted, is that impact investors are gravitating to new opportunities well beyond financial services. They don’t necessarily see MFIs as key to impact investing, yet they struggle with scaling-up in other sectors (alternative energy is a notable exception), due to the lack of sustainable, i.e. investible, institutions. The opportunities are an appetizing smorgasbord: health care, education, affordable housing, solar energy, irrigation for small farmers, potable water, agricultural value chains, and so forth. But none of these match the financial intermediation skill sets of MFIs. What’s more, microfinance and the broader financial inclusion industry remain the largest target of impact investors, by assets under management, in annual investor surveys.

But can MFIs succeed as impact players outside of their core microlending and savings businesses? A few examples give hope.
<ul>
 	<li>Equity Bank in Kenya actively supports education, including through capital improvement and equipment loans for schools, handling payroll for teachers, and special savings accounts for paying school fees.</li>
 	<li>BRAC in Bangladesh offers a wide array of client services, run as separate businesses from their huge microfinance business. Among other services, BRAC operates thousands of primary schools for girls, a (stock-exchange listed) bank targeting small businesses, and advisory services for entrepreneurs.</li>
 	<li>Pro Mujer offers health care screening and other health care assistance, largely subsidized by their MFI operations.</li>
 	<li>Higher Education Finance Fund (HEFF), managed by OMTRIX, Inc. in Costa Rica, has financed MFIs throughout Central and South America to develop higher education loans for students. HEFF needed to provide significant technical assistance to its MFIs for product development and marketing to get education loans off the ground.</li>
 	<li>Caspian Impact Investment Advisers, a private impact fund manager focused on socially responsible businesses in India, helped develop the nascent affordable housing market in India by making investments in affordable housing providers as well as by supporting the microfinance institutions in their portfolio, like Equitas and Ujjivan, to expand into housing loans.</li>
 	<li>Pamiga Association, which provides technical assistance and financing to a network of 12 rural MFIs in East and West Africa, offers loans through its finance company to its network MFIs for solar energy and water for irrigation. Over the past few years, it has become clear that to do so successfully Pamiga will also need to offer financing to SMEs that can go the “last mile” and install, maintain, and offer installment payment systems (pay-go) to their clients.</li>
</ul>
There is clearly no one way to address product diversification. Subsidies, commonly seen as anathema to “investing”, may be necessary in the initial stages to incubate product offerings till they become sustainable. If investors and donors push to expand impact investing beyond alternative energy and microfinance, whether in education, health care, housing, or agricultural value chains, they will need viable institutions with adequate capacity to do so. A main lesson from microfinance is that targeted subsidies are a good way to build such institutional capacity. For those MFIs with the institutional capacity and financial sustainability to get there, targeted donor subsidies for technical assistance to build capacity for product diversification within the MFIs makes good sense. At the same time, there remains a need for like-minded investors to continue supporting successful microfinance business models because they have a proven track record and an unparalleled understanding of the needs of the poor and disenfranchised populations they serve.

The next post in this series will explore digital financial services.

Dr. Ira Lieberman is President of LIPAM International. Todd A. Watkins is Professor of Economics, and Executive Director of the Martindale Center for the Study of Private Enterprise at Lehigh University. Anna Kanze is an Investment Manager at Grassroots Capital Management, PBC. 

Also check out the other blogs in this series: “<a href="https://cfi-blog.org/2017/04/20/microfinance-is-dead-long-live-microfinance/">Microfinance Is Dead; Long Live Microfinance!</a>” and “<a href="https://cfi-blog.org/2017/04/27/time-to-ditch-impact-investings-unproductive-self-analysis/">Time to Ditch Impact Investing’s Unproductive Self-Analysis</a>”

For video recordings of the Martindale Center event discussions, <a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_6gzZfFsSeOrSqntz90KSNR">click here</a>.

Image credit: Accion

Have you read?

<a href="https://cfi-blog.org/2013/03/20/four-challenges-for-impact-investing/">Four Challenges for Impact Investing</a>

<a href="https://cfi-blog.org/2017/03/22/how-water-org-took-a-leap-of-faith-into-social-impact-investing/">How Water.org ‘Took a Leap of Faith’ into Social Impact Investing</a>

<a href="https://cfi-blog.org/2016/11/29/what-to-consider-when-investing-in-green-microfinance/">What to Consider When Investing in "Green" Microfinance</a>

&nbsp;

Can MFIs Deliver What Poor People Need?

<img class="alignright wp-image-23528" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/04/notes-514998_1920.jpg" alt="" width="314" height="206" />Discussion of impact investing has grown increasingly heated. There’s a conference nearly every week. Several weekly clipping services­—even a daily one—share news of the latest investments and conversions: 100% for impact! New benchmarks! New sectors! Perpetual motion! What fuel is creating this heat? The cold conviction that someday soon, all investing will be impact investing!

Meanwhile, in a parallel universe worried about losing its gravitational pull, a debate waxes and wanes over whether microfinance should be disqualified as an impact investment, either because its subsidized, non-profit origins magnetically repel VCs or because randomized controlled trials find that the average benefit to clients of microcredit is modest.

Which is ironic, because microfinance and its sister star, financial inclusion, remain the largest impact sectors in annual investor surveys.

This hyperactivity and incoherence can only mean one thing: the term “impact investing” has achieved its financial industry apotheosis: it means whatever we need it to mean. It’s a gaseous cloud that shapeshifts depending on who’s looking.

Into this chaos stepped 32 microfinance and impact investing participants and analysts from around the world who convened March 31-April 1, hosted by Lehigh University’s <a href="http://cbe.lehigh.edu/martindale">Martindale Center</a>, with support from the <a href="http://calmeadow.com/">Calmeadow Foundation</a> and the <a href="http://fiecouncil.com/">Financial Inclusion Equity Council</a> (of which CFI is the secretariat). The mission: to explore what microfinance has achieved, what it can yet accomplish, and to seek out lessons that might inform the design and execution of other business models (potential impact investments) with non-financial as well as financial objectives.

The discussion largely acknowledged the reality that the impact investing nebula is whatever an investor thinks it is. It’s not that the activity the term purports to encompass has consolidated into an important position in the investment universe, but rather that the term has outlived its usefulness. It is time to jettison the term and in its place require more specificity, rigor and accountability from investors and entrepreneurs.

The dialogue reflected the many perspectives that animate impact debates. Must impact investments improve the lives and prospects of the poor? Or can activities that have no deliberate targeting of the poor, like renewable energy in rich countries or organic baby food, qualify? Do high, market, or superior financial return—pick one—disqualify a company? Does any company that provides products and services that poor or marginalized people purchase automatically qualify? Does an impact business model that achieves commercial success and reliable access to conventional capital lose its impact label? Are impact companies only those that require non-commercial impulses—eternal subsidy or heartstring-tugging photos—to push capital their way?

Despite reprising these long-running debates with no more consensus than in previous iterations, a more pragmatic and substantive alternative emerged to the “Impact or Not” movie we’ve been reliving like Groundhog Day for the last few years.

What signal triggered the consensus? The largely unremarked fact that “impact” is no longer a matter of faith or intention. Rather, four decades of experience and research have tested the efficacy of specific business models, products and services in achieving their non-financial goals, such as better school attendance, better health, or greater productivity. So too, much progress has been made in collecting data, setting conventions, and benchmarking performance with respect to non-financial value. Just maybe, the nebula’s multiple dimensions and fuzzy borders can be mapped.

The filter that separates microfinance and all “impact” businesses from other investments is a more demanding standard that requires assessment of the kind of non-financial value that is both intended and actually created. From this perspective, the holy grail of impact metrics—a common scale that will enable us to rank the impact of budget schools, working capital loans, health screening, and off-grid energy—is an unnecessary distraction. Instead, as several participants insisted, impact can take many forms, but investors must clearly state what they intend in terms of non-financial results, subject to the same scrutiny and third-party validation as their financial statements.

With the non-financial objective specified and research in hand, investors can decide for themselves what impact they wish to consider. More low-income finance? Increased school attendance by girls? Less carbon? Jobs? Savings?

Likewise, the continually recurring conversation on trade-offs between impact and market returns can be exited. Just as impact is in the eye of the investor, so too are good or poor returns.

Only two standardized contrivances need be of use: an “anti-hypocrisy” screen, like the Global Impact Investment Rating System (<a href="http://giirs.nonprofitsoapbox.com/about-giirs/about">GIIRS</a>), that scrutinizes a company’s HR, supply chain, environmental, and community practices to ensure the company isn’t making the world better by exploiting its workers or consumers or ravaging its community; and a corporate structure, like the Public Benefit Corp in the U.S., that discourages a company from abandoning its non-financial objectives once it achieves commercial viability thanks to the impact subsidy it enjoyed.

The Lehigh gathering focused on how microfinance could leverage its uniquely successful business model and market penetration to generate even more financial and non-financial value and retain its ability to innovate and execute at scale. This discussion delivered a welcome escape from the unproductive noise and hype surrounding the term “impact,” and redefined the challenge and the way forward based both on the microfinance experience and the solid base of research it has inspired.

Paul DiLeo and Anna Kanze are Investment Managers at Grassroots Capital Management, PBC.  Todd A. Watkins is Professor of Economics, and Executive Director of the Martindale Center for the Study of Private Enterprise at Lehigh University.

Also check out their related commentary: <a href="https://cfi-blog.org/2017/04/20/microfinance-is-dead-long-live-microfinance/">Microfinance Is Dead; Long Live Microfinance!</a>

For video recordings of the Martindale Center event discussions, click <a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_6gzZfFsSeOrSqntz90KSNR">here</a>.

Have you read?

<a href="https://cfi-blog.org/2015/03/03/what-impact-investors-could-learn-from-microfinance/">What Impact Investors Could Learn from Microfinance</a>

<a href="https://cfi-blog.org/2017/03/22/how-water-org-took-a-leap-of-faith-into-social-impact-investing/">How Water.org 'Took a Leap of Faith' into Social Impact Investing</a>

<a href="https://cfi-blog.org/2017/03/17/whats-responsible-about-impact-investing-exits/">What's "Responsible" About Impact Investing Exits?</a>

&nbsp;

Time to Ditch Impact Investing’s Unproductive Self-Analysis

Most foundations and development finance institutions have moved on from microfinance, in search of the leading edge of innovation and impact. They have concluded that their work is done now that leading microfinance institutions (MFIs) have definitively cracked the capital markets with healthy balance sheets and two large, heavily oversubscribed Indian IPOs just in the last year. Meanwhile, impact investors, particularly in the U.S., are divided on whether microfinance is, or ever was, an impact investment. In any case, they prefer to focus their attention on new “disruptive” business models. In impact industry publications, conferences and even terminology, microfinance is dead; yesterday’s solution at best.

Fortunately for people at the bottom of the pyramid (BOP), no one told microfinance that it has died. The robust IPOs and active trend of mergers and acquisitions indicate healthy commercial capital market interest. More importantly, the industry now has a central role in national financial systems all over the world, with hundreds of millions of clients, affected household members likely approaching one billion, and penetration into the majority of low-income communities in the world. The idea that the poor can constructively use and be sustainably provided with a comprehensive range of financial services—unthinkable 20 years ago—is no longer debated. Policymakers and mainstream financial institutions have recognized that a dynamic BOP finance sector fosters both equitable and sustainable development and the health of national financial systems and economies. And simply from an institutional standpoint, as David Roodman has noted, “From the point of development as industry building, support for microfinance has succeeded…in building microfinance institutions and industries that cater to poor people, create jobs, that enrich the national economic fabric.” It also bears mentioning that the poor people at heart of the industry are overwhelmingly female.

In the context of these mirror image appraisals, 32 microfinance and impact investing participants and analysts from around the world convened March 31 - April 1, hosted by Lehigh University’s <a href="http://cbe.lehigh.edu/martindale">Martindale Center</a>, and sponsored by the <a href="http://calmeadow.com/">Calmeadow Foundation</a> and the <a href="http://fiecouncil.com/">Financial Inclusion Equity Council</a> (of which CFI is the secretariat) to explore what role microfinance will play going forward. Overall, the group agreed that while dead to some, microfinance is alive and kicking on the ground and vigorously generating diverse business models and approaches to building economies and social value.

Around the world, microfinance is employing evolving models as it takes its place in the financial and economic development landscapes: mainstream commercial banks downscaling; specialized banks branching into SME lending, housing and other subsectors; mobile banking; agricultural finance; and microinsurance. And in nearly all countries, a substantial subset of MFIs are continuously experimenting on ways to blend commercial and social missions, building on sustainable financial foundations to diversify product offerings beyond microcredit to meet more of their clients’ varied needs.

As we will explore in subsequent blogs in this series, these various models challenge microfinance to revisit its role in creating social value for the client. The pursuit of scale and efficiency often—but certainly not always—implies “mission drift”. It also remains to be seen whether mission-led MFIs are the most effective means to build social value for poor clients in a world where mobile and digital technologies can reach the previously excluded at a fraction of the cost of traditional microfinance models and potentially deliver valuable information and education as a bonus.

More fundamentally, skepticism over the future of microfinance reflects doubts that today’s leading incumbent MFIs—once the disruptive innovators themselves—can ever generate disruptive forces of the magnitude needed to make meaningful progress towards achieving objectives as ambitious as the Sustainable Development Goals. Quite conceivably, the future lies with new models, like digital financial services, that reduce costs through substitutes for face-to-face interaction, reduce risk via data and algorithms, and increase outreach by saying yes to more potential clients with customized, individually-tailored product design and delivery.

The future of microfinance and the challenge for those who prioritize social value for clients is in taking advantage of the strengths of incumbent MFIs, particularly their proximity to clients: a four-decades-deep, hard-earned understanding of heterogeneous needs at the BOP. As donor and impact investor attention is captured by shiny new frontiers—health care, budget schools, smallholder agriculture, off-grid energy—MFIs that want to build on the value of this experience face two challenges.

First, those in the microfinance sector must convincingly deliver to impact investors the (often unwelcome) message that MFIs—professionally governed, managed and staffed, with reliable access to capital markets, diversified product offerings, and unique penetration at the BOP—offer the best available platform to design, test and in many cases deliver—directly or as orchestrator—products and services to create social value. Even where new channels or specialized institutions can be effective, as in the case of mobile money or housing finance, new entrants will need to learn how to fit narrow product expertise into the complex and sophisticated financial lives of poor people, much as microfinance needed to learn that clients need more than a three month group loan with weekly repayments.

Second, while the bulk of microfinance portfolios may be fully commercially sustainable and attractive to conventional investors, innovation and experimentation to reach the still-excluded continue to require patient, mission-aligned investors, grant subsidies or below-market financing—the model that fertilized microfinance to begin with. More than the success of microfinance on purely commercial terms, this central and essential role of subsidy—not for market distorting price reductions, but rather for innovation, infrastructure and capacity building—is the salient takeaway from microfinance for impact investing more broadly.

The fact that so many donors and impact investors view microfinance as dead undermines the ability of the industry to further strengthen through trial and error the robust business model that underlies its current success and stature—and inspires today’s exuberance for “impact investing”.  Microfinance is alive, well and firmly integrated into global mainstream capital markets. But to reclaim top rank status as a destination for impact investments, MFIs must redouble efforts to distinguish themselves by focusing on client outcomes and serve as the labs of innovation in product design and delivery to build social value.

Paul DiLeo and Anna Kanze are Investment Managers at Grassroots Capital Management, PBC.  Todd Watkins is Director of the Martindale Center at Lehigh University. 

For video recordings of the Martindale Center event discussions, <a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_6gzZfFsSeOrSqntz90KSNR">click here</a>.

Todd Watkins contributed to this post.


Have you read?

<a href="https://cfi-blog.org/2016/12/07/can-social-missions-be-preserved-in-initial-public-offerings/">Can Social Missions Be Preserved in Initial Public Offerings?</a>

<a href="https://cfi-blog.org/2017/01/26/a-tale-of-four-ipos-is-public-investment-in-microfinance-becoming-ok-again/">A Tale of Four IPOs: Is Public Investment in Microfinance Becoming OK Again?</a>

<a href="https://cfi-blog.org/2017/04/12/whos-responsible-for-responsible-impact-investing-exits/">Who's Responsible for 'Responsible' Impact Investing Exits?</a>

&nbsp;

Microfinance Is Dead; Long Live Microfinance!

This series highlights takeaways from a global workshop at Lehigh University, where leaders from the inclusive finance sector discussed the question of whether financial inclusion is more relevant than ever during the pandemic crisis.

Renee Chao-Beroff

Todd A. Watkins

Jennifer Isern

Alok Misra

Enjiang Cheng

Iwan Nazirwan

Hang Nguyen

Alex Silva

Shannon Mudd

Paul DiLeo

Anna Kanze

Ira Lieberman

Sub-Saharan Africa

India

South Asia

East Asia and Pacific

Latin America and The Caribbean

Challenges and Crises

Enabling Environment

Financial Health

Impact Investing

Microfinance Institutions

Resilience

Smallholder Farmers

Underserved Groups

Youth

Digital Financial Services

Agent Banking

Digital Payments

Fintech

Mobile Banking

Credit

Microfinance

Blog Post