Micro, small, and medium enterprises (MSMEs) in Indonesia are suffering in the wake of COVID-19 according to data collected by CFI. Seventeen percent of the businesses in the sample have closed, and 85 percent of those that continue to operate estimate their profits have decreased, often by 50 percent or more.

Owners of the MSMEs that were operating at the time of the survey remained optimistic despite the economic downturn. Almost two-thirds reported they were covering their business expenses with revenue and thought they could keep their doors open for another three months based on how things were going. In addition to altering their business practices to stay open, the data on owners’ use of financial tools suggests that they are drawing down their financial resources, raising concerns that they have little cushion for the months ahead.

From July 13 to August 8, 2020, CFI conducted phone interviews with a random sample of <a href="https://bina-artha.com/" target="_blank" rel="noopener noreferrer">Bina Artha Ventura (BAV)</a> clients in Indonesia. BAV, which is <a href="https://www.accion.org/mastercard-and-accions-partnership-to-unlock-millions-of-underserved-microbusinesses" target="_blank" rel="noopener noreferrer">participating in Accion’s partnership with Mastercard</a>, is a microfinance institution that uses a group lending methodology to serve entrepreneurs, mostly women, who predominantly live in rural areas. CFI completed 730 interviews, 660 of which were with female MSME owners. Two-thirds of the owners ran sole proprietorships while 31 percent ran microenterprises (one to 10 employees). Those microbusinesses employed an average of three people before the pandemic. MSMEs in the sample have been operating for almost eight years on average. Most businesses were grocery or food stands, although farming and the sale of household goods were also common. This is one of six surveys CFI is conducting in Indonesia as part of its <a href="https://www.centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact" target="_blank" rel="noopener noreferrer">ongoing effort to study the impact of COVID-19 on the financial health of MSMEs</a>. As with data from CFI’s first survey in Nigeria, the data from this survey is <a href="https://www.centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/indonesia" target="_blank" rel="noopener noreferrer">presented in this interactive dashboard</a>.
<h2>Survey Insights</h2>
<h4>Nearly one in five women-led businesses have closed. They were almost twice as likely to close as male-led businesses.</h4>
<blockquote>Of the women-led microbusinesses that closed, 78 percent said they were completely confident that they would reopen in the future, but only 57 percent of the women-led sole proprietorships that closed said the same.</blockquote>
Since COVID-19 struck Indonesia, 18 percent of women-led businesses in the sample have closed. These closures have proportionally impacted businesses of different types and sizes, and they have been driven largely by a drop in customer demand, likely the result of restrictions on movement being enforced in the country. The owners of these businesses were generally confident that they would be able to restart their business in the future, but there were major differences based on how large the businesses were prior to the pandemic. Of the women-led microbusinesses that closed, 78 percent said they were completely confident that they would reopen in the future, but only 57 percent of the women-led sole proprietorships that closed said the same. Importantly, women-led businesses were almost twice as likely to close as male-led businesses. Of the 70 male-led businesses in the sample, only 10 percent had shuttered their operations.
<h4>COVID-19 has led to dramatic declines in profits, but roughly two-thirds of businesses say they are covering their expenses.</h4>
<blockquote>70 percent of operating businesses reported a decrease in profits of 50 percent or more.</blockquote>
Businesses generally did well in the year before the pandemic struck. Fifty-six percent of respondents reported their profits increased compared to the year before while 38 percent said they had stayed the same. Only 5 percent of people said their profits had declined, but that number has skyrocketed since COVID-19: 85 percent of businesses reported that their profits have declined compared to pre-pandemic levels. Those declines have been dramatic, with 70 percent of operating businesses reporting a decrease in profits of 50 percent or more. While profit levels shrunk dramatically, owners were confident that they would be resilient to this shock. Sixty-three percent of owners said they were covering their expenses just with business revenue and think they could continue operating for at least three months based on how things were going.
<h4>MSMEs are trying to survive by changing business practices to boost revenue and cut costs, including reducing their labor force.</h4>
<blockquote>Half of operating microenterprises reported that they cut employees.</blockquote>
MSME owners are employing a mix of revenue-boosting and cost-cutting measures to ensure their revenues continue covering their expenses. For instance, a third of all operating businesses reported offering discounts to stimulate sales while a fifth chose to raise prices instead. Almost a fifth of businesses started a delivery service since the pandemic began. Cost-cutting measures were also common. For those businesses with employees, reducing the size of their workforce and work hours for staff was an important strategy. Half of operating microenterprises reported that they cut employees, leading to a 42 percent reduction in employment within this segment. This action likely had downstream effects. Many owners reported that they were working longer hours to meet customer demand or make ends meet, potentially a result of a reduced workforce.
<h4>In addition to their businesses, owners’ households are enduring, but data on financial tools suggests their margin of error is small.</h4>
Three-quarters of households reported that they were covering all their expenses with non-debt income sources. Severe food insecurity – defined as people going to bed hungry because of a lack of money – was relatively low at 10 percent. In comparison, CFI’s survey of urban MSME owners in Lagos, Nigeria found that 34 percent of owners reported severe food insecurity in their households.

While this is encouraging, a closer look at the financial tools owners are using to cope with the crisis suggests that conditions are likely to worsen. For example, 22 percent of owners sold a household asset to keep their business running. Of the households that sold an asset, only 63 percent reported being able to cover their expenses compared to 79 percent who did not sell an asset. Similarly, 47 percent of MSME owners reported skipping a loan payment, and those owners were less likely to have covered their household expenses by a similar margin compared to those who had made their payments.
<blockquote>Savings also appears to have collapsed in the months since the pandemic hit.</blockquote>
Savings also appears to have collapsed in the months since the pandemic hit. Since March, only 38 percent of people reported saving while 53 percent reported withdrawing money from savings. In the year prior to the pandemic, 84 percent of people reported saving compared to 54 percent who said they withdrew money. While the comparison is not one-to-one because of the different periods, it is certainly not encouraging, especially because savings is another indicator of households’ ability to cope. Ninety percent of owners who had saved since March reported being able to cover their household expenses compared to only 67 percent of owners who had not saved.

Collectively, this analysis implies respondents have dwindling financial options. Only so many assets can be sold, and savings will dry up if not replenished. Debts not repaid choke future lines of credit. These underlying patterns may help to explain a less optimistic sentiment shared by respondents: 79 percent said they could only cover their essentials for a month or less if their income sources dried up.
<h2>Summary and Reflections</h2>
Since the pandemic reached Indonesia in March, 17 percent of businesses have closed, profits have collapsed, and employment has plummeted. Women-owned businesses have been hit especially hard, with 18 percent of them closing compared to only 10 percent of male-owned businesses. Owners who managed to keep their business open reported a high degree of confidence in their ability to continue operating, relying on a mix of revenue-boosting and cost-cutting business practices to ensure their revenues continue to at least meet their expenses. This has helped stave off catastrophe at home, where food insecurity remains low and people continue to cover their household expenses.

However, data on the use of financial tools suggests owners and their households have little margin for error in the months ahead. Selling household assets, skipping loan payments, and net savings withdrawal activity indicate that respondents are already relying heavily on financial tools to meet their basic needs. Without a change in their circumstances, it is unlikely that MSME owners will be able to replenish these resources. Thus, it is reasonable to expect a worsening financial situation in the months ahead.

<em>This survey is part of our partnership with <a href="https://www.accion.org/mastercard-and-accion-partner-to-unlock-growth-for-millions-of-underserved-microbusinesses-around-the-world" target="_blank" rel="noopener noreferrer">Mastercard Center for Inclusive Growth</a> to understand the impact of COVID-19 on MSMEs.</em>

MSMEs in Indonesia Are Surviving but COVID-19 Leaves Little Margin for Error

CFI MSME Financial Health Data Team

Indonesia

East Asia and Pacific

Test of a Lifetime: COVID-19 and Financial Inclusion

Challenges and Crises

Enabling Environment

Data Analytics

Financial Technology

Entrepreneurs of MSMEs

Underserved Groups

Financial Health

MSME/SME Finance

Credit

Resilience

Women

Blog Post

New data from CFI’s <a href="https://centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/" target="_blank" rel="noopener noreferrer">survey of micro, small, and medium enterprises (MSMEs) in Lagos, Nigeria</a>, show the staggering impact of COVID-19. Since the <a href="https://www.bbc.com/news/world-africa-51671834" target="_blank" rel="noopener noreferrer">first confirmed case</a> of COVID-19 in Nigeria in late February, 9 percent of the 737 businesses in the sample have closed; the number of employees has declined by 51 percent compared to its high point the preceding year; and 80 percent of businesses have seen their profits decline.

The data also show MSME owners’ households in a precarious position. More than half of business owners said their household is currently not covering their expenses from earned income, and if their income were to dry up, nearly 60 percent would be unable to pay for essentials within a month. Food insecurity is high, too – one-third of respondents reported they or someone in their household has gone to bed hungry in the past two months because there has not been enough money to buy food.

This survey is part of CFI’s multi-country effort to <a href="https://centerforfinancialinclusion.org/understanding-covid19s-impact-on-financial-health-of-msmes/" target="_blank" rel="noopener noreferrer">understand the impact of COVID-19 on the financial health of MSMEs</a> and is the first of six longitudinal surveys in Lagos. Broadly, the survey seeks to understand which businesses are shuttering their operations and why; how the performance and practices of operating businesses have changed; what financial tools MSMEs are using and whether their use is correlated with businesses’ resilience; and how changes in these livelihoods are related to changes in household well-being. The initial survey aimed to establish a retrospective baseline for firm performance and financial tool use in addition to capturing changes in behavior and outcomes since COVID-19 arrived in Nigeria. Future surveys – which will occur every two months for the next year – will track these indicators over time.

From June 16 to July 15, 2020, CFI conducted phone interviews with a random sample of Accion Microfinance Bank (AMfB) clients living in Lagos. AMfB is participating in <a href="https://www.accion.org/mastercard-and-accion-partner-to-unlock-growth-for-millions-of-underserved-microbusinesses-around-the-world" target="_blank" rel="noopener noreferrer">Accion’s partnership with Mastercard</a>, which supports the digital transformation of financial service providers. CFI completed interviews with 737 respondents, 55 percent of whom were women. Two-thirds of the businesses in the sample were micro-enterprises (1 to 10 employees) while another quarter were sole proprietorships. Most business were well-established, with an average operating age of 13 years. There was a healthy mix of businesses, including grocers, school operators, and manufacturing businesses.

CFI is presenting its data from this survey effort in this <a href="https://centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/nigeria/" target="_blank" rel="noopener noreferrer">data dashboard</a>. The dashboard is a living document – it will be updated as CFI refines and conducts new analysis, and as new data from other surveys becomes available.
<h2>Survey Insights</h2>
<h3>Nine percent of businesses have closed since COVID-19, but owners are confident they will reopen again.</h3>
The data show that 64 of the 737 businesses in the sample shuttered their operations since COVID-19 arrived in Nigeria. Of these, 40 of the businesses closed because of government restrictions on their businesses. School operators were disproportionately affected. Of the 44 school operators in the sample, 52 percent reported not operating. Of all the other types of businesses – like grocers, tailors, or electronic stores – with an n of 10 or more in the data, only the share of restaurants that have closed cracked double digits at 12 percent. At the time of the survey, these entrepreneurs were confident that they would reopen their businesses when government restrictions are lifted.
<h3>Total employment is down by 51 percent. Closed businesses are a major contributor to the decline, but nominally small losses incurred by microenterprises are adding up.</h3>
The survey asked respondents to report the largest number of staff – full-time, part-time, and seasonal –they employed at one time in the 12 months preceding coronavirus. They included family members if they were paid a wage. Against that benchmark, employment has plummeted. Prior to coronavirus, MSMEs in the sample employed 3,001 people. At the time of the survey, that number had dropped by 51 percent to 1,468 people.

Two major patterns are contributing to the decline. First, business closures are a significant driver of net job loss, largely because so many schools, which are major employers, shut down. A mere seven percent of the entire sample – representing 53 closed businesses – accounted for 44 percent of net job losses, and closed schools accounted for nearly 80 percent of that. Second, many microenterprises have lost a nominally small number of employees (on average, just more than one), which collectively has a significant impact on employment. The 463 operating micro businesses have lost 550 employees, roughly a third of all jobs lost.
<h3>Those job losses are symptomatic of the drop in profits that 80 percent of MSMEs are experiencing.</h3>
Prior to COVID-19, 63 percent of businesses reported their profits increased compared to the year before, but the pandemic has halted that progress. Eighty percent of businesses reported their profits have fallen since the start of the pandemic. Including the businesses that have closed, half of all businesses said they can no longer cover their operating expenses. If there is any consolation, it is that most businesses – even those with a negative cash flow – reported a modest runway before needing to shutter operations. Based on how things were going at the time of the survey, 72 percent of operating businesses estimated they could manage for at least another 3 months before shutting down.
<h3>MSMEs are employing a variety of coping strategies to keep their businesses afloat.</h3>
Businesses were coping using a diverse mix of strategies. For instance, in addition to the dramatic reduction in the workforce, owners are cutting employees’ hours and working longer hours instead. About 11 percent of owners increased prices, 38 percent reduced prices, and 28 percent had done both. Similarly, 32 percent of respondents stopped selling to customers on credit while 29 percent started doing so. Meanwhile, the number of people making savings withdrawals since the pandemic began outpaced the number of people making deposits by just more than two-to-one. For reference, this ratio was effectively one-to-one in the year before the pandemic began.
<h3>Many owners’ households appear to be on the precipice, with an inability to cover expenses and indications of food insecurity.</h3>
Predictably, given their businesses’ performance, owners’ households appeared to be struggling. Fifty-six percent of owners said their household could not cover all their expenses with the combined income household members are earning. If income were to dry up completely, the cushion for the households appears to be very small – 60 percent of owners said their households could cover expenses for a month or less. Households’ financial struggles are having very real impacts: roughly a third of owners reported someone in their household had to go to bed hungry at some point in the past two months because there was not enough money to buy food.
<h2>Summary and Next Steps</h2>
Collectively, this preliminary analysis of CFI’s survey data suggests MSMEs in Lagos are being walloped by COVID-19. The general slowdown in economic activity resulting from restrictions on movement has led to a dramatic reversal of MSMEs’ fortunes. With profits declining, owners are slashing jobs and resorting to a mix of strategies to keep operating. While they expect to be able to do so for a few months, their households stand to suffer more in the near term as expenses of essential items outpace the income available to pay for them.

While the sample is not statistically representative of MSMEs in Lagos, this information adds to the growing set of data available from <a href="https://datastudio.google.com/u/0/reporting/1yyG5QHGV-v-bxw6pJNZvwtqnIfCLj-7q/page/rw0JB" target="_blank" rel="noopener noreferrer">Bankable Frontiers Associates</a>, <a href="https://covid19tracker.africa/country/NGA/summary" target="_blank" rel="noopener noreferrer">insight2impact</a>, and the <a href="https://www.worldbank.org/en/country/nigeria/brief/monitoring-covid-19-impact-on-nigerian-households" target="_blank" rel="noopener noreferrer">World Bank</a>, among others, examining the impact of COVID-19 on households and livelihoods in Nigeria. In a future blog post, we’ll examine the learnings from the collective pieces of work in-depth, but each indicates severe economic stress consistent with this data. For instance, both the insight2impact and World Bank data indicate food insecurity occurring at similar rates to what was seen in this survey. Additionally, CFI will examine what policymakers can do to help mitigate these concerning findings. Whatever the intervention, it must happen quickly. In the meantime, business will struggle and dinner plates will be empty.

<em>This survey is part of our partnership with <a href="https://www.accion.org/mastercard-and-accion-partner-to-unlock-growth-for-millions-of-underserved-microbusinesses-around-the-world" target="_blank" rel="noopener noreferrer">Mastercard Center for Inclusive Growth</a> to understand the impact of COVID-19 on MSMEs.</em>

&nbsp;

MSMEs in Lagos Struggle Due to COVID-19, but Remain Positive

Nigeria

Sub-Saharan Africa

Micro, small, and medium enterprises (MSMEs) play an important role in economies across the globe. As crucial as they are for economies, MSMEs face a number of challenges when it comes to financial health. The entrepreneurs of these businesses navigate a complex web of exogenous and endogenous obstacles, ranging from discrimination based on gender or caste to challenges acquiring and implementing business skills.

While there has been extensive research done and data collected on financial health, there is a relative lack of surveys that seek to capture a holistic understanding of MSME financial health in one document. This tool seeks to close that gap.

This combined framework and survey tool is intended for policymakers, financial service providers, and NGOs so that they can learn about their MSME constituents. These entities will be able to use this survey to segment MSMEs based on their performance and drivers of it, in turn allowing them to better target policies, products, and services. While broadly applicable to MSMEs globally, CFI took a specific interest in microenterprises — both formal and informal — in emerging markets, and the survey instrument is ideally suited for that segment.

A Framework for Understanding the Financial Health of MSME Entrepreneurs

Mastercard Center for Inclusive Growth

Behavioral Insights

Financial Capability

Report

Ram Krishna is the owner of a local grocery shop in the outskirts of Hyderabad.

“Yes, I have digital options,” he told <a href="http://www.accessassist.org/" target="_blank" rel="noopener noreferrer">ACCESS ASSIST</a> in February. “But my customers pay in cash mostly. It’s convenient. I have no fear of fraud. I prefer it that way. I have to pay to my suppliers and workers in cash.”

Little did Ram Krishna know that his preference for cash, arising out of convenience and ease of doing business, was about to change. When the World Health Organization released a <a href="https://www.forbes.com/sites/rogerhuang/2020/03/09/who-encourages-use-of-digital-payments-due-to-covid-19/#2549508e41eb" target="_blank" rel="noopener noreferrer">statement</a> on March 9 recommending people turn to cashless transactions in March, and the Reserve Bank of India <a href="https://economictimes.indiatimes.com/wealth/personal-finance-news/rbi-urges-customers-to-use-digital-banking-facilities-amid-coronavirus-outbreak/articleshow/74653847.cms" target="_blank" rel="noopener noreferrer">followed suit</a>, it was evident that contactless and digital payments would get a significant push. Since cash handling carries the risk of contamination of COVID-19 and requires social interaction, many customers have started demanding and using digital options.
<h2>Survey: Micro-Merchants are Weary and Skeptical</h2>
However, despite strong political will and government support to push the digital agenda across India – not to mention the immense <a href="https://www.cgap.org/research/publication/digitizing-merchant-payments-why-and-how" target="_blank" rel="noopener noreferrer">potential of a cashless economy</a> – micro-merchants have been weary and skeptical.

This is the conclusion of our dipstick survey of 50 micro-merchants in February across various sectors, from<em> kirana</em> shops (small convenience stores), small eateries, salons, vegetable and fruit sellers, to medical shops and mobile shop owners. We sought to understand and identify barriers to adoption of cashless modes of doing business. The study used in-depth interviews and focused discussions with micro-merchants from the cities/towns of Delhi, Krishnagiri (Tamil Nadu), and Guntur and Hyderabad in Telangana.
<blockquote>We sought to understand and identify barriers to adoption of cashless modes of doing business.</blockquote>
The interviewees had revenues ranging from $13,500 to $170,000, average margins of 15 to 20 percent and average transaction sizes ranging between $2.25 to $3. Seventy percent of the respondents were less than 50 years old. Ninety percent of respondents owned smartphones and 98 percent of them had either secondary or tertiary education. Almost all of them had at least one bank account and 84 percent made personal payments digitally. Seventy-five percent of the retailers who had not adopted digital payments had all the basic prerequisites for adoption (bank account, a smartphone, internet access and basic literacy).
<h2>Barriers: Infrastructure, Supporting Services and Demand</h2>
The barriers to adoption of digital payments were explored by analyzing the responses of the retailers who had either not adopted the digital payment instruments or had adopted, but with limited sustained usage rates. The survey also inquired about possible challenges they anticipated in adopting and using the digital payment instruments. The anticipation itself acted as a deterrent for micro-merchants to adopt digital payment instruments.

On the supply side, infrastructure-related issues like uninterrupted power supply and slow speed of internet remained a challenge. Inconsistent and unreliable technological infrastructure and poor capacity building support in rural and peri-urban markets to support electronic payments were found to be important reasons of non-adoption.

<img class="aligncenter wp-image-39081 size-full" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/06/barriers-to-adoption-of-digital-channels-by-micro-merchants.png" alt="barriers to digital adoption graphic" width="820" height="385" />

On the demand side, having access to POS machines and the convenience of cash were the top reasons for micro-merchant’s disinterest in adopting digital modes, with 23 percent of respondents echoing this as primary concern. One example is from the Krishnagiri semi-urban area, where a retailer applied for POS with his local private bank. In spite of regular follow up for more than 4 months, the bank was unable to provide a POS machine.

Twenty-three percent of the respondents mentioned weak aggregate customer demand. Their customers usually set aside monthly household expenses and prefer transacting with cash as it helps keep expenditures on budget. Even during the pandemic, the preferred mode of payment for this segment remains cash.
<blockquote>Customers set aside household expenses and prefer transacting with cash as it helps keep them on budget.</blockquote>
Sadly, 12 percent of respondents tried going digital, but subsequently discontinued due to insufficient demand, low perceived benefits and added complexity of operation. Complexity of handling POS machines, inability to handle unusual transactions -- especially when they fail due to technical errors or poor internet -- were key concern areas for many retailers.
<h2>No One to Show Them How</h2>
Moreover, shop owners do not have access to help from peers or family members to guide and facilitate the use of technologies for digital payments. In local neighborhoods, availability of the service providers for troubleshooting issues was also limited to mobile phone repair and internet connectivity fixes in most cases.

Among the respondents, 12 percent of the micro-merchants were unaware of the possibility of accepting digital payments, signaling a strong need for targeted communication strategies. Fifty percent of retailers who were not using digital payments mentioned they were not aware of the process of accessing digital modes. Neighborhood grocery retailers, which usually serve local households, refrain from using digital transactions, citing small size and scale of their businesses.

Moreover, they felt that installing digital payment instruments would be an unnecessary cost. Bigger department stores usually can streamline the operations and financial management to offset costs from fees, but 12 percent of respondents mentioned they operate on thin margins, and any cost escalation eats away at those margins.
<h2>Fear of Fraud and Lack of Trust</h2>
The fear of fraud stemming from a lack of trust of employees processing payments was also observed. All of the sample respondents mentioned payments being handled by owners or family members and in cash. The only exception was observed in a medical shop where the POS machine is integrated with inventory and billing. Such integrated application helps address the fear of manual error from retailer’s end; however, it comes with the tradeoff of becoming formalized and having to deal with tax requirements and compliance.
<h2>Leveraging a Critical Link: Suppliers</h2>
It will be equally critical to identify the key leverage points for improving digital payment adoption at scale. One leverage point is suppliers.

<img class="aligncenter wp-image-39083 size-full" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/06/how-do-you-pay-your-suppliers-micro-merchant-survey.png" alt="how to pay suppliers micro-merchants survey results" width="849" height="432" />

A <a href="https://www.mastercardcenter.org/insights/move-indias-small-merchants-toward-digital-financial-services" target="_blank" rel="noopener noreferrer">broken link in the digital payment value chain</a> is usually third or fourth stage distributors. Such suppliers or distributors demand cash from retailers, which in turn had a cascade effect. In fact, 49 percent of the sample respondents made cash payments to suppliers while 29 percent made check payments leading to a whopping 78 percent of respondents using non-digital modes for supplier payment.

Any digitization effort aimed at improving last-mile micro-merchant’s adoption rate should also push for adoption at the supplier’s end as well. Appropriate incentive structures for increased digital adoption need to be carefully thought out and incorporated into supply chains.
<h2>Leveraging Peer Support</h2>
The merchants’ peer networks played a prominent role in influencing merchants’ behavior and propensity to adoption of digital modes.
<blockquote>Retailers rely on tech-savvy friends for receiving or making payments through applications.</blockquote>
Peers accepting digital modes of payment helped to weaken inhibitions of others. Early movers in the peer group act as critical influencers: they discuss the benefits or challenges of digital adoption, which either weakens or reinforces inhibitions. Many retailers mentioned that they rely on friends for receiving or making payments through applications like GooglePay or online transfers. All the retailers mentioned that their friends were “tech-savvy” or “reliable” – and free.

The core value proposition of accepting digital payments – a secure, efficient and convenient way of being paid – needs to resonate with the merchants’ business needs. While we mobilize efforts and resources for increasing access and usage of digital financial services to bring back normalcy in post-COVID times, let us not ignore the key barriers and challenges last-mile retail units face.


The Digital Payments Push: What 50 Micro-Merchants in India Are Saying

India

South Asia

Payments

Scrolling through Instagram these days, I’ve noticed a pattern that has emerged since COVID-19 prompted lockdowns across the globe. With movement restricted, many social media users in the US have engaged in culinary adventures. New experiments in the kitchen abound despite the noted shortage of ingredients like flour on supermarket shelves.

But what I haven’t been seeing on my social media feed on the food front is much more dire: COVID-19 will push up to an estimated <a href="https://www.oxfam.org/en/research/dignity-not-destitution" target="_blank" rel="noopener noreferrer">half billion people into poverty</a> across the globe, threatening food security. Prior to the pandemic, approximately <a href="https://www.who.int/news-room/detail/11-09-2018-global-hunger-continues-to-rise---new-un-report-says" target="_blank" rel="noopener noreferrer">820 million people were chronically hungry</a>. Now, the World Food Program estimates that by the end of 2020, <a href="https://insight.wfp.org/covid-19-will-almost-double-people-in-acute-hunger-by-end-of-2020-59df0c4a8072" target="_blank" rel="noopener noreferrer">265 million people</a> in low and middle-income countries will be under the threat of starvation.
<h2>A Challenge for a Continent</h2>
These issues are particularly acute in several countries in Africa, where job losses and income losses are affecting food security, defined as access to sufficient, safe, and nutritious food. In a recent <a href="https://amref.zoom.us/rec/play/uZZ_Ju2p-zo3E9ed4wSDBKR6W9S9J_2s0iFP-qZemkixVXRQOlWkYuAbMLeKlvVOBygaPgBJmSDPJCzg?continueMode=true&amp;_x_zm_rtaid=FQWENb2fTM2AEbhvJuEg9g.1590501183404.6cee48bfc63a9f06cac60da22d85013d&amp;_x_zm_rhtaid=599" target="_blank" rel="noopener noreferrer">Africa Dialogues webinar</a>, hosted by Dalberg Advisors and Amref Health Africa and moderated by Lolem Ngong and Edwin Macharia, Professor Hamadi Iddi Boga of the Ministry of Agriculture, Livestock, and Fisheries in Kenya; Sara Menker, Founder and CEO of Gro Intelligence; and Monica Musonda, Founder and CEO of Java Foods, explored how the pandemic is disrupting agricultural supply chains and impacting smallholder farmers and vulnerable populations across the continent.

As Menker highlighted, there isn’t a lack of food around the world. Food insecurity, rather, is rooted in a massive distribution problem and a widespread inability to afford food, now exacerbated by COVID-19. Foreign exchange reserves across the African continent are at an all-time low due to the pandemic. In a weakened macroeconomic environment, the cost of imports has increased, and although some African markets are experiencing food insecurity to a greater extent than others, net importers of calories are finding themselves in an increasingly precarious situation. In Zambia, for example, the <a href="http://www.fao.org/giews/countrybrief/country.jsp?code=ZMB" target="_blank" rel="noopener noreferrer">price of fortified cereal</a> for children has increased to $6. Groups including informal workers, microentrepreneurs, and women tend to be the most adversely impacted by such price fluctuations.
<blockquote>Informal workers, microentrepreneurs and women tend to be the most adversely impacted by price fluctuations.</blockquote>
Musonda noted during the webinar that up to 60 percent of wages from informal work in Africa are used to buy food. Finding themselves without work, or with fewer working hours due to COVID-related restrictions on physical movement, informal workers and microentrepreneurs face increasing food insecurity, and women, who allocate more of their own resources to <a href="https://www.cgap.org/blog/3-ways-financial-inclusion-improves-womens-food-security" target="_blank" rel="noopener noreferrer">other members of the household during hardship</a>, are disproportionately affected.
<h2>How Does Financial Inclusion Come into Play?</h2>
As a well-documented <a href="https://www.uncdf.org/financial-inclusion-and-the-sdgs" target="_blank" rel="noopener noreferrer">enabler of food security</a>, financial inclusion has an important role to play in the mitigation of COVID-19’s harms to vulnerable groups. Here, I highlight a few of <a href="https://centerforfinancialinclusion.org/covid-19-reveals-the-limits-of-individual-action-and-market-based-solutions/" target="_blank" rel="noopener noreferrer">many considerations</a> for financial inclusion initiatives when taking action to reduce food insecurity.
<h3>Supporting SMEs and Smallholder Farmers</h3>
Propping up small and medium-sized business is an important consideration for financial inclusion and, by extension, food security in Africa. SMEs form an <a href="https://www.researchgate.net/publication/315516536_AFRICAN_SMALL_AND_MEDIUM_ENTERPRISES_SMES_CONTRIBUTIONS_CHALLENGES_AND_SOLUTIONS" target="_blank" rel="noopener noreferrer">integral part</a> of the food supply chain in Africa. According to Musonda, <a href="http://www.ipsnews.net/2019/09/smes-main-drivers-africas-food-economy/" target="_blank" rel="noopener noreferrer">SMEs handle 64 percent of food</a>, much of which is fresh and perishable, on the continent. These are the foods that are crucial, but we must do more to ensure that SMEs stay alive during this time of crisis.

This is where financial service providers (FSPs) play an important role. FSPs need to address both short-term and longer-term financing options for SMEs. In the short-term, as <a href="https://www.covid-finclusion.org/forum/discussion/surviving-the-liquidity-crunch-what-are-your-expectations-and-plans-for-managing-mfi-liquidity-what-worries-you-most" target="_blank" rel="noopener noreferrer">FSPs themselves are struggling with liquidity constraints</a>, the role of other actors, such as impact investors, development finance institutions, and policymakers, will be important to filling the void in available liquidity. But beyond liquidity through FSPs, there is a broader role for governments to play when it comes to food security.

In Kenya, the government has created an ecosystem of SMEs to support smallholder farmers in a mutually beneficial initiative that connects nodes of the supply chain. According to Prof. Boga, 90 percent of farmers in Kenya are smallholder farmers. To support this population, the government has created an ecosystem of SMEs to support them, and has implemented an e-voucher program in which farmers receive vouchers on their mobile phones to exchange for partially subsidized farm supplies based on their individual and household needs.
<h3>Promoting and Strengthening Cash Transfer Systems</h3>
Government-to-person (G2P) and person-to-person (P2P) <a href="https://blogs.worldbank.org/voices/responding-crisis-digital-payments-social-protection-short-term-measures-long-term-benefits" target="_blank" rel="noopener noreferrer">cash transfers are an effective strategy</a> to increase both financial inclusion and food security. NGOs, governments, and the private sector are working together to promote and strengthen this most important vehicle for quickly delivering crucial cash to low-income households and individuals. <a href="https://www.unicef-irc.org/publications/pdf/IRB 2016_04.pdf" target="_blank" rel="noopener noreferrer">Evidence</a> from several large-scale <a href="https://www.odi.org/sites/odi.org.uk/files/odi-assets/publications-opinion-files/7596.pdf" target="_blank" rel="noopener noreferrer">evaluations</a> shows that as households receive more in cash transfers, they spend more on food, with positive impacts on meals consumed and dietary quality.

The regulatory environment and payment infrastructure in many countries can present a challenge for massive payouts, but the financial inclusion community views the current crisis as an <a href="https://blogs.worldbank.org/voices/responding-crisis-digital-payments-social-protection-short-term-measures-long-term-benefits">opportunity to fast-track improvements to payments systems</a>, particularly through digital payments ecosystems. While digitalization is promising, however, CFI’s Alex Rizzi <a href="https://centerforfinancialinclusion.org/a-covid-digitization-stampede-mustnt-trample-consumer-protection/" target="_blank" rel="noopener noreferrer">cautions</a> that rushed pushes to go digital may harm the poor, and it will continue to be important to put base-of-the-pyramid consumers at the center of considerations for digital cash payments.
<blockquote>Countries with strong DFS infrastructures are taking the lead in implementing systems to help people afford food.</blockquote>
In Africa, countries with strong DFS infrastructures are taking the lead in implementing systems to help the base of the pyramid afford food and other living expenses. The Western Africa Central Bank (BCEAO) is promoting the use of electronic payment tools by making it easier for people to open a mobile money account and by making P2P transfers free. Kenya’s National Treasury <a href="https://www.ugogentilini.net/wp-content/uploads/2020/04/Country-social-protection-COVID-responses_April3-1.pdf" target="_blank" rel="noopener noreferrer">appropriated</a> an additional 10 billion Kenyan schillings, or $100 million, to support for the elderly, orphans and other vulnerable groups through cash transfers. In addition, fee waivers on P2P mobile money transactions on M-PESA were <a href="https://techcrunch.com/2020/03/16/kenya-turns-to-its-mobile-money-dominance-to-stem-the-spread-of-covid-19/" target="_blank" rel="noopener noreferrer">approved</a>. The Moroccan Economic Watch Committee activated a mobile payment device for cash transfers directly to an estimated 3 million informal workers, while in Tunisia, the government is offering one-off cash transfers to households with members working in the informal sector and housing the elderly.

To support governments and markets where the digital payment infrastructure is still developing, initiatives like the <a href="https://www.worldbank.org/en/topic/paymentsystemsremittances" target="_blank" rel="noopener noreferrer">World Bank’s G2Px</a> focus on bringing together expertise across sectors to scale G2P payments responsibly. NGOs such as the World Food Program <a href="https://www.wfp.org/cash-transfers" target="_blank" rel="noopener noreferrer">continue to employ cash transfers</a> in coordination with partners.
<h3>Supporting Women’s Financial Inclusion as a Means to Greater Food Security</h3>
Research indicates that within households, women are at a <a href="https://www.adb.org/sites/default/files/publication/30315/gender-equality-and-food-security.pdf" target="_blank" rel="noopener noreferrer">greater risk of being food insecure</a>. In times of hardship, such as the current pandemic, they are more likely to reduce their own food consumption to leave enough for men and boys. However, access to secure financial services <a href="https://www.cgap.org/blog/3-ways-financial-inclusion-improves-womens-food-security" target="_blank" rel="noopener noreferrer">has the potential</a> to <a href="https://elibrary.worldbank.org/doi/abs/10.1093/wbro/lkx003" target="_blank" rel="noopener noreferrer">promote women’s empowerment</a> and advance food security. Women with bank accounts are likely to have greater bargaining power to allocate more household resources to purchasing nutritious food. Increasingly, many donors and policymakers are recognizing the need to shift cash transfers to women as one approach to tackling food insecurity. This provides an <a href="https://elibrary.worldbank.org/doi/abs/10.1093/wbro/lkx003" target="_blank" rel="noopener noreferrer">on-ramp for digital financial services while improving convenience and confidentiality</a> of these payments.

Will our documentation of this moment in time capture the resilience, cooperation, and hard work of the individuals and institutions responding to this unprecedented crisis? Food security is a critical basic need, and financial inclusion is an important means of achieving it. With financial services digitizing at a breakneck pace, we mustn’t forget our most basic needs and how inclusive finance can serve them.

Food Security and COVID-19: How Financial Inclusion Can Support Livelihoods

Smallholder Farmers

<em>This post originally appeared on the <a href="http://www.accion.org">Accion</a> website.</em>

Chilean banks have made critical advances to drive greater financial inclusion in recent years. From agent networks to payment platforms to the CuentaRUT account — a simplified deposit account with a debit card that the state-owned Banco Estado made available to anyone in Chile with an identity card, Chile has nearly reached universal access to financial services.

However, despite these advances, many small merchants in Chile still aren’t finding financial tools that meet their needs. Micro, small, and medium enterprises (MSMEs) make up <a href="http://www.smefinanceforum.org/data-sites/msme-country-indicators">98.5 percent</a> of enterprises in the country and are a significant driver of economic growth; however, <a href="http://www.smefinanceforum.org/data-sites/msme-finance-gap">more than a quarter</a> of these microenterprises have faced difficulty in accessing financing in times of need. Compounding this problem are high levels of financial insecurity among Chileans. <a href="https://news.gallup.com/reports/233399/gallup-global-financial-health-study-2018.aspx">Nearly half of the population</a> feels unsure about how they would cover their basic needs if they lost their income. For merchants whose personal and business lives are closely intertwined, this lack of financial security in their day-to-day lives translates to lack of security in their businesses as well.

Accion's Customer Strategy team traveled to Santiago to talk to micro-entrepreneurs so we could better understand how they are currently using their financial services. MetLife Foundation supported this research as part of our <a href="https://www.accion.org/accion-metlife-foundation-improve-financial-inclusion-in-latam">joint effort to boost the financial capability of customers</a>. Just as <a href="https://www.centerforfinancialinclusion.org/why-arent-people-saving-money-in-mexico">CFI did in Mexico</a>, we conducted interviews with a wide variety of small merchants to understand their motivations, goals, and feelings toward financial services, and to hear about the strategies they use to stay financially healthy.

Here’s what we learned:
<h3>1. Significant barriers block entrepreneurs from using business accounts.</h3>
Every microentrepreneur we spoke with had a CuentaRUT card, but for many, that was the extent of their relationship with formal financial services. All of them cited high fees, interest rates, and long application processes to access business accounts and credit as barriers to usage. Margarita, the owner of a travel agency and a small bookstore, told us that the most challenging part of starting her business was opening a business bank account, which required numerous documents and costly fees. Therefore, many use their CuentaRUT account for both personal and business purposes, making it difficult to manage their business and personal financial lives separately.
<h3>2. Chileans perceive taking credit from banks as risky.</h3>
Gianfranco, the owner of a small restaurant, wants to expand his business, but he has no interest in taking out a loan. He fears losing everything he has worked for by putting his business up as collateral. He told us, “I don’t like the idea of being indebted or dependent on anyone.” Maritza, the owner of a mini-market, shared a similar sentiment: “I don’t have confidence in financial institutions; they don’t worry or care about their smaller clients.” Many of the merchants we spoke to prefer to borrow from friends and family.
<h3>3. Blacklisting deters participation in the formal financial system.</h3>
[caption id="attachment_34006" align="alignright" width="234"]<img class="wp-image-34006" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2019/01/Screen-Shot-2019-01-08-at-3.32.07-PM.png" alt="A Chilean restaurant owner sits at a table" width="234" height="204" /> <strong>Jamie, a restaurant owner in Santiago</strong>[/caption]

Dicom, the national credit agency, records negative credit information such as payment delays and defaults. However, the agency does not offer a clear path to resolve negative reports and as a result, many small businesses avoid deepening their relationship with lenders. Many major retail stores offer consumer credit cards, and in the past, they did so without proper credit assessment and did not inform customers of the <a href="https://www.nytimes.com/2011/07/24/business/global/abuses-by-credit-issuers-in-chile-and-brazil-snare-consumers.html">consequences of default</a>. As a result, many people, unable to pay or unaware of the lasting nature of default, were reported to Dicom, and remain on that blacklist. Today, nearly 900,000 people are recorded as delinquent.

Jaime, a restaurant owner in Santiago, is 74 and has been an entrepreneur all his life. He was reported to Dicom over 30 years ago and has no way to resolve the black mark on his account. In fact, he doesn’t know what caused him to be listed in the first place, despite his efforts to find out. He has upgraded his business several times, but always with his savings, as he has no access to credit. Today, he hopes to buy a car so that he can purchase supplies directly for his restaurant, without paying for transport. However, he cannot make such a large purchase until he builds up enough savings. Jaime needs information to help him better understand why he was blacklisted and concrete steps to help him improve his credit score.
<h3>4. Informal savings remain more comfortable and familiar for people.</h3>
Findex data tells us that only 21 percent of the population in Chile saves money at formal financial institutions. Many interviewees told us that they have difficulty putting money away, often finding it overwhelming just to meet their fixed expenses. When they do set money aside, they prefer to save informally, either in inventory or through investment in assets that will produce income later. Many told us that opening a savings account seems difficult, but everyone wanted to increase their resources so that they could take more time off and work less.
<h3>5. Merchants prefer to learn about financial products from people, not websites.</h3>
Several merchants mentioned that they are hesitant to make financial decisions based on digital information. Lorena de Diaz, the owner of a house cleaning business, told us that she prefers to learn about new products in person, as she can’t verify the accuracy of information provided through a website or mobile application. She likes to be able to ask questions at the branch and feels that she better understands financial products when a person can explain it.

The microentrepreneurs we spoke to need tools tailored to their needs, from working capital to finance their inventory to inexpensive business saving and checking accounts, delivered with transparent and trustworthy communication from their providers. As we continue working with fintechs and financial service providers of all sizes, we hope that better understanding customers’ pain points, aspirations, and desires will lead to better communication on how to use financial products, or even entirely new products that truly improve people’s financial health. Over the next two years, Accion will be working with financial service providers in Mexico and Chile to use customer research to design, test, and implement product innovations that will drive usage and improve financial health.

<em>This research was conducted by Accion as part of our part of our <a href="https://www.accion.org/accion-and-metlife-foundation-announce-expanded-partnership-to-advance-financial-inclusion/">Building Financial Capabilities and Strengthening Institutions through Customer-Centered Innovations</a> project, supported by MetLife Foundation.</em>

5 Reasons Small Merchants Aren’t Using Financial Services in Chile

Building Financial Capabilities and Strengthening Institutions Through Customer-Centered Innovations

Chile

Latin America and The Caribbean

In this report, Christy Stickney, CFI Fellow and independent consultant, highlights the characteristics of owners of small and medium-sized enterprises (SMEs) whose businesses have overcome significant hurdles and grown from their micro size.

Christy has utilized qualitative research to identify and analyze clients of MFIs whose borrowing had increased significantly over time from the portfolios of three leading microfinance institutions in Latin America – MiBanco (Peru), Banco Solidario (Ecuador), and Banco ADOPEM (the Dominican Republic). As part of the research, Christy conducted 55 in-depth client interviews and consulted with institution staff. She identifies and describes in detail a select group of "growth entrepreneurs" (GEs) who operate higher growth businesses, have overcome significant growth hurdles, and express a clear vision for future business growth. Christy argues that this category of emerging SMEs holds great potential for future growth and job creation.

Christy also provides recommendations for financial institutions (including microfinance institutions [MFIs]), FinTech companies, governments, and other financial ecosystem actors to support growth and greater financial inclusion for emerging SMEs and growth entrepreneurs.

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Emerging SMEs—Secrets to Growth from Micro to Small Enterprise

CFI Research Fellows Program

Dominican Republic

Ecuador

Peru

Credit Provision

Financial Service Providers

Microfinance Institutions

<em><img class="alignright" style="border: 0" src="http://centerforfinancialinclusionblog.files.wordpress.com/2011/08/disc-meter.jpg?w=300&amp;h=174" alt="" width="300" height="174" />&gt; Posted by Center Staff</em>

This edition of top picks features posts that spotlight green loans reducing energy poverty, savings and loans to improve the vulnerability of microbusinesses, and factors driving uptake of mobile insurance services.

In celebration of Earth Day, the Kiva Blog took the opportunity to <a href="http://kivablog.kiva.org/kivablog/2014/04/22/green-loans-are-a-small-step-for-households-but-a-giant-leap-for-emissions-reduction" target="_blank" rel="noopener">share their work on green loans</a>. These loans to individuals and small business owners help with the high upfront costs of clean energy technology. Globally, 1.3 billion people live in energy poverty – without access to modern energy services. Green loans support healthy and environmentally friendly energy switches, like from kerosene to solar lighting. Kerosene lighting produces black carbon or soot which is harmful to breath and also a greenhouse gas. Kiva has facilitated the funding of 39,000 green loans.

New research conducted by the Corporation for Enterprise Development (CFED) asked microbusiness owners in the United States about their current finances. The results, captured in a <a href="http://cfed.org/blog/inclusiveeconomy/new_research_broadens_understandings_of_microbusiness_financial_vulnerability/" target="_blank" rel="noopener">CFED Blog post</a>, indicate that a concerning percentage of businesses don’t have the financial means to cope with economic shocks. Fifty-five percent of respondents reported that they could only cover one month or less of business expenses with their current savings. Thirty percent of those polled had no savings at all. Cash flow difficulty was the most commonly cited challenge.

Drawing from the most recent MMU <em>State of the Industry </em>report, a <a href="http://www.gsma.com/mobilefordevelopment/the-state-of-mobile-insurance-what-are-the-key-factors-currently-driving-success" target="_blank" rel="noopener">new post on the GSMA Blog</a> synthesizes global trends in mobile-based insurance services and indicates key factors driving uptake. There were 84 live mobile insurance services in 2013, 16 of which were launched that year. The regions with the most mobile insurance schemes were Sub-Saharan Africa and South Asia. The most popular type of mobile insurance, offered by roughly three-quarters of the surveyed services, is life cover. Some of the factors associated with successful services are easy to understand terms and conditions, “freemium” business models in which customers receive free insurance in return for meeting certain airtime usage levels, and convenient account debit methods, such as charging customer service fees from an airtime wallet rather than from a mobile money wallet, which is less likely to have an active balance.

<em>Image credit: <a href="http://commons.wikimedia.org/wiki/User:Iainf" target="_blank" rel="noopener">Ianf</a></em>

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Green Loans, Microbusiness Vulnerability, Mobile Insurance – Top Picks of the Microfinance Blogosphere

Energy Finance

Insurance

Insurance Companies

Mobile Banking

Deborah Drake

Vice President

Mayada El-Zoghbi

Managing Director

Eric Noggle

Jacqueline Foelster

Tess Johnson

Aryasilpa Adhikari

Radhika  Agashe

Laura Schroeder

Priya  Punatar

Gina Harman

Christy Stickney

United States

Customer Centricity

Delivery Channels

Digital Financial Services

Though Nigeria’s government has set ambitious goals for financial inclusion, the majority of its people lack a formal bank account. Accion has worked in the country since 2007 to expand access to financial services.

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

This blog from <a href="https://us.accion.org/">Accion in the U.S.</a> was originally posted on <a href="https://nextbillion.net/impact-of-small-business-lending/">NextBillion</a> and is re-published here with permission.

<em>By Gina Harman, CEO, Accion in the U.S., and Liz Urrutia, CEO, Opportunity International</em>

The field of microfinance arose to address a pressing problem in emerging markets: Billions of people around the globe were shut out of, or poorly served by, the financial sector. But while microfinance institutions grew rapidly around the globe, so too did economic inequality in developed countries. It was within this context that organizations like <a href="http://us.accion.org/" target="_blank" rel="noopener">Accion in the U.S.</a> and <a href="http://opportunityfund.org/" target="_blank" rel="noopener">Opportunity Fund</a> adapted the microlending model to the United States more than two decades ago, expanding access to economic opportunity for entrepreneurs who lacked the financing and resources they needed to start or grow their businesses. In the ensuing years, the mission-based lending industry has continued to expand its services across the country – <a href="https://ofn.org/sites/default/files/OFN_20_Years_Opportunity_Finance_Report.pdf" target="_blank" rel="noopener">even in times of economic recession</a>.
<h2>From Financial Inclusion to Financial Health</h2>
In the early days, progress toward our mission could be measured by portfolio numbers, such as number of loans disbursed and amount of capital deployed, as well as by evaluating how many of our clients were from traditionally underserved populations, such as people of color, women and low- to moderate-income individuals. However, we also understood that gaining access to financial services is only meaningful if that access places an individual on a path to greater financial stability and improved quality of life. In short, financial inclusion does not necessarily enable financial health.

Over time, with support from the <a href="https://microtracker.org/assets/documents/entrepreneurtracker-overview.pdf" target="_blank" rel="noopener">Aspen Institute’s EntrepreneurTracker</a> initiative, our organizations have been able to evaluate borrower outcomes such as business survival, revenue growth and job creation in the years following loan disbursement. Still, we knew that these numbers alone didn’t tell the full story. That’s why we kicked off a <a href="https://us.accion.org/impact-study/" target="_blank" rel="noopener">multi-year, mixed methods study</a> in 2015 to more fully understand the impact of our lending and advising services over a longer time horizon. This research, conducted by Harder+Company Community Research, was made possible through lead funding from the W.K. Kellogg Foundation and JPMorgan Chase &amp; Co., with additional support from S&amp;P Global.
<h2>How Are Our Clients Faring?</h2>
The results of this research revealed that, by and large, the entrepreneurs we serve are thriving, even two to three years after receiving their loan. Most businesses in the study increased sales (60 percent) and profit (57 percent). Forty percent of borrowers added employees during the study period, and entrepreneurs with employees significantly increased benefits provided to those employees. What’s more, the majority of study participants specifically attributed progress toward their business and personal goals to the services they received from Accion or Opportunity Fund.

This study also provided unprecedented insight into the emotional benefits of mission-based small business lending. At the end of the study, 63 percent of participants expressed that support from their lender had “a lot” of positive impact on their confidence. In follow-up interviews, entrepreneurs discussed the demoralizing effect of previous loan rejections, sharing that the approval from Accion or Opportunity Fund was a sign that someone believed in them. As one participant put it: “The biggest thing has been the confidence that I’ve gained in myself. I’m really proud of it.”

But the report also highlighted some ongoing challenges – among them, the fact that financial health remains a key need among the business owners we serve. For example, the majority of clients surveyed at the end of the study had not taken steps to prepare for a financial emergency (55 percent) and found finances to be a significant source of stress (58 percent). This was a statistically significant improvement from the beginning of the study, when only 36 percent of participants had prepared for a financial emergency and 71 percent reported significant anxiety about finances. Nevertheless, though these findings indicate that our clients are on the path to greater financial stability, they remain vulnerable to financial shocks.
<h2>Defining Success on Entrepreneurs' Terms</h2>
The multifaceted nature of the study findings illuminates the limitations of a “one-size-fits-all” definition of impact. For instance, as the mission-based lending field moves beyond measures of inclusion to focus on borrower outcomes, traditional metrics like revenue growth and job creation don’t necessarily align with entrepreneurs’ own definitions of success. That’s why the research employed a technique called cluster analysis, which revealed five distinct typologies of entrepreneurs, each with unique goals, challenges and successes.

For example, the <i>Focused and Growing</i> group (44 percent of the sample) sought to grow, and succeeded. By the end of the study, they had all moved into their businesses full-time, had successfully used their loans to expand their businesses, and were experiencing increased sales and profits.

In comparison, the <i>Stable and Strategic </i>group (12 percent of the sample) juggled multiple sources of income while carefully planning for long-term, safe business growth. They increased their financial stability over the study period, and they also reported increased quality of life.

For the <i>Off Balance and Seasonal</i> group (9 percent of the sample), unexpected hardships and seasonal cash flow meant that their main priority was keeping their business afloat. In follow-up interviews they expressed an appreciation for the tailored support and guidance they received from their lender to help them weather financial challenges.

Borrowers in the <em>Retrenching</em> group (19 percent of the sample), were most likely to have used their loan to start a new business. While most experienced business growth over the study period, very few reported taking a salary from the business. Nevertheless, they remained confident about their financial future at the end of the study and reported a significant decrease in financial stress.

For those in the Slowly Growing and Optimistic group (17 percent of the sample), key goals for business ownership included fulfilling a specific dream or becoming their own boss. Although the majority experienced increases in sales, most were not able to increase savings, and some had even drained their savings over the study period. Many of these entrepreneurs operated highly specialized businesses with unpredictable cash flows, and were looking for opportunities to diversify their offerings.

With the completion of this research, we have gained invaluable insights into the impact of our services – as defined by our clients. As our organizations look to expand access to high quality, transparent and affordable financial services, it will be crucial to continue to refine our definitions of success, and to iterate and design new products and services to best align with their needs.

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Beyond Inclusion: How Mission-Based Small Business Lenders in the U.S. Are Evolving Their Definition of Impact

<em>&gt; Posted by Anisha Singh, Senior Research Associate, IFMR LEAD</em>

<em><img class="alignright wp-image-24670" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/11/thumb_72f989620eb54da896649a8461a443a6.jpg" alt="" width="515" height="343" /></em>

<em>Want to receive payments from customers? There’s an app for that. Want to make payments to suppliers? There’s an app for that. Customer wants to pay you one week from now? Scramble to take out diary and note down payment receivable. Customer is not contactable after one week? Oh well, that’s the end of that.</em>

Among merchants in India, widespread awareness of available digital financial services options has not translated into usage of these services. The core challenge here is making digital platforms more inclusive and relevant to their daily lives. While India has made immense progress in transitioning to a less cash-reliant financial ecosystem, recent research concludes that the services on offer in the country do not directly address all relevant merchant pain points and thereby fall short of providing a compelling value proposition for them to make the switch from cash. This shortcoming hasn’t been for lack of trying. Researchers and providers have identified and rolled out various new value-added services that could help increase this value proposition. However, for merchants in India, there is still one key transaction type left unaddressed: how can informal arrangements, such as offering goods on credit, be included in digital services?
<h3>What’s at the heart of merchant transactions?</h3>
Recent research by IFMR LEAD in the space of digital finance for micro-merchants across urban and rural regions of four Indian states suggests that as many as 20 percent of micro-merchants use extensions of credit as their primary transaction method with suppliers as well as with customers. For the majority of merchants surveyed, over 20 percent of the value of their monthly transactions with suppliers and customers is on credit. Merchants typically extend credit to customers for up to two weeks and receive credit from suppliers for up to a month. Credit from suppliers tends to be more formal than credit to customers. Merchants often sign a promissory note while taking goods on credit from suppliers, whereas they deem a simple note in their inventory books sufficient for extending credit to customers.
<h3><strong>What does an ideal</strong> digital<strong> product look like for merchants?</strong></h3>
There is much excitement and openness among merchants to experiment with digital modes and include payment applications such as mobile wallets and QR codes into their daily business operations. However to make it worthwhile for merchants to transact digitally, it is necessary to build a holistic service that includes credit extension. We collected first-hand insights from merchants to understand their preferences and concerns regarding such a service:
<ul>
 	<li>On the supplier side, merchants were not in favor of direct debits from their accounts at a later date for goods received on credit. However, a majority noted the importance of a reminder service to make payments in the form of SMS messages or push notifications. Product provisions to record inventory purchased on credit, make standard monthly digital payments, and record signatures from suppliers for the verbal credit agreements were the next most preferred features.</li>
 	<li><em>‘Facebook’ for merchants: </em>A significant proportion of merchants also indicated their preference for a networking platform wherein they can interact with their suppliers through personalized user accounts. By logging into their account, they would like to be able to see all their suppliers, open chat conversations with individual suppliers, and send them push notifications requesting additional stock or extension of credit terms and such.</li>
 	<li>On the consumer side, merchants are concerned with customers not paying them back and having no way to trace them. The majority of merchants stressed the value of a reminder service through SMS or push notifications to alert customers of their pending payments and allow them to make the transaction digitally without visiting the merchant..</li>
 	<li>Surprisingly, merchants did not express a need for an inventory management component to record goods given on credit and payments collected from customers. Merchants believed that a strong back-end system through inventory management with suppliers would sufficiently translate into better management of credit terms with customers.</li>
 	<li>Across the board, merchants stressed their requests for these features to come at a low cost with low transaction fees. Furthermore, they indicated that services should incorporate credit limits on the amounts that can be extended in supplier and customer interactions and the potential for credit limits to be monitored and enhanced based on transaction history.</li>
</ul>
With high awareness but low usage of digital platforms among merchants in India, exploring such value-added services for merchants is a must to ensure greater uptake and continued usage. However, to ensure sustainability of such products, it is equally imperative to explore ‘stickiness’ for customers and other players in the merchant ecosystem as well.

<em>This post draws on IFMR LEAD’s work in collaboration with J.P. Morgan on '</em><a href="http://ifmrlead.org/process-mapping-and-evaluation-of-digital-financial-services-in-india/"><em>Digital Financial Inclusion and Consumer Capabilities in India</em></a>' <em>and with the Mastercard Center for Inclusive Growth on '<a href="http://ifmrlead.org/the-evolving-financial-ecosystem-for-micro-merchants-in-india/">The Evolving Financial Ecosystem for Micro-Merchants in India</a>'.</em>

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2017/07/10/how-a-human-touch-agent-can-make-a-difference-in-promoting-digital-financial-services/">How a Human Touch Agent Can Make a Difference in Promoting Digital Financial Services</a>

<a href="https://cfi-blog.org/2016/08/11/exploring-responsible-agent-management-in-india/">Exploring Responsible Agent Management in India</a>

<a href="https://cfi-blog.org/2016/09/12/digitizing-self-help-groups-in-india/">Digitizing Self-Help Groups in India</a>

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What’s in It for Me? Increasing the Value Proposition of Fintech for Merchants in India