<em>Past crises have taught the microfinance sector a lot about weathering storms, and microfinance institutions (MFIs) are once again facing challenging times. This case study is part of a series that CFI, in partnership with the European Microfinance Platform (e-MFP) and the Mastercard Center for Inclusive Growth, is publishing to revisit tales of tough times and resiliency in five markets — <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-viator-azerbaijan/" target="_blank" rel="noopener noreferrer">Azerbaijan</a>, Bosnia and Herzegovina, <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-spandana/" target="_blank" rel="noopener noreferrer">India</a>, Nicaragua and <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-vitas-palestine/" target="_blank" rel="noopener noreferrer">Palestine</a> — and discuss how MFIs, with the help of their investors and other stakeholders, emerged and thrived. The lessons learned from these cases will be compiled and examined in a forthcoming report, </em>Weathering the Storm II<em>, a follow-up to the first edition published in the aftermath of the global financial crisis a decade ago. The hope is that these lessons will be applicable to not only the COVID-19 response, but to future crisis responses as well.</em>

During the final months of 2008, as the world was entering what would be the worst economic crisis of the past half-century, Senad Sinanović, CEO of Partner Microcredit Foundation in Bosnia and Herzegovina, was contemplating the future.

A year earlier, he and his staff had celebrated Partner’s 20th anniversary. Partner was founded following the tragic war that marked the breakup of Yugoslavia, which had itself been assembled from the ashes of the Austro-Hungarian Empire 90 years earlier. It was in the country’s capital, Sarajevo, that WWI began, with the assassination of the Archduke Franz Ferdinand. On his frequent work visits to Sarajevo, Sinanović sometimes passed by the plaque marking the site of the “shot heard round the world,” along the way stepping on the Sarajevo Roses — red-painted shell marks on the pavement, remnants of the Bosnian war of the 1990s. In that corner of the world, history can seem omnipresent.

But it wasn’t history that was on Sinanović’s mind. He was worried about how the financial crisis would impact his clients, his institution, and the broader microfinance sector in the country. The path ahead concerned him greatly. The situation was unfolding against a backdrop of high liquidity in the sector. A strong period of growth of the main MFIs during the second half of the 2000s, as well as a new regulatory framework for microcredit, contributed to the high confidence of donors and funders, who responded by pouring large amounts of funding into the market.

In 2008, the tiny country of Bosnia and Herzegovina, with a population of 3.7 million, was the second biggest destination worldwide, behind Peru, for <a href="https://www.cgap.org/sites/default/files/CGAP-Focus-Note-Foreign-Capital-Investment-in-Microfinance-Reassessing-Financial-and-Social-Returns-May-2011.pdf" target="_blank" rel="noopener noreferrer">foreign capital investment</a> in the microfinance sector. In that market, Partner was (and still is) one of its leading MFIs, with the third largest by gross loan portfolio at about 181 million convertible marks (abbreviated KM), or about USD$106 million, and the second largest in number of active borrowers, at 63,500.

High liquidity may be a blessing during growth periods, but it quickly becomes a curse when loan demand contracts and all that cash sits in a bank, yielding no income. The deep recession in Bosnia brought about by the global financial crisis strongly affected the micro and small enterprises in the country, resulting in less appetite for investment, and thus for the business loans provided by the microcredit sector.
<blockquote>High liquidity may be a blessing during growth periods, but it quickly becomes a curse when loan demand contracts and cash sits in a bank, yielding no income.</blockquote>
Those same challenges also lowered clients’ ability to repay their existing loans. In a context of intense competition between MFIs and widespread multiple borrowing — which was difficult to trace since the use of credit bureau data was still incipient — this predictably resulted in severe loan delinquency problems and credit losses across all MFIs. The poor lending standards of several MFIs also undermined the sector’s reputation, further legitimizing non-repayment of loans even beyond what might have been expected from the economic downturn alone.
<h2>Dealing With High Liquidity</h2>
Partner had, by the end of 2008, a total debt of 156 million KM, broken down into 10 outstanding short-term loans with local banks and 23 long-term loans from foreign social and development investors. While the overwhelming majority of these were market-rate loans, Partner also had subsidized loans, including a 6 million euro loan from a bilateral public funder.

<img class="alignleft wp-image-41167" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/01/Chart-debt-in-KM-4.png" alt="bar graph debt" width="700" height="389" />Some of the loans had just been disbursed when the crisis began to unfold, leading to a situation where Partner was sitting on a pile of money that it could not lend out, and thus could not generate income, even as the interest due on the loans continued to accrue.

To limit interest losses, especially on its more recent and expensive loans, Sinanović tried to give the money back, asking to prepay the loans ahead of schedule. However, this was not welcomed by all investors, and some needed to be persuaded to accept the money and terminate the contracts without penalties. This process included a meeting in April 2009 with lenders at the Microfinance Centre (MFC) conference in Belgrade, organized by a group of Bosnian MFIs, including Partner. Facing the reluctance of some investors to accept early loan prepayment, one of the Bosnian CEOs questioned if their behavior was consistent with social investing, which helped change investors’ minds. During the period of crisis, and in the following years, Partner’s short- and long-term debt fell significantly. By the end of 2011, its total debt was down 61 percent from its peak in 2008.
<h2>Getting Ahead of Events</h2>
While reducing excess liquidity solved a part of Partner’s problems, the MFI was still facing strong, serious challenges in its loan portfolio and the consequences of escalating credit and market risks.

<img class="alignright size-full wp-image-41142" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/01/Chart-glp-delinquency-partner.png" alt="graph" width="600" height="320" />During 2009 and 2010, Partner’s portfolio contracted by nearly 50 percent off its 2008 peak, and while it has been recovering steadily since then, as of 2019, its portfolio remains 25 percent smaller than it was over a decade ago, at 137 million KM ($78 million).

<img class="alignright size-full wp-image-41191" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/01/Chart-write-offs-partner-V2.png" alt="chart" width="600" height="266" />Beginning in 2008, delinquency levels grew rapidly, peaking at 11.5 percent in 2010. Partner also took an aggressive approach to writing off loans it saw as non-recoverable. Between 2009 and 2011, the MFI wrote off 11.4 percent of its 2008 gross loan portfolio (GLP). While high, these credit losses were modest in the context of the Bosnian microfinance crisis. Three of Partner’s major competitors experienced cumulative write-offs of 25 percent or more of their peak 2008 portfolio (according to the authors' calculation using <a href="https://databank.worldbank.org/source/mix-market" target="_blank" rel="noopener noreferrer">MIX Market</a> data).

Nonetheless, Partner’s portfolio quality was worrying, and during the early months of the crisis, Sinanović knew already that Partner would breach many of its debt covenants with its lenders. Together with Partner’s board of directors, Sinanović decided to get ahead of events and provide lenders all the information available on the context of the crisis, the reputation issues affecting the sector, and the exact situation of the MFI. For this, Sinanović and his staff prepared a detailed, 13-page memorandum outlining the impact of the crisis on Partner, its clients, and the Bosnian microfinance market, as well as Partner’s response up to that point and planned next steps. The memo also included extensive monthly data and ratios pertaining to Partner’s portfolio and financial situation. This document was sent to all 17 creditors in April 2009, when the crisis was still in its early phase.
<blockquote class="pullquote--left">Sinanović and his staff prepared a detailed, 13-page memorandum outlining the impact of the crisis.</blockquote>
In this way, Partner’s transparency helped gain lenders’ confidence and, at the same time, effectively created the reporting template for all individual creditors. This early transparency helped Partner avoid being flooded with multiple and diverse requests for information by lenders and gave Sinanović and his team the space to focus on containing repayment problems in its portfolio.

Midway through the crisis, after extensive conversations with like-minded MFIs in the country and with support of outside stakeholders, Partner went further. In 2010, together with two other MFIs, EKI and Mi-Bospo, Partner created U-Plusu. This non-profit financial management advisory center aimed to tackle client over-indebtedness and improve the public image of the institution and the sector by providing financial education and mediation services between clients and financial institutions, especially in cases of multiple borrowing.

Despite the serious impact from the crisis, with credit losses accompanied by steep drops in lending and profitability (ROE decreased from 24 percent in 2008 to -5 percent in 2009), Partner managed to keep the situation under control throughout, and its solvency was never at risk. In fact, despite the large provisions and eventual write-offs, Partner’s equity only slightly decreased during the crisis period (from 43 million KM to 41 million KM).
<blockquote>Partner's solvency was never at risk and its equity only decreased slightly.</blockquote>
Partner’s ability to weather the storm was closely linked to a process of foresight and preparation led by Sinanović and the MFI’s directors. It started with swift adaptation to a significant decrease in loan demand, both in terms of credit offer and operational structure, and an aggressive strategy regarding write-offs, while getting rid of excessive liquidity and being proactive and transparent in its communications with creditors. All this helped Partner ready itself for what would be a sustainable — albeit smaller — future.

<em>What are some dos and don’ts and key success factors that the microfinance sector can learn from the Partner case? CFI’s forthcoming report, </em>Weathering the Storm II<em>, will draw on lessons from Partner and cases from microfinance institutions in four other markets: </em><a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-viator-azerbaijan/" target="_blank" rel="noopener noreferrer"><em>Azerbaijan</em></a><em>, </em><a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-spandana/" target="_blank" rel="noopener noreferrer"><em>India</em></a><em>, </em><a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-vitas-palestine/" target="_blank" rel="noopener noreferrer"><em>Palestine</em></a><em> and Nicaragua. See also the <a href="https://centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there/">original Weathering the Storm</a> report from 2011. </em>

Weathering the Storm II: A Case Study of Partner

In 2010, when the world was going through the largest economic crisis in three generations, the microfinance sector found – in most cases for the first time – that it’s not immune. The sector’s many stakeholders, very few of whom had previously experienced a major crisis, had to learn on the fly. Seeing this knowledge gap – and also recognizing an opportunity – CFI launched <a href="https://centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there/" target="_blank" rel="noopener noreferrer">Weathering the Storm</a>, a first-of-a-kind research project to capture the experience of MFIs dealing with crisis.

With the onset of COVID-19 came a scramble for direction on how to respond, and, amid the hubbub, the first Weathering the Storm made the rounds on <a href="https://twitter.com/bull_greta/status/1254851974798999553">social media</a> as one of the reference materials for this new crisis. Many of its lessons -- admonition to MFIs to “keep leverage low and liquidity high,” focus on prioritizing client and staff confidence, emphasis on maintaining transparency with creditors -- proved as true in April 2020 as they did a decade ago. Indeed, its discussion of creditor responsibilities helped inform the rapid and well-organized <a href="https://www.covid-finclusion.org/investors" target="_blank" rel="noopener noreferrer">response by social investors</a>.

Even so, it wasn’t a perfect fit. Much of the original Weathering the Storm focused on institutions whose crises were due more to internal mismanagement than to external threats -- a situation that is largely reversed today. And most of that study focused on avoiding a crisis rather than surviving one – hardly appropriate advice to institutions facing a pandemic. Recognizing these differences, CFI -- this time in partnership with<a href="http://www.e-mfp.eu/" target="_blank" rel="noopener noreferrer"> e-MFP</a> -- launched <a href="https://www.centerforfinancialinclusion.org/series/weathering-the-storm-ii" target="_blank" rel="noopener noreferrer">Weathering the Storm II </a>to seek out cases that are more relevant to today’s situation.

The new project includes five case studies from around the world that highlight challenges that were not extensively featured in its predecessor publication. These cases examine institutions that were beset more by external challenges than internal mismanagement, and some of them feature institutions that survived exceptionally high levels of credit losses.
<blockquote class="pullquote--left">Surviving the immediate danger is only the start of a multi-year journey.</blockquote>
But perhaps what comes out most clearly from these new cases is that deep crises have long tails. Surviving the immediate danger is only the start of a multi-year journey. Some institutions spent years operating under loan restructuring agreements, effectively insolvent, as they wrote off bad loans only to the extent their paper equity allowed. New funding typically became available only after they had fully stabilized and were ready for renewed growth.

It’s true that these were the worst-case scenarios that still ended with a successful turnaround. And while the current pandemic may also create similar outcomes for a few, most institutions are likely to face less severe pressures and experience faster rebounds. Nevertheless, even if the pandemic itself ends sometime during 2021, most institutions won’t end the year fully back to normal. The after-effects are likely to last well into 2022, and for some, it may take several more years to fully recover.

In early 2021, we will compile the lessons from the combined 15 case studies from Weathering the Storm I and II – a volume that will be able to serve as a useful guide for the long road ahead. And, as with its predecessor, we hope that years from now, the many stakeholders in the sector will be able to consult it whenever the situation requires.

Preparing for the Long Tail of COVID’s Impact on Microfinance

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

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

<em>Past crises have taught the microfinance sector a lot about weathering storms. Microfinance institutions (MFIs) are once again facing challenging times. This case study is part of a series that CFI, in partnership with the European Microfinance Platform (e-MFP) and the Mastercard Center for Inclusive Growth, is publishing to (re)visit tales of tough times and resiliency in five markets – <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-viator-azerbaijan/" target="_blank" rel="noopener noreferrer">Azerbaijan</a>, Bosnia and Herzegovina, India, Nicaragua and <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-vitas-palestine/" target="_blank" rel="noopener noreferrer">Palestine</a> – and discuss how MFIs, with the help of their investors and other stakeholders, emerged and thrived. The lessons learned from these cases will be compiled and examined in a forthcoming report, Weathering the Storm II, a follow up to the <a href="https://centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there/" target="_blank" rel="noopener noreferrer">first edition</a> published in the aftermath of the global financial crisis a decade ago. The hope is that these lessons will be applicable to not only the COVID-19 response, but to future crisis responses as well.</em>

Spandana started in 1998 as a microcredit program of an NGO. It quickly became one of the bellwethers of the country’s microfinance industry, offering small group loans to predominately low-income women without the need for collateral. When Spandana was incorporated as a non-bank financial company/microfinance institution (NBFC-MFI) in 2003, it was the largest microfinance institution in India and the sixth largest in the world. In the early 2000s, Spandana was growing rapidly and began exploring a path to an initial public offering (IPO).

The state of Andhra Pradesh (AP) had become one of the most competitive microfinance markets in India during this time. As more commercial MFIs grew, they competed with the state government’s Self-Help Group-Bank Linkage (SHG) program. The SHGs had access to capital from the banking system and worked with millions of underserved women by helping them save small sums and take out loans.

The AP government started to become uneasy with the outsized impact and influence of commercial MFIs, however. Increased competition led to excessive lending, with many clients taking out multiple loans from both SHGs and commercial MFIs. Average household debt in AP rose to about INR 65,000 compared to a national average of about INR 70,001. The MFIs were accused of harassing customers for repayment. The suicide rate spiked, and the state government began attributing some of these suicides to excessive lending by the MFIs and coercive loan recovery practices.
<blockquote>The Andhra Pradesh government started to become uneasy with the outsized impact and influence of commercial MFIs.</blockquote>
In order to rein in the alleged coercive recovery practices of the commercial MFIs, the state government passed the AP Microfinance Institutions (Regulation of Money Lending) Act in October 2010. The ordinance barred MFIs from collecting payments at certain locations, such as a borrower's home or place of work. The regulatory authority also set interest rate caps and mandated stringent reporting guidelines.

<img class="alignright wp-image-40319" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Spandana-Portfolio-Distribution-Chart-V3-1024x639.png" alt="" width="450" height="281" />Clients misconstrued the ordinance to justify non-repayment of loans owed to the MFIs with no serious repercussions. Within a month, the loan repayment rate had dropped from 99.89 percent to 1 percent. An estimated INR 70 billion in loans in the state, from about 6.25 million accounts, had come under stress. This led to severe cash flow problems for the MFIs in the region. In the end, the ordinance caused some MFIs in the state to close and declare bankruptcy. For Spandana, even though it had sufficient capital adequacy (with equity of INR 4.85 billion), the unfolding crisis meant severe financial stress and cash flow problems.

At the onset of the crisis, loans in AP accounted for about half of Spandana's portfolio. In addition to its customers, the livelihoods of the firm’s employees were also at stake: Spandana employed 7000 in AP and had 850 branches operating there.

After the shock of the ordinance rippled through the microfinance ecosystem, Spandana felt it had no choice but to take the case to the court. While it was good news that their case eventually reached the Supreme Court, it meant a long wait, and Spandana’s management was forced to suspend operations in AP and scrap their IPO plans while the court heard their case. Knowing it couldn’t depend on the legal challenge alone, however, Spandana leadership triaged the most pressing challenges and made some difficult business decisions.
<h2>Hard Solutions for A Long Recovery</h2>
The senior management team quickly recognized that liquidity, crucial for ensuring the company could continue operations, was the top challenge. But for Spandana, additional liquidity in the form of financing was hard to come by as it had taken on debt from 48 lenders to fuel its growth.

<img class="alignleft wp-image-40320" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Lenders-Chart-V3-1024x711.png" alt="pie chart" width="450" height="312" />The team ultimately felt that a corporate debt restructuring (CDR) would be appropriate to get needed liquidity and avoid default. ICICI Bank and SIDBI, Spandana's largest lenders, agreed with the management team's assessment that Spandana needed a CDR. The team needed to convince the Reserve Bank of India (RBI), however, because it did not allow such a facility for NBFCs. Spandana's executive team, along with ICICI and SIDBI, began efforts to persuade the RBI to authorize debt of NBFCs as eligible for a CDR. At the same time, the management team held discussions with its investors to gather internal support for a CDR, pending RBI approval.

In 2011, after months of dialogue with the RBI, Spandana, along with other NBFCs in AP, finally got what they wanted: authorization to proceed with a CDR in accordance with guidelines established by the new policy. The RBI also established rules, which played an important role in stabilizing the regulatory environment on issues related to operational process, customer protection, and governance. It also created a separate class of institutions for NBFC-MFIs for regulatory purposes.

ICICI and SIDBI managed to persuade most lenders to sign on to the CDR package by emphasizing the increased chance of recovery over time with improved ground-level conditions, although some lenders did not agree to the CDR and were left out. In September 2011 (see timeline graphic below) Spandana’s investors signed the CDR, which would restructure their INR 21.46 billion in loans outstanding to address its exposure in AP and assist with liquidity challenges. The CDR had two components:
<h3>1. Optionally Convertible Note (OCN)</h3>
INR 10 billion (46 percent) of the outstanding loan value, an amount equivalent to AP portfolio that was deemed irrecoverable, was restructured into a convertible quasi-equity instrument. A redemption premium of 12 percent per annum was payable at redemption. The lenders also had the option to convert these instruments into equity shares of the company, an option Spandana hoped investors would exercise.
<h3>2. Term Loan</h3>
The remaining INR 11.5 billion (54 percent) was bundled into a 72-month term loan repayable in monthly installments at 12 percent interest from April 2012. The term loan was secured by a pledge of 7.27 million Spandana shares owned by its founder, Padmaja Reddy.
<h2>Leaner and Stronger Operations</h2>
While the CDR resolved the initial liquidity issues keeping Spandana from defaulting, many other business and operational challenges had to be dealt with in order to ensure long-term survival. The first, most immediate challenge was Spandana's increasing operational costs coupled with declining revenue. After an exhaustive analysis of its operational costs, the team decided to reduce its number branches and staff.

The next challenge was to establish strong practices related to customer experience and engagement. This included organizing institution-wide staff trainings on appropriate field behavior and client communications. To further improve field behavior, the staff remuneration structure was changed so that 70 percent of staff salaries were fixed, as opposed to 30 percent before the crisis. The goal of this was to encourage staff focus on portfolio quality instead of growth.
<blockquote class="pullquote--right">Staff members were encouraged to focus on portfolio quality instead of growth.</blockquote>
In 2012, after waiting almost two years, the Supreme Court ruled that Spandana could restart lending and recovery operations in the state. This decision restored Spandana’s recovery efforts and it managed to collect INR 10 billion between FY 2011 and FY 2017. With collections resuming in AP, and the new liquidity provided by the CDR, Spandana decided to expand its portfolio to other states to counter perceived overexposure to AP. By deploying capital in other states, Spandana managed to lower its exposure in Andhra Pradesh to 3.1 percent of its active portfolio in 2017, significantly lower than the pre-crisis level of 51 percent.

Spandana also needed to show it was on track operationally. In FY 2014, Spandana reported disbursing INR 16.67 billion in new loans. The improved collection rate and business performance gave confidence to the CDR lenders, which helped Spandana persuade them to defer CDR payments for a period of two years, from January 2014 to December 2015. This agreement allowed Spandana to continue using the cash from collections to reinvest in the expansion of lending operations. ICICI Bank also stepped up to provide an INR 11.5 billion credit facility to boost portfolio growth outside AP. As a result of these efforts, Spandana was able to strengthen its financial performance and condition and begin servicing the CDR when initial payments came due in 2016.
<h2>Profitability and A Strong New Ally</h2>
The shift in strategy, resumed collections in AP, and operational changes allowed Spandana to become profitable starting in FY 2014 (2013-14) after three years of losses (see graphs below). In FY 2016, Spandana reported a profit of INR 2.45 billion. Moreover, its capital adequacy ratio, which was negative the prior two years, turned positive in FY 2017.

<img class="size-full wp-image-40382 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Profit-Tax-Chart-V6.png" alt="" width="750" height="458" />

<img class="aligncenter size-full wp-image-40383" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Capital-Adequacy-Chart-V5.png" alt="graph" width="750" height="399" />

Although Spandana attempted to fulfill the CDR obligations, there were times when collections and revenue were not adequate to cover payments. Therefore, in 2016, the management began scouting for investors to obtain new funding and buy out the CDR lenders who did not intend to convert their investment into equity. While Spandana continued to negotiate the payoff of the OCN, time was running out fast to find new equity investors. In 2017, Kedara Capital, recognizing Spandana's long-term value, invested by buying out the remaining portion of the OCN. Spandana was also able to get a consortium of banks to provide a loan of INR 11 billion to pay off the outstanding term loan of the CDR. Following these moves, Spandana exited the CDR package, which assisted in improving its credit rating

<img class="aligncenter size-full wp-image-40325" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/11/Spandana-Timeline-V2.png" alt="spandana timeline" width="1500" height="613" />

By 2019, Kedara Capital gradually increased its investment in Spandana to 59.1 percent. As a majority shareholder, Kedara took an active role to help Spandana consolidate the number of lenders and increase the availability of capital at lower cost. With the support of Kedara, the number of lenders was reduced to five, and Spandana was able to obtain new financing for business expansion. Kedara also advised the company to improve its governance structure by bringing in industry experts to serve as independent directors. This rebuild fueled Spandana’s operating and profit margins while enabling the upgrade of its credit ratings.
<blockquote class="pullquote--right">Kedara advised Spandana to improve its governance structure by bringing in industry experts to serve as independent directors.</blockquote>
Finally, 10 years after the AP crisis, Spandana came full circle when it successfully launched its IPO in 2019.  It went well: the company’s share price rose more than 33 percent between August 2019 and late February 2020. Then, COVID hit…

<em>What are some of the dos and don’ts and key success factors that the microfinance sector can learn from the Spandana case? CFI’s forthcoming report, </em>Weathering the Storm II<em>, will draw on lessons from Spandana and cases from microfinance institutions in four other markets – <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-viator-azerbaijan/" target="_blank" rel="noopener noreferrer">Azerbaijan</a>, Bosnia, Palestine and Nicaragua. See the original Weathering the Storm report from 2011 <a href="https://centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there/" target="_blank" rel="noopener noreferrer">here</a>.
</em>

<em>The author is extremely grateful to N.K Maini, ex-Deputy Managing Director of SIDBI, Gourisankar Gollapudi, CEO of Manaveeya Development and Finance Limited, Nitin Agarwal (former CEO of Spandana between 2010 and 2014) Prakash Kumar, CGM, SIDBI, for agreeing to be interviewed about the Spandana crisis and revival. This case would not be complete without their contributions.</em>

Weathering the Storm II: A Case Study of Spandana

Microfinance began in its early days as a novel approach to economic development with a focus on making loans to low-income customers using social collateral. No longer niche, microfinance has reached millions of customers around the world and helped demonstrate that low-income people are, in fact, bankable. Fast forward to today, when microfinance is now but a subset of a diverse range of financial service providers targeting low-income customers.

How did we get here and what happens next for microfinance? CFI recently sat down with one of the editors of a new book that seeks to answer that question.

Paul DiLeo, Managing Director of Grassroots Capital Management and former faculty member of CFI’s <a href="https://centerforfinancialinclusion.org/board-leadership-for-impact-program-overview/" target="_blank" rel="noopener noreferrer">governance training</a> programs in Africa, coedited “<a href="https://www.brookings.edu/book/the-future-of-microfinance/" target="_blank" rel="noopener noreferrer">The Future of Microfinance</a>,” with Ira Lieberman, Todd Watkins and Anna Kanze. The book was born out of a workshop at Lehigh University and includes contributions from more than twenty leading authorities in the field. Together, they tell the important story of how microfinance developed and how it has met the needs of hundreds of millions of people. They also set forth answering questions about how it can continue to meet those needs.
<h3>Why did you publish this book?</h3>
<strong>PD</strong>: The coeditors and I felt that, somewhat paradoxically, as microfinance has consolidated its position to be an integral component of national financial systems around the world, its visibility has diminished. Its success -- and setbacks -- hold important lessons for the broader financial inclusion and impact investing communities at a time when market-based solutions to pressing social and environmental challenges are receiving so much attention. The microfinance experience can be useful in helping these initiatives achieve timely success and avoid pitfalls. Also, while not a consideration when the bulk of the book was written, it also offers some guidance on the essential value we have to preserve as microfinance navigates the pandemic.
<h3>Looking back on microfinance’s history, what are some of the key milestones or accomplishments?</h3>
<strong>PD</strong>: In the early days, microfinance started to demonstrate that poor people didn’t pose an insurmountable credit risk; they were not unbankable and they were not uncreditworthy. From there, the industry moved to prove that the institutions serving microfinance clients can operate sustainably and that they aren’t preponderantly dependent on subsidized or concessional financing. Further, the funding going into the microfinance industry began to evolve to a broader range of financing – from grants and heavily subsidized capital, to purely commercial capital. From there, microfinance institutions (MFIs) began taking on more of the substance of financial institutions from a regulatory, supervisory, and governance standpoint.

What’s interesting is how microfinance has become less of a “headline topic.” In other words, microfinance is now part of the mainstream landscape just like every other sort of subcategory of financial institutions. Microfinance is no longer this idiosyncratic oddity that people can write “whoever imagined this” articles about.
<blockquote class="pullquote--right">Microfinance is no longer this idiosyncratic oddity that people can write “whoever imagined this” articles about.</blockquote>
However, there is a downside. Microfinance was never intended to become “mainstream.” It was always intended to be distinctive from everything else in conventional financial services.
<h3>I’m sure if I asked you in January, your answer would be much different, but how would you describe the chapter of microfinance we're in now?</h3>
<strong>PD</strong>: I think this chapter poses the question of whether microfinance can preserve its essential differentiation: does it retain its priority commitment and distinctive character to continue to serve poor people? Some institutions do it more efficiently, do it more profitably, achieve greater scale, so there's nothing distinctive about microfinance in those dimensions. What distinguishes microfinance is the priority to develop products and services along with the ability to find ways of reaching and innovating for their clients.

Microfinance derives a substantial proportion of its value through relationships that accrue to the client rather than being captured and maximized for the benefit of the financial intermediary. This isn’t a new concept, but the current situation resulting from COVID is going to put this topic in focus because inevitably you're going to see a lot of mergers. We’ll have to keep an eye on the character of the fewer institutions that survive.
<h3>On the topic of consolidation, the book mentions how, in competitive markets, like Peru or India, consolidation is much faster than in less saturated markets. Do you see COVID accelerating consolidation, and if so, in which markets?</h3>
<strong>PD</strong>: Consolidation in the microfinance industry has always been a challenge because in many markets there are many smaller institutions that do not see the benefit, or feel pressure to achieve economies of scale. I think what may be different now, as opposed to previous crises, is that decapitalization is going to be faster and more severe, and the impact is affecting all institutions to a significant degree at the same time.

The wild card is what the regulatory authorities will do because in many of the less competitive markets a lot of these institutions may not be subject to strict regulatory capital requirements, which allow institutions to operate with relatively low levels of capital, or even negative net worth, while they wait and see if a brighter day comes. If regulators do not move to force consolidation, you could see the typical resistance to consolidation and, as a result, a lot of these institutions will continue to fight for survival. Whether consolidation is forced by regulators or not, funders could force consolidation, since they are the ones providing life support. Hopefully, the industry will keep in mind the importance of preserving what is distinctive about microfinance, rather than just trying to create the most profitable and efficient institutions.
<h3>The book mentions how many players in the space “have gone on to other endeavors like financial inclusion, which is closely related to microfinance, but not quite the same thing.” Do you think there’s still enough interest and, more importantly, enough capital to reinvest in microfinance?</h3>
<strong>PD</strong>: Unfortunately, some of the legacy investors in microfinance have declared victory and moved on because, from their perspective, microfinance is well established and has relatively good access to capital markets based on a solid business model developed through experimentation and trial and error over many years.

In one sense, there's nothing wrong with these investors that ostensibly have a development objective moving on to support new models. However, in pursuing their mandates to address social and economic issues, they shouldn’t just move on to the next bright, shiny object in financial inclusion. They should continue to support and guide a proven model like microfinance as it scales to preserve social missions and achieve appreciable benefit to target populations.
<blockquote class="pullquote--left">Investors shouldn’t just move on to the next bright, shiny object in financial inclusion.</blockquote>
It’s a shame that many of these investors have essentially ceded responsibility for preserving what they played a large part in creating. Instead of saying “it’s not our role anymore,” those funders can recommit and play an outsized role in preserving the character and integrity of microfinance. Just because you have succeeded in developing and nurturing a business model like microfinance, doesn't mean your responsibilities are over.
<h3>From a governance perspective, what are some considerations microfinance investors and executives should keep in mind as the industry continues to grapple with COVID-19?</h3>
<strong>PD:</strong> It’s important to re-emphasize that leaders in management and boards need to look at both the financial stabilization of their institution and the implications for clients to determine their response.

For example, accelerating the shift to more digital channels may be an obvious response to COVID, but we need to ensure that we aren’t leaving certain client segments – rural, illiterate, older, women – behind.

We may feel pressure to quickly achieve pre-COVID levels of profitability, but this urge should be resisted if it means abandoning certain clients, products or research that are core to our social mission.
<h3>There’s a chapter written on the need to refocus on the client. Do you think the industry has moved away from focusing on customer centricity to something like product development?</h3>
<strong>PD:</strong> The book has a line that states most MFIs understand the poor, which helps them better serve the poor; however, we must make a distinction between the product and the client. There's a lot of outfits that understand the poor very well, like lotteries, gambling casinos, and payday lenders. They can devise products that extract as much value as possible from the poor. The issue here is not just understanding the poor: it’s about what institutions do with that knowledge, the objective of learning about their vulnerabilities, and what they need.

MFIs have a huge amount of knowledge about the poor. MFIs understand the economic systems in which they operate as well as how the communities work and the characteristics of their value chains. That said, we must ensure we retain those strengths because if we move towards a more transactional relationship, we lose our ability to create meaningful value for customers and, instead, prioritize maximizing value extraction.
<h3>Do you have any recommendations to ensure the upcoming consolidation period is both responsible and maintains the ethos of client centricity?</h3>
<strong>PD:</strong> In our current context, I think one of the strengths of microfinance as a mature, established sector is that it has a diverse funder and shareholder base. Hopefully, these investors will recognize the crucial and, in many cases, unique role that microfinance can play in helping poorer, informal clients and communities weather the crisis. But for this to happen, legacy investors – the DFIs, philanthropies, social investors – who may have been diluted to low levels need to step up. MFIs exist to create value for their clients in a sustainable way, and legacy investors need to speak up and ensure that this character defines the way that the industry moves forward from COVID.

What Is the Future of Microfinance? Q and A with Paul DiLeo

<em>Past crises have taught the microfinance sector a lot about weathering storms. Microfinance institutions (MFIs) are once again facing challenging times. This case study is part of a series that CFI, in partnership with the European Microfinance Platform (e-MFP) and the Mastercard Center for Inclusive Growth, is publishing to (re)visit tales of tough times and resiliency in five markets – Azerbaijan, <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-partner/" target="_blank" rel="noopener noreferrer">Bosnia and Herzegovina</a>, <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-spandana/" target="_blank" rel="noopener noreferrer">India</a>, Nicaragua and <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-vitas-palestine/" target="_blank" rel="noopener noreferrer">Palestine</a> – and discuss how MFIs, with the help of their investors and other stakeholders, emerged and thrived. The lessons learned from these cases will be compiled and examined in a forthcoming report, Weathering the Storm II, a follow up to the <a href="https://centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there/" target="_blank" rel="noopener noreferrer">first edition</a> published in the aftermath of the global financial crisis a decade ago. The hope is that these lessons will be applicable to not only the COVID-19 response, but to future crisis responses as well.</em>

Aynur Aliyeva began 2015 in limbo and facing uncertainty. Her CEO had just left Azerbaijan and gone back to the Philippines, thousands of miles away, having been denied a renewed work visa a few months earlier. As his deputy at the Azerbaijani microfinance company Viator, Aliyeva stepped in, working feverishly with lawyers and government authorities to bring the CEO back. Unbeknownst to her, a far greater challenge loomed just ahead.

On February 21<sup>st</sup> of that year, the Azerbaijani currency, the manat, lost 25 percent of its value — all in a single day. For a country whose currency had been steady since at least 2000, even during the height of the global financial crisis in 2008-09, such a devaluation was a major shock. It capped a year of severe economic pressures, with falling oil prices over the past year having already been felt in every corner of the petroleum-driven economy. Even with that, the devaluation was something new entirely — “snow in the middle of summer,” thought Aliyeva.

These pressures were bearing down on Viator. Like other MFIs in the country, much of Viator’s portfolio was lent out in USD-denominated loans, and most of its debt was likewise in dollars. Now its borrowers — few of whom actually earned USD incomes — were facing large payment shocks, on top of already being affected by the slowing economy. Viator was entering an existential crisis. Meanwhile, Aliyeva spent those initial few months navigating between a remote CEO, concerned investors and staff, and a loan portfolio that was fast deteriorating.

<img class="wp-image-40041 alignright" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-1-v2-1-1024x620.png" alt="" width="400" height="242" />In April 2015, Aliyeva was finally appointed CEO. With that uncertainty resolved, Viator embarked on a crisis response. Its first step was to change its lending policy; until then, Viator had been lending between a third and half of its loans in USD. With the devaluation, it began to sharply curtail this practice, bringing USD disbursements down to zero by the end of the year. That was just in time, because on December 21<sup>st</sup>, the manat was suddenly devalued again, this time by another 32 percent. With these two devaluations, the manat had lost half of its value — and the decline would continue through 2016 into 2017.

The resulting fear and uncertainty, combined with a major recession, destroyed trust and threw the entire financial sector into turmoil. Viator was a small fish, had no deposits, and certainly did not meet the too-big-to-fail test. Its primary shareholder was a Norwegian NGO that, while morally supportive, had little financial expertise and no access to additional capital. If Viator was to survive, it would have to do it on its own.

And survival was indeed at stake. Several of the country’s MFIs, far larger and more important than Viator, would not make it.

Aliyeva had never run an MFI in the midst of crisis, but that had its advantages, too — she carried no “founder’s syndrome” baggage; whatever mistakes were made previously were made by her predecessor. This allowed her to ignore the past and focus entirely on the present and the future.

<img class="wp-image-40055 alignleft" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-2-v4-1024x660.png" alt="" width="600" height="387" />In the meantime, in Viator’s portfolio, things were going from bad to worse. By the end of 2015, 47 percent of its loans were overdue. A year later, that number had grown to 77 percent, comprising mostly loans that were by then more than 12 months behind. Faced with such numbers, most managers would panic.

Aliyeva did not panic. With many of the country’s financial institutions — banks and MFIs alike — hunkering down in the midst of crisis, Viator suddenly found a wide-open market. In the face of uncertainty and volatile cash flows, people still needed to borrow. And so Viator continued to lend. Indeed, no matter how bad things got during the long crisis period, Viator never stopped lending.

Having already switched to entirely local currency loans, Viator focused on the best clients and low-risk products. Chief among these was the jewelry loan, which allowed clients to monetize the gold received during weddings and other family events — a common cultural practice in Azerbaijan. With this secure and relatively liquid collateral, Viator could lend during the depths of the crisis, and still keep credit risk low.

Of course, this new lending was far below pre-crisis levels. Midway through 2016, monthly disbursements averaged AZN 0.6 million, or 70 percent lower than a year earlier. By mid-2017, this was cut again by half, down 83 percent from the level set two years before. These lower disbursements were accompanied by lower operating costs; in 2016 alone, operating expenses were halved, mainly through salary cuts and staff attrition, as well as layoffs that prioritized retention of the best-performing and most experienced staff.

<img class="aligncenter size-full wp-image-40044" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-3-v2-e1604330128251.png" alt="" width="1200" height="438" />

Though shrinking, Viator was by no means closing its doors. Despite the greatly reduced levels, new disbursements proved crucial to its survival. By January 2017 — a year after the second devaluation that marked the full onset of the crisis — repayments from its new portfolio of jewelry-backed loans accounted for nearly two-thirds of Viator’s total cash inflows. Indeed, for nearly five years during the period 2015-2019, loan repayments were Viator’s sole source of cash inflows. That proved crucial not only for allowing Viator to continue disbursing new loans, but also to continue to repay its debt.

<img class="aligncenter wp-image-40045" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-4-v2-1024x587.png" alt="" width="797" height="457" />

At the start of 2015, nearly all of Viator’s funding was in the form of debt from foreign social investment funds, mostly in foreign currency. Given the depth of the crisis, its investors were naturally worried. Many had also invested in other MFIs in Azerbaijan, not surprising considering that just before the crisis, the country was one of the five largest markets in the world for microfinance investment. Now these investors were faced with preserving capital and minimizing losses.

Complicating matters further, some investors had disbursed their investments as recently as February 2015, while others were already near the end of their loan maturities. With Viator in violation of multiple debt covenants, investors faced the same coordination problem that arises with nearly every crisis-stricken MFI: if all of them were to follow the loan covenants and accelerate their debts, they would be fighting for the meager leftovers of a liquidated entity. Not only would they face steep financial losses, they would also be abandoning an MFI that was one of the few institutions still providing loans to excluded rural households in Azerbaijan.

<img class="aligncenter size-large wp-image-40047" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-5-v2-1-1024x350.png" alt="" width="1024" height="350" />

To nearly all investors, the answer was clear: the debt had to be restructured. Despite this, the negotiations among them proved challenging. Some of the investors had prior experience handling workouts, but for others, this was the first time. There were additional obstacles that some negotiators faced when needing to explain these inter-creditor discussions and tentative agreements to their own credit committees, some of which had limited experience investing in microfinance or even in emerging markets more generally. For one credit committee, the sole reference point for debt restructuring was a court-supervised process — a drawn-out and deeply uncertain option in the context of Azerbaijan. Educating them in these realities took time.

One crucial input into these negotiations was an assessment and recommendations from an external advisor, hired by Viator in early 2016 upon the recommendation of one of its investors. The advisor had extensive experience managing situations such as this, having worked at a crisis-stricken MFI in Bosnia and Herzegovina during its turnaround following the 2008 crash. Her report found that while Viator was deeply affected by the crisis, its operations were sound and it remained a viable institution that could survive the crisis. The report also contained a series of suggestions to Viator, especially aimed at strengthening collections on overdue loans — advice that Aliyeva readily adopted.

The consultant went further and invited several of Viator’s senior staff to her former MFI in Bosnia to directly observe the collections systems the MFI had instituted during its turnaround. This experience, along with training of Viator’s collections staff, were crucial factors into Viator’s crisis response.

The work this consultant did for Viator was not only important to the MFI; included with her report was a series of cash flow projections that showed the turnaround to be very much possible. These projections would prove a critical input for Viator’s investors.

Throughout this time, Viator’s transparency and openness with both the external advisor and with its investors played an important role in building trust. As it happens, several of the fund managers had also invested in another Azerbaijan MFI that took an approach that was diametrically opposite from Viator’s. Its unwillingness to communicate and share information made Viator’s openness even more notable in the investors’ eyes — and made them more willing to make the difficult decisions required for the workout.
<blockquote class="pullquote--left">Viator’s transparency and openness with both the external advisor and with its investors played an important role in building trust.</blockquote>
With the consultant’s report concluded in June 2016, negotiations among Viator’s creditors swung into high gear, and finally in August 2016, they signed an inter-creditor agreement that extended all loans, regardless of maturity. The agreement specified a single repayment schedule for all investors, who would be paid pro rata, but using a formula that gave some additional preference to debts with the earliest maturities. The agreement also fixed a discounted interest rate of 5 percent for all creditors. Over the course of the next two years, reflecting the depth of the crisis, this agreement would be amended twice more, adding further discounts to the interest rate.

During these negotiations, Aliyeva was adamant that rather than funneling all excess inflows from loan repayments back to its creditors, Viator should use a substantial portion of these cash flows in order to reinvest in new lending. For investors, this meant they would have to sacrifice some repayments in the short-term. It is here that the external consultant’s projections proved crucial, for they showed the value of reinvesting cash flows into new loan disbursements. Indeed, a number of Viator’s investors used these same projections as a benchmark to monitor Viator’s performance over the coming months.

<img class="alignright wp-image-40058" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-6-v3-1-1024x713.png" alt="" width="550" height="383" />With its liquidity thus stabilized, Viator could focus on managing its solvency situation. Here, things were arguably even more challenging. It certainly helped that Viator entered the crisis well-capitalized, with equity comprising 40 percent of total assets at the end of 2014. Even so, that generous level of capital was not enough when 63 percent of its pre-crisis portfolio was six or more months delinquent by the end of 2016. One way that Viator handled this challenge was by adapting its provisioning practices. At the outset of the crisis in 2015, it provisioned generously (100 percent for all loans overdue by more than 90 days), in 2016-18 provisioning dropped to as low as 64 percent, even when nearly all overdue loans had by then exceeded 12 months.

The decision to change its provisioning rules helped conserve much needed equity, which by 2017 had eroded to just 13 percent of assets. Doing so bought crucial respite during the years that non-performing loans continuing to fester on its books. Finally, rescue arrived in 2019, four years after the onset of the crisis, when the Azerbaijani government implemented a rescue package for the microfinance sector. Through it, Viator received both a grant and a subsidized loan from the Central Bank of Azerbaijan that allowed it to cover a major portion of its losses. Only then did Viator once again fully provision for its delinquent portfolio. Almost exactly five years after the onset of the crisis in February 2015, Viator could finally close the last page on this difficult episode and truly look forward.

A few months later, it was facing COVID-19…

<em>What are some dos and don’ts and key factors of success that the microfinance sector can learn from the Viator case? CFI’s forthcoming report, </em>Weathering the Storm II,<em> will draw on lessons from this case and cases from microfinance institutions in four other markets – <a href="https://centerforfinancialinclusion.org/weathering-the-storm-ii-a-case-study-of-partner/" target="_blank" rel="noopener noreferrer">Bosnia and Herzegovenia</a>, India, Palestine and Nicaragua. See also CFI's original <a href="https://centerforfinancialinclusion.org/weathering-the-storm-hazards-beacons-and-life-rafts-lessons-in-microfinance-crisis-survival-from-those-who-have-been-there/" target="_blank" rel="noopener noreferrer">Weathering the Storm</a> report from 2011</em>.

Weathering the Storm II: A Case Study of Viator

<a href="https://www.cdcgroup.com/en/" target="_blank" rel="noopener noreferrer">CDC Group</a>, the UK’s development finance institution, is one of the largest DFIs in the world. With nearly $6 billion invested in companies located mostly in Africa and South Asia, CDC is an impact investor that aims to drive development through commercial means.

CDC invests across a wide range of sectors but focuses on seven priority sectors that it has identified as having the greatest potential for development impact. Among these, the financial services sector currently represents a <a href="https://www.cdcgroup.com/our-impact/key-data#how-we-invest-in-sectors!" target="_blank" rel="noopener noreferrer">greater share of CDC’s portfolio</a> than any other sector.

As part of its exploration into how DFIs are responding to COVID-19, in particular with respect to the role of the financial sector, CFI connected with Machal Karim, an executive on CDC’s Development Impact team who focuses on financial services in developing countries.
<h2>For its COVID-19 response, CDC has laid out three areas of focus: ‘Preserve,’ ‘Strengthen’ and ‘Rebuild.’ Can you tell us more about those?</h2>
We prepared a briefing document with complete details that is available on our <a href="https://www.cdcgroup.com/en/covid-19-response/" target="_blank" rel="noopener noreferrer">COVID-19 response page</a>.
<blockquote>Our immediate priority has been to preserve the viability of our current portfolio of over 1,200 businesses that employ more than 800,000 people combined.</blockquote>
Our immediate priority has been to preserve the viability of our current portfolio of over 1,200 businesses that employ more than 800,000 people combined. This is particularly the case in those sectors most affected by COVID-19, where it’s been crucial to act to protect the positive environmental, economic, and social impact of these businesses. Our support has included providing working capital, technical assistance, and guidance to improve their resilience and protect jobs.

Our second area of focus is to strengthen the resilience of businesses by scaling up our response to the economic and health challenges of the crisis. On the economic side, we’re channeling much-needed liquidity to local banks to enable them to support their business customers. And to support those that have a direct role in combating the COVID-19 pandemic, we are assessing opportunities to invest in businesses providing healthcare or access to basic goods and services.

We’re now at a point where, alongside these more immediate actions, we’re thinking more about our third area of focus – to support economies to rebuild and recover once the worst effects of the pandemic have passed. As a DFI, our role to address the long-term challenges a crisis will bring – continuing to invest patient capital at a time when commercial investors pull back – is vital.
<h2>In terms of ‘Strengthen,’ CDC is looking to provide liquidity for local financial service providers. Have you identified opportunities for this type of support yet?</h2>
We’re giving priority to those who are in most urgent need of liquidity support. Over the last few months, we’ve committed just over $400 million to our program of systemic liquidity.

As an example, we’ve recently made an <a href="https://www.cdcgroup.com/en/news-insight/news/cdc-announces-additional-us75-million-trade-finance-deal-with-absa-as-part-of-covid-19-response/" target="_blank" rel="noopener noreferrer">additional $75 million commitment</a> to our existing trade finance facility with Absa Bank, an African financial services group. The pandemic has put significant pressure on African banks as international banks continue to withdraw from the continent.
<blockquote>What makes this facility particularly innovative is that it is aimed at boosting trade finance funding to some of Africa’s most vulnerable countries.</blockquote>
The investment will enable local banks to sustain the availability of trade finance, supporting supply chains during the crisis. And what makes this facility particularly innovative is that it is aimed at boosting trade finance funding to some of Africa’s most vulnerable countries and in sectors that are critical to serving people’s basic needs during the crisis – food and agriculture and health.
<h2>What about timeframes? What do you see as the medium-term needs beyond liquidity?</h2>
<blockquote>What we do know is that the crisis is shifting from an acute challenge to a chronic one, and this means that our role will be as a partner for the long-term.</blockquote>
CDC has identified various <a href="https://www.cdcgroup.com/en/news-insight/news/guidance-on-protecting-customers-during-covid-19/" target="_blank" rel="noopener noreferrer">short-term to longer-term risks and provided corresponding suggestions</a>, but we’re at a stage where it’s still very difficult to talk about timeframes. We still cannot predict what the ultimate impact will be. What we do know is that the crisis is shifting from an acute challenge to a chronic one, and this means that our role will be as a partner for the long-term, supporting businesses through the course of the pandemic and to rebuild sustainably.

In terms of needs beyond liquidity, our approach throughout has been to provide guidance for employers, investors, and financial institutions on issues ranging from <a href="https://www.cdcgroup.com/en/news-insight/insight/articles/how-can-investors-help-companies-protect-jobs-during-covid-19/?fl=true" target="_blank" rel="noopener noreferrer">job protection</a>, to <a href="https://www.cdcgroup.com/wp-content/uploads/2020/04/CDC-Group-Guidance-on-protecting-customers.pdf" target="_blank" rel="noopener noreferrer">customer protection</a>, to <a href="https://www.cdcgroup.com/en/news-insight/insight/articles/guidance-on-managing-a-remote-workforce-during-the-covid-19-pandemic/?fl=true" target="_blank" rel="noopener noreferrer">remote working</a>. As time has moved on, the nature of this guidance has evolved to include advice on <a href="https://www.cdcgroup.com/en/news-insight/insight/articles/returning-to-the-workplace-during-covid-19-labour-and-workforce-considerations/" target="_blank" rel="noopener noreferrer">returning to the workplace</a> and how to support women working from home with limited access to technology.

Another part of our approach has been to provide support to investee businesses through <a href="https://www.cdcgroup.com/en/covid-19-response-facilities/" target="_blank" rel="noopener noreferrer">our technical assistance facility, CDC Plus</a>. This has included one facility providing grants to businesses, so they can adapt or scale-up to form part of the response to the pandemic, and a second facility to support the development of guidance for companies on how to respond to the crisis.
<h2>Throughout the short and medium terms, CDC suggests businesses maximize their “digital footprint and channels” as much as possible. How are your investees working to accelerate digitization for consumers?</h2>
We’ve been supporting our investee businesses, including financial institutions, to proactively explore how they may want to pivot their current products or operations to better meet customer needs. Much of this has revolved around learning more about digital opportunities and maximizing their digital offerings so they can continue to operate under the changing environments and new types of customer interaction and behavior that the pandemic has brought about.

We continue to support our investees through various channels, including our technical assistance facility, to explore these opportunities and step up their activities as economies open up.
<h2>Consumer protection remains an important topic for CDC. How have consumer protection challenges shifted in the COVID era?</h2>
<blockquote>Consumer protection risks have become particularly heightened due to the pandemic.</blockquote>
We recognized that financial institutions and their customers would come under particular stress as a result of COVID-19. Consumer protection risks have become particularly heightened due to the pandemic, as financial institutions have had to balance the immediate stress on liquidity with the need to sustain support to their customers and abide by regulatory requirements.

Early on, we ensured that the financial institutions we’re invested in had the support they needed to make decisions and manage risks while protecting customers, such as by issuing this <a href="https://assets.cdcgroup.com/wp-content/uploads/2020/04/09165635/CDC-Group-Guidance-on-protecting-customers_9-April-2020.pdf" target="_blank" rel="noopener noreferrer">guidance document</a>. Mindful of the many stresses on employment, liquidity and cashflows, we urged our financial institution partners to continue to consider the needs of, and risks to, customers through the crisis.
<h2>How has this crisis shifted the perception of inclusive finance, if at all?</h2>
<blockquote>Now more than ever, support to financial systems is critical for economic recovery, particularly for the most vulnerable.</blockquote>
Now more than ever, support to financial systems is critical for economic recovery, particularly for the most vulnerable. Our work to provide systemic liquidity has been a concrete channel of support to the market, with an explicit focus on supporting the most vulnerable first and ensuring their liquidity needs are managed.

When we start to recover, it will be vital to remember all segments of the market to ensure that the most vulnerable and excluded groups are not left behind. It will also be important to continue to support financial institutions in reaching those customers that have historically been perceived as higher risk and harder to reach, as they are also the most vulnerable.
<h2>CDC’s head of Africa has argued that the banking sector is where DFI support is most crucial, but that private capital will be required in the longer term. Does CDC structure any direct support to MSMEs or does everything flow via the banking sector?</h2>
<blockquote>We know that our most effective way for getting capital to SMEs is through partners, rather than investing directly.</blockquote>
A key part of our <a href="https://www.cdcgroup.com/wp-content/uploads/2020/05/Financial-Institutions_11.pdf" target="_blank" rel="noopener noreferrer">Financial Institutions' Strategy</a> is to help intermediaries serve SMEs because SMEs are the growth engines of the economy in our geographies. We know that our most effective way of getting capital to this size of business is through partners, rather than investing directly.

This includes investing in non-bank financial companies so that alternatives to traditional bank financing become available to SMEs, as well as supporting microfinance institutions looking to extend their lending to SMEs. It also includes working with our bank investees to increase the finance they provide to SMEs. This can mean funding work to develop products and operations better suited to SME clients. And it can mean entering into risk-sharing agreements, which reduce banks’ capital cost of lending to SMEs, or trade finance agreements to bridge the ‘trade finance gap’ and support trade undertaken by local businesses. Finally, it includes investing through funds to reach SMEs with different types of capital.

That’s why an important part of our response has been focused on working with our investee financial institutions, so that we can quickly help them to increase the credit available in our markets. For example, by expanding our pre-existing trade finance programs, we can inject liquidity quickly and accurately, and ensure that domestic supply chains keep operating, which in turn supports SMEs within those markets.
<h2>Has CDC coordinated with other DFIs on its COVID-19 response? What’s been the nature of this inter-DFI coordination, and what more can be done?</h2>
DFIs came together very early on to find ways to collaborate in response to the pandemic. The <a href="https://www.cdcgroup.com/en/news-insight/news/development-finance-institutions-join-forces-to-respond-to-covid-19-in-developing-countries/" target="_blank" rel="noopener noreferrer">DFI Alliance</a>, involving organizations from 16 OECD countries, has been working together to bring liquidity to the market, support companies impacted by the virus, and promote new investment.

CDC has been working with both bilateral and multilateral DFIs. There are various working groups underway coordinating on areas ranging from technical assistance funding, to our approach to certain sectors, to supporting the liquidity of investment funds.

We’ve also been collaborating on how to support the rebuilding of businesses and economies in a way that is more inclusive. For example, alongside our peers, we <a href="https://www.cdcgroup.com/en/news-insight/news/2x-challenge-and-gender-finance-collaborative-response-to-the-covid-19-pandemic/" target="_blank" rel="noopener noreferrer">called for a gender-sensitive approach</a> among investors in both immediate responses and longer-term recovery solutions.
<blockquote>We will continue to stand firm to play our role at a time when commercial investors are pulling back.</blockquote>
We feel proud of what we’ve been able to achieve so far and recognize there is a lot more to do as the pandemic shifts from an acute to a chronic challenge. Our approach of providing much-needed liquidity through financial intermediaries is very likely to continue to be needed in the coming years. We will continue to stand firm to play our role at a time when commercial investors are pulling back, so that in the long-term, businesses and economies are able to successfully rebuild.

DFIs, Financial Inclusion and the COVID-19 Response: A Q&A with Machal Karim of CDC

In June, CFI published a blog post asking whether repayment <a href="https://centerforfinancialinclusion.org/are-moratoriums-good-for-clients/" target="_blank" rel="noopener noreferrer">moratoriums are good for clients</a>. As one of the <a href="https://centerforfinancialinclusion.org/preserving-liquidity-policymaker-responses-to-covid-19-and-the-impact-on-low-income-customers/" target="_blank" rel="noopener noreferrer">key tools being used by policymakers</a> to mitigate the consequences of COVID-19 on microfinance clients, moratoriums have provided vital relief to people at a time of unprecedented need.

But when we assess the value of moratoriums, we must also carefully consider what impacts they are having on the financial institutions that serve low-income and underserved segments. From confusion caused by moratoriums announcements to the liquidity impacts for financial institutions serving the BOP, the implications of loan moratoriums are proving to be very mixed.
<h2>COVID-era Moratoriums: Confusion and Rumors</h2>
Moratoriums for loan payments was one of the first measures taken by policymakers around the world when the pandemic shut down businesses. Consumer and MSME borrowers were told they could hold off on repaying their debts, usually for a few months. While this measure seems straightforward, the way in which it was implemented and communicated has varied widely across markets – and often within markets – leading to significant confusion.
<blockquote>While a moratorium seems straightforward, implementation and communication varied widely across markets.</blockquote>
Some moratoriums were mandatory, others were offered as recommendations. The timeframes varied, anywhere from one through six months. Some financial institutions implemented them with an “opt in” approach for customers, while others in the same market took an “opt out” approach. Some regulators said customers needed to request deferments in writing, then later said they could do so via phone, SMS, or email, adding further challenges to financial institutions. In some cases, financial institutions told their clients they could hold off on principal payments but not interest payments. Others said clients would need to pay the combined principal and interest in one balloon payment at the end of the period. And in many markets, it was not clear which borrowers and institutions the moratoriums would apply to, leading to false rumors and public turmoil.

A key issue contributing to the confusion is that the FSPs that serve the poor are made up of many types of entities, typically licensed and supervised by different regulators, with moratorium parameters often differing between them. So consumers and MSMEs were hearing mixed messages and weren’t sure which ones applied to them.
So far, it’s small and mid-size non-bank financial institutions (NBFIs) that are finding themselves most negatively impacted by the moratoriums in their markets, both by the liquidity implications as well as the confusion over how to implement the moratoriums and who it applies to. Many of their clients are no longer able to repay their loans, and even those who can pay are refusing to because they believe the moratoriums apply to them.
<blockquote>Moratorium parameters often differ between types of entities which serve the poor.</blockquote>
In some countries, such as India, the Reserve Bank of India (RBI) stated that <a href="https://economictimes.indiatimes.com/wealth/borrow/lending-institutions-to-allow-3-month-moratorium-on-all-term-loans/articleshow/74840850.cms#:~:text=The%20Reserve%20Bank%20of%20India%20(RBI)%20in%20a%20press%20conference,outstanding%20on%20March%201%2C%202020.&amp;text=Normally%2C%20simple%20interest%20is%20payable,loan%20during%20a%20moratorium%20period." target="_blank" rel="noopener noreferrer">banks and NBFCs are “allowed” to provide moratoriums</a> to their borrowers, but didn’t specify the conditions around how the moratorium should be carried out.

In discussions with the Central Bank of Egypt, they said that the moratorium announced by the central bank applied only to bank loans, but somehow got miscommunicated, leading many MFI customers to initially believe it applied to them as well. At that point, the regulator responsible for non-bank financial institutions in Egypt, the Egyptian Financial Regulatory Authority (FRA), announced its own moratorium. FRA took a more nuanced approach to a moratorium for microfinance clients, in coordination with the MFIs themselves and the Egyptian Microfinance Federation. The mid-March moratorium stated that MFI clients could repay a portion of their loans, down to 50 percent, for a period of two months (March and April), with extensions allowed on an as-needed basis. FRA’s view was that MFIs could not afford a sudden and complete stop in repayments, especially as they don’t have deposits to fall back on, nor would it be a good precedent in terms of microfinance borrower culture. The Bank of Zambia told us they chose to not impose any moratorium, leaving it to individual financial institutions to decide how to address the issue with their clients.

In Peru, MFIs were struggling even before COVID, and there’s now a debate about a proposed law that would forgive all interest charges for six months. It’s still under discussion but industry observers estimate that the law would force at least 26 MFIs into <a href="https://gestion.pe/economia/sbs-26-entidades-financieras-quebrarian-si-aprueban-condonacion-de-intereses-noticia/" target="_blank" rel="noopener noreferrer">serious solvency problems</a>.

Most moratorium announcements have overlooked the loan repayments that MFIs themselves must pay to their bank lenders. Many central banks have urged the banks under their supervision to extend the moratoriums to their MFI/NBFI clients but have not mandated it. And, according to one observer in India, there are banks who fear that extending moratoriums to MFIs will affect their own bank’s credit rating, so are reluctant to do so. MFIs and NBFIs thus find themselves caught in the middle between client moratoriums and their own creditors. Not only are MFIs struggling to meet their current loans in this environment, but their banks and investors are hesitant to issue new loans to them, further exacerbating the situation.
<h2>FSPs: Caught in the Middle and Facing a Liquidity Crisis</h2>
In this pandemic environment, with no loan repayments coming in, deposits being drawn down, and maturing debt commitments coming due with little sign of being renewed or rescheduled, many MFIs are facing the possibility of a serious liquidity crisis. Many industry observers suggest that MFIs won’t get back to their normal repayment rates until 2022. The reduction in cash reserves means shortages in their operational budgets, including their ability to pay staff costs, which also exacerbates their ability to collect repayments. One recent analysis shows that a slip in client repayment rates from 95 to just 85 percent would render most MFIs <a href="http://cgap.org/blog/covid-19-how-does-microfinance-weather-coming-storm" target="_blank" rel="noopener noreferrer">insolvent in less than a year</a>. In a June 2020 survey in Rwanda, 95 percent of the microfinance banks and limited liability microfinance institutions reported <a href="http://afr.rw/IMG/pdf/focus_note_-_covid-19_survey_12.06.20_.pdf" target="_blank" rel="noopener noreferrer">emergency need for liquidity support</a> in the next three months.

Allowing a collapse in the microfinance sector could very well end up negating overall COVID economic relief measures. So far, most MFIs are continuing to operate and few have indicated that they are struggling from serious liquidity shortages, particularly the larger players. According to a recent <a href="https://www.cgap.org/pulse" target="_blank" rel="noopener noreferrer">CGAP survey</a> of MFIs, only 14 percent of respondents reported having less than three months of liquidity on hand (as of April 2020). This figure jumps to 25 percent when operating expenses and debt repayments are factored in. What concerns observers, though, is what happens when the moratoriums end and borrowers are still unable to repay. When the lockdowns and moratoriums end, many microfinance clients will need additional credit to resume business activities, not to mention repay other liabilities accrued to meet their household needs during lockdown.
<blockquote>Allowing a collapse in the microfinance sector could negate overall COVID economic relief measures.</blockquote>
MFIs that are in a precarious position because of the liquidity squeeze described above won’t be in a position to provide this critical credit. This will be compounded by MFIs being unable to access further credit from wholesale lenders such as banks as their collection efficiency will plummet during and after lockdown. In financial situations like this, where there is considerable reduction in consumer demand and a broader economic slowdown, banks become risk averse – even more so when dealing with the poorest segments of society and the institutions that serve them.
<h2>Recommendations for Policymakers and Regulators</h2>
Going forward, we’d make the following recommendations, which can also be found in the recent CFI policy brief:
<h3>Authorities must carefully consider the appropriateness of blanket moratoriums for all institutions and build some flexibility into the policy.</h3>
As we’ve seen so far in Egypt, offering only a partial moratorium to MFI clients has so far proven successful and has eased the impact on the MFIs. The risks of poorly-thought out moratoriums don’t just apply to MFIs, either: a recent stress test by the Bank of Uganda showed that more than half of Uganda’s commercial banks <a href="https://www.theeastafrican.co.ke/business/Half-Ugandan-banks-fail-pandemic-liquidity-test/2560-5584762-ji0t3c/index.html?utm_source=newzmate&amp;utm_medium=email&amp;utm_campaign=2318&amp;tqid=3fGufmcvDU4BEZgeQv5CBIR5.HzSy386xe.6Ebixzw" target="_blank" rel="noopener noreferrer">would have collapsed</a> if the central bank had enforced a three-month customer loans repayments holiday at the onset of the COVID-19 pandemic. In India, industry experts are starting to worry about the impact that twice-extended moratoriums will have on the banks. As The Economist <a href="https://www.economist.com/finance-and-economics/2020/08/01/has-indias-moratorium-on-loan-payments-delayed-the-pain-for-banks" target="_blank" rel="noopener noreferrer">notes</a>, "Much of the RBI's early response to the pandemic involved protecting borrowers. It may yet find itself being forced to step in to save some lenders."
<h3>Moratorium mandates must be clearly thought out and communicated uniformly across all institutions.</h3>
Moratorium announcements can be very confusing to consumers and financial institutions alike. Regulators and policymakers must articulate clearly who the moratoriums apply to, and announcements affecting different groups should occur at the same time to avoid confusion. If moratoriums are to be made optional, say by letting customers opt in, the procedures should be simple, straightforward and clearly communicated. There should also be a clear understanding between the regulator and financial institutions on how they wish to see the moratoriums carried out, with measures in place to ensure that instructions are carried out accordingly. For example, merely recommending that banks extend moratoriums to their MFI clients without following up to ensure this is happening will probably not deliver the results that central banks want to see.

Policymakers and regulators were caught off guard by the pandemic, and are struggling to do everything they can to alleviate the suffering people are facing. While moratoriums were implemented with good intentions, the effects may end up being detrimental in the long run.

Are Moratoriums Good Policy and Good for FSPs?

In the <a href="https://openknowledge.worldbank.org/bitstream/handle/10986/12272/9780821389270.pdf?sequence=6" target="_blank" rel="noopener noreferrer">New Microfinance Handbook</a> (2013), Mayada El-Zoghbi and Barbara Gähwiler wrote about how donor funding to the microfinance sector was concentrated in a small number of institutions in a handful of countries, and that this called into question the catalytic nature of donor funding.

“Internal systems often reward disbursements of large amounts of funding, creating a bias toward markets and recipients of funding that can absorb large amounts easily,” they wrote. “More challenging obstacles for financial inclusion that may require small, long-term, and patient funding are too often ignored.” To illustrate the point, they used data from the 2010 <a href="https://www.cgap.org/topics/collections/international-funding" target="_blank" rel="noopener noreferrer">CGAP Funder Survey</a> demonstrating that more than 50 percent of all single-country donor commitments went to just 15 countries, including some of the more developed microfinance markets like India, Bangladesh, and Kenya.

A decade on from that first attempt by CGAP to map funding flows for financial inclusion, we know a lot more about the potentially catalytic role of donor funding, thanks in part to the widespread adoption of the <a href="https://www.cgap.org/research/publication/new-funder-guidelines-market-systems-approach-financial-inclusion" target="_blank" rel="noopener noreferrer">market systems approach</a>. We’ve also seen big <a href="https://www.centerforfinancialinclusion.org/how-the-development-sector-is-channeling-money-to-digital-financial-services" target="_blank" rel="noopener noreferrer">shifts in the financial inclusion sector driven by technology</a>, and the emergence of digital financial services (DFS) and fintech as areas for funders seeking development impact.

Over the past eight years, MIX, a unit within CFI, has partnered with CGAP to track the evolving landscape of financing for financial inclusion and this year spearheaded an analysis of funding flowing specifically to DFS – the first of its kind in the industry. This <a href="https://centerforfinancialinclusion.org/how-the-development-sector-is-channeling-money-to-digital-financial-services/" target="_blank" rel="noopener noreferrer">recently published analysis</a> suggests that funding for DFS may be following similar patterns to the growth of microfinance such that there's a concentration of funding in a relatively small number of countries, which also tend to be relatively financially included (and high-income).

In fact, the 15 countries that receive the most funding for DFS account not just for half but for three-fourths of total development spending (as of the end of 2018). This includes a number of middle-income countries, like China, Brazil, and India, as well countries like Kenya and Bangladesh that are low-income but have relatively established financial ecosystems. While the digital revolution is held up as an opportunity to expand financial access to those currently unserved, we find that funding to countries with already high levels of financial inclusion is 2.5 times as much as the funding to the least financially included countries.
<blockquote>Funding to countries with already high levels of financial inclusion is 2.5 times as much as the funding to the least financially included countries.</blockquote>
Microfinance went through this. As the concentration problem arose, funders recognized the need not just to support existing markets and institutions but to develop ecosystems for new players to emerge. They shifted to supporting regulations for non-bank entities to lend to financially excluded people and businesses (for example, new legal statuses, like the NBFC MFIs in India). These regulatory changes allowed for hundreds of new institutions to be established and microfinance to spread into new markets, attract capital, experiment, and expand the reach and range of services. Funders also supported the proof of concept of new business models and product innovations for new, specialized microfinance institutions.
<h2>A Debate Over the Additionality of Development Funding</h2>
There is a buzz around fintech that development funders seem to find hard to resist. As Greta Bull wrote in <a href="https://www.cgap.org/blog/great-expectations-fintech-and-poor" target="_blank" rel="noopener noreferrer">her essay on fintech in 2019</a>, “Anything with a technology tag gets funding and attention, whether it is solving a real problem or not.” Our new data shows that, while a few years ago funders were supporting the digital growth of a range of institutions – banks, MFIs, mobile money providers, and fintechs – in the past two years, 100 percent of DFS funding to financial institutions has gone to fintechs. Are development funders providing the risk capital needed to build new investment-ready inclusive businesses? Maybe. But we have also seen large equity investments in fintech companies that have already raised significant money from impact investors and commercial venture capitalists. This raises the question: where exactly is the additionality of this development money?
<blockquote>We have seen large equity investments in fintech companies that have already raised significant money.</blockquote>
Again, maybe we can look at microfinance for some suggestions on where to go. Funders to microfinance came to the realization that they may not be the best entities to invest in MFIs. This led to the development of the Microfinance Investment Vehicles (MIVs), which pooled investments from public and private funders and provided the expertise and the necessary structure to respond to <a href="https://centerforfinancialinclusion.org/microfinance-coalition-mivs-team-up-in-response-to-covid-19/" target="_blank" rel="noopener noreferrer">specific needs</a> of the microfinance sector. As of last year, almost $17 billion was deployed by these specialized fund managers, according to a <a href="https://symbioticsgroup.com/wp-content/uploads/2020/02/symbiotics-symbiotics-2019-miv-survey.pdf" target="_blank" rel="noopener noreferrer">survey by Symbiotics</a>.
<h2>Conclusion</h2>
The DFS sector is still young, and it is good that these debates are already happening. Ideally, funding to financial inclusion should be built around detailed theories of changes that address market failures and are catalytic in nature. This might mean rejecting a big investment in a high profile fintech in favor of small, long-term, and patient funding. The hope for funders must be that, in ten years’ time, when we’re looking back at how funders supported the growth of financial inclusion in a period shaped by technology and global crises, that funding was shown to be additional, pro-poor, and instructive for how to go about effectively supporting the next big thing.

Have We Been Here Before?

At CFI, we can sometimes be skeptical of voluntary surveys. Just think of the selection bias involved. The kinds of people who reply to voluntary surveys are, by definition, not representative of the general public. They are the select group who may be paying attention, who may have strong views, or who just happen to run across the invitation for the survey on their LinkedIn feeds.

But having been asked to respond to the latest <a href="http://www.e-mfp.eu/news-and-events/special-edition-covid-19-financial-inclusion-compass-published-revealing-sector-fear" target="_blank" rel="noopener noreferrer">Compass</a> for a <a href="https://www.youtube.com/watch?v=0EnzkIq-yxc&amp;feature=youtu.be" target="_blank" rel="noopener noreferrer">webinar</a> held on July 13, I was forced to go beyond my skepticism and reflect more deeply on what the findings revealed. I was pleasantly surprised that the results of the survey mirrored what I have been hearing and learning elsewhere in my many conversations within CFI, with external partners, and with the stakeholders that make up this industry: providers, investors, regulators and policymakers, and support organizations.

I came away from this experience with four key takeaways:
<h2>1. The wisdom of the crowd can be eerily accurate.</h2>
The interesting thing about the methodology of this exercise is that it may not be a rigorous representation of the stakeholders in this industry, but it does bring out the wisdom of the crowd. The challenges that were identified for each stakeholder group – clients, providers, funders and others – literally mirrored every conversation I’ve been in over the past four months linked to COVID-19. Clients are experiencing financial pressure, and most demand-side research -- by <a href="https://datastudio.google.com/u/0/reporting/1-T5e174z7670AygBH3ptmiA51ghFJd-D" target="_blank" rel="noopener noreferrer">BFA</a>, <a href="https://www.covid19tracker.africa/" target="_blank" rel="noopener noreferrer">Finmark Trust</a> and others -- confirms this. Clients are not able to move around to run their businesses, tend their fields, or <a href="https://migrationdataportal.org/themes/migration-data-relevant-covid-19-pandemic" target="_blank" rel="noopener noreferrer">migrate for work</a>; and <a href="https://www.worldbank.org/en/news/press-release/2020/04/22/world-bank-predicts-sharpest-decline-of-remittances-in-recent-history" target="_blank" rel="noopener noreferrer">remittance flows</a> are indeed down 20 percent globally.

For FSPs, repayment is at the forefront of their concerns, but so are the macroeconomic conditions, with GDP growth experiencing an <a href="https://www.worldbank.org/en/news/feature/2020/06/08/the-global-economic-outlook-during-the-covid-19-pandemic-a-changed-world" target="_blank" rel="noopener noreferrer">estimated 5 percent contraction</a> globally in 2020. As a result, there are pressing concerns with liquidity that e-MFP and CFI have discussed on <a href="https://www.covid-finclusion.org/investors" target="_blank" rel="noopener noreferrer">covid-finclusion.org</a>. Challenges facings funders (information, losses, inability to meet investee needs) and others (inability to travel to the field, decrease in demand, and aligning their strategies), were all common sense and aligned with what I am gleaning from engagements with the <a href="https://www.covid-finclusion.org/investors" target="_blank" rel="noopener noreferrer">Microfinance Investment Vehicles</a> (MIV) group and our internal research.
<h2>2. Priorities identified are skewed by the type of respondents to the survey.</h2>
More than 50 percent of respondents were FSPs or support organizations, meaning that other stakeholder groups were less well represented. Perhaps some regulators and policymakers were among the “other” category, which accounted for around 13 percent of respondents, but the result of the sampling bias is that the priorities identified with regulators and policymakers did not resonate with what we have been hearing and researching at CFI. Based on what we have seen with the policy responses actually taking place and the dialogue that is happening among policymakers, we see a different set of priorities for this stakeholder group than what came out of the survey. The priorities we have identified are as follows:
<ul>
 	<li>Fiscal stimulus to people and MSMEs. Based on <a href="https://blogs.worldbank.org/voices/how-social-protection-can-help-countries-cope-covid-19" target="_blank" rel="noopener noreferrer">World Bank data</a>, we know that 126 countries have already introduced such measures.</li>
 	<li>Liquidity measures for financial institutions, both banks and non-banks.</li>
 	<li>Implementing moratoria to address liquidity constraints among consumers whose income sources have been disrupted by lockdown measures.</li>
</ul>
<blockquote>Research on clients is important, but might be receiving too much attention among support organizations.</blockquote>
Similarly, the priorities for consultants and support organizations did not correspond with what we are seeing. While doing research on clients is of course important, it is possibly receiving too much attention among support organizations. We see a need to help interpret the findings of the data that is already being collected to help inform policy and provider practices. We also see the need to support the longer-term digital transformation that many providers need in order to survive, and hopefully thrive, after the pandemic. CGAP’s Global <a href="https://www.cgap.org/pulse" target="_blank" rel="noopener noreferrer">Pulse Survey</a> of Microfinance Institutions is showing that only 34 percent of the MFI respondents have opened new digital channels for customers. A larger number have expanded call centers to respond to customer inquiries. Finally, we think a focus on market consolidation will inevitably be needed.
<h2>3. The concerns raised in the Compass report assuage my own concerns.</h2>
I was pleasantly surprised by the concerns raised and see this as reflective of something positive overall. The heavy focus on maintaining the progress we’ve achieved as a sector, especially the gains made by clients and the focus on consumer protection, indicates to me that the work of organizations like CFI over the past decade have been effective in instilling the importance of a customer-focused view and elevating consumer protection as a topic of priority for the sector. This is especially important given that the majority of respondents to the Compass survey are FSPs and support organizations.
<h2>4. The opportunities raised in the Compass report are tangible and the actions of stakeholders show that these are not just words.</h2>
Beyond the increased focus on digital channels and digital transformation, which we know has been a key focus of this sector for over a decade, I was especially excited to see that respondents flagged cooperation and a refocus of the priorities of the sector.
<ul>
 	<li>On the issue of cooperation, the collaboration between the Microfinance Coalition and the MIVs is unheralded. As CFI has been facilitating dialogue among these two groups, we can truly attest to their openness, transparency, and aligned interests. The key stakeholders in this sector are proactively collaborating to reduce risks and ensure that we do not lose the gains we have already achieved.</li>
 	<li>That there is a realization that we have to do better as a sector is also reassuring. And there are so many opportunities for us to reset our priorities to address fundamental issues like <a href="https://centerforfinancialinclusion.org/food-security-and-covid-19-how-financial-inclusion-can-support-livelihoods/" target="_blank" rel="noopener noreferrer">food security</a>, <a href="https://centerforfinancialinclusion.org/covid-19-reveals-the-limits-of-individual-action-and-market-based-solutions/" target="_blank" rel="noopener noreferrer">safety nets</a>, and other important roles that the financial system can and should deliver for the development agenda.</li>
</ul>
The dedicated COVID-19 Compass has been a Herculean effort on the part of e-MFP. It is great to see this important platform quickly adapting to showcase what is on everyone’s mind, and to put together such an elegant report in record time is quite impressive. I hope everyone gets the opportunity to read the report and to reflect on the results as they relate to their own experiences.



Four Reflections on the COVID e-MFP Compass

Deborah Drake

Vice President

Isabelle Barrès

Former Vice President and Campaign Director, Smart Campaign

Joana Afonso

Daniel Rozas

Cristina Dumitrescu

Olivier Edelman

Narasimhan Srinivasan

Paul DiLeo

Garrett Jaso

Machal Karim

Loretta Michaels

Howard Miller

Mayada El-Zoghbi

Microfinance Coalition

Andrée Simon

Micol Pistelli

Pablo Anton-Diaz

Amin Khairy

Elisabeth Rhyne

Bosnia and Herzegovina

Europe and Central Asia

India

South Asia

Azerbaijan

Sub-Saharan Africa

Egypt, Arab Rep.

Latin America and The Caribbean

Middle East and North Africa

Peru

Kosovo

North America

United States

Jordan

Lebanon

Malawi

Uganda

Challenges and Crises

Consumer Protection

Credit

Enabling Environment

Financial Service Providers

Microfinance

Microfinance Institutions

Over-indebtedness

Partnerships

Policy, Regulation and Government Initiatives

Governance

Impact Investing

Risk Management

Banks

Digital Credit

Digital Financial Services

MSME/SME Finance

Resilience

Responsible Investing

Supply Chain Finance

Women

Delivery Channels

Fintechs

Refugees and Migrants

Underserved Groups

Agricultural and Rural Finance

Consumer Credit

Customer Centricity

Education Finance

Energy Finance

Housing Finance

Informal Credit

Insurance Companies

Neobanks

Human Touch

Brief

Blog Post

Event

Press Release

Report

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.

<em>This post was <a href="https://www.findevgateway.org/blog/2020/05/microfinance-coalition-call-action-donors">originally published</a> on FinDev Gateway.</em>

Many microfinance institutions were created through donor initiatives in the 1980s and 1990s. As these institutions have matured and commercialized, donors have shifted their efforts away from direct subsidies of microfinance operations to other critical issues, such as the infrastructure and policy environments that limit growth of the inclusive finance sector. Donors have also invested in demand-side research, building financial capability of clients, and addressing specific constraints of excluded groups, like women, farmers and youth.

Donors have continued to support market-building efforts to crowd in capital to new opportunities, such as PAYGO business models for access to energy and other services. They have also increasingly supported <a href="https://www.cgap.org/research/publication/navigating-next-wave-blended-finance-financial-inclusion" target="_blank" rel="noopener noreferrer">blended finance vehicles</a> that can support achievement of the Sustainable Development Goals (SDGs). In CGAP’s latest round of the Funder Survey, it found that <a href="https://www.cgap.org/research/publication/2018-trends-international-funding-financial-inclusion" target="_blank" rel="noopener noreferrer">one-third of inclusive finance funders</a> have aligned their funding to the SDGs.
<blockquote>The foundational support of donors is once again crucial to preserving and fostering responsible financial inclusion.</blockquote>
In light of the impact of the COVID-19 crisis on financially vulnerable micro-entrepreneurs and the institutions that serve them, the foundational support of donors is once again crucial to preserving and fostering responsible financial inclusion. CGAP is working with its members to provide visibility on where donor subsidy may be most impactful, and is supporting a data initiative to capture the effects of COVID-19 on the institutions that serve the bottom of the pyramid (BOP).

The Microfinance Coalition has identified several ways in which donors and microfinance institutions can work together to respond to the needs of the BOP during this crisis.
<h2>1. “Last Mile” Cash Distribution</h2>
Governments and humanitarian organizations are already scaling cash transfers to the BOP. As of mid-April, over <a href="https://blogs.worldbank.org/voices/how-social-protection-can-help-countries-cope-covid-19" target="_blank" rel="noopener noreferrer">126 countries</a> had expanded or introduced cash transfer programs. WFP and UNICEF also <a href="https://www.wfp.org/school-health-and-nutrition" target="_blank" rel="noopener noreferrer">announced</a> an expanded initiative to support children who are out of school and have thus lost access to school feeding initiatives. The new program supports children through vouchers or cash transfers in 68 countries.

With their deep community connections, microfinance institutions can be core partners in the “last mile” distribution of these cash transfer initiatives, particularly in communities where digital channels are not the customers’ preferred choice or where infrastructure is not readily available.
<h2>2. Partner in the Emergency Food and Medical Response</h2>
Beyond cash distribution, the humanitarian community is scaling emergency food and medical assistance.

With their extensive infrastructure, whether in the form of branch offices or agents, microfinance institutions could be leveraged in the distribution of emergency relief efforts, provided measures are taken to protect the health and well-being of their staff, and protective gear and sterilization practices are utilized. At a minimum, microfinance institutions can be used to channel information to the BOP about relief efforts that could support their ability to withstand the lockdown measures and the significant drops in income.

Furthermore, many microfinance institutions work with or operate savings groups, village savings and loan associations, and other models that are geared toward serving the most vulnerable segments. These quasi-formal structures can be leveraged in the distribution of relief efforts, facilitating access to the most excluded and often neglected segments of society.
<h2>3. Onboarding into the Digital Economy</h2>
Emerging <a href="https://www.findevgateway.org/slide-deck/2020/03/diagnosis-epidemics-impact-financial-health-working-class-and-mses-china-policy" target="_blank" rel="noopener noreferrer">evidence from China</a> is demonstrating that micro and small enterprises that are engaged on digital platforms or those that are equipped to make and receive payments digitally are more successfully navigating the COVID-19 crisis. While China’s digital ecosystem is more robust than many of the least developed countries in which the Coalition works, China does provide a lesson regarding the importance of onboarding micro and small enterprises into the digital economy as an important hedge against future pandemics and other crises.

Microfinance institutions are well-positioned to support the digitization of their clients’ businesses. Given the levels of trust they have developed with their customers, their outreach channels could serve to educate and support a gradual onboarding process.

&nbsp;

Many microfinance institutions have already begun to digitize some components of their operations, creating opportunities for their customers to transition and increase their comfort with digital tools. For example, an Accion investee, <a href="https://www.accion.org/accion-invests-in-civico-to-accelerate-access-to-innovative-financial-services-in-latin-america" target="_blank" rel="noopener noreferrer">Civico</a>, developed a new digital application to help facilitate conditional cash transfers to underserved merchants. AccessHolding recently launched a web-based application to help loan officers work quickly with customers to restructure loans. And the FINCA Impact Network is delivering public health and safety messaging to its 2.6 million customers worldwide through the network’s digital channels and agents, which are experiencing user spikes as high as 2,000 percent in the past month. For many customers, it is the first time they have connected with FINCA remotely.
<blockquote>The Microfinance Coalition stands ready to support relief efforts and requests that donors consider microfinance institutions as possible partners in relief distribution.</blockquote>
Donors are undoubtedly stepping up their relief efforts, and in doing so, are likely to rely on their traditional humanitarian assistance arms. The Microfinance Coalition stands ready to support these relief efforts and requests that donors consider microfinance institutions themselves as possible partners in the relief distribution system.

Furthermore, the Coalition calls upon the donor community to consider mechanisms to facilitate direct support to microfinance institutions in the following ways:
<ul>
 	<li>Investing as first loss partners in liquidity and guarantee facilities.</li>
 	<li>Providing technical assistance funding to support onboarding of the BOP into the digital economy.</li>
 	<li>Providing grant support to enable microfinance institutions to quickly expand their existing capabilities to extend their reach and to protect staff with the appropriate protective gear and sterilization practices.</li>
</ul>
Most microfinance institutions have long ago stopped relying on donor subsidies. There is limited risk that any short-term measures to use MFIs as relief partners or provide them direct support would trigger dependency or misdirect these institutions from their commercial orientation. The Coalition and the MFIs in our respective organizations are prepared to leverage our established networks and client relationships to support COVID-19 relief efforts to the fullest extent possible. We welcome the partnership of donors working similarly to alleviate the pandemic’s impact on the BOP.

Microfinance Coalition: Call to Action for Donors

The COVID-19 pandemic has been a disruptive force that has changed the way we go about life, how we interact with one another and how we do business.

<a href="https://www.fincaimpact.com/">FINCA Impact Finance</a> (FIF), a global network of 20 microfinance institutions with mostly local staff of 10,000, has implemented an operational response strategy to protect customers and staff during the crisis.

We have placed a priority on ensuring that our clients have safe access to their accounts via branchless delivery channels in order to help ease the burden that many of them are currently facing during the pandemic. We are also making full use of the digital communication channels that we have in place to establish consistent lines of communication.
<h2>Promoting Branchless Channels</h2>
FIF is making a concerted effort to encourage the use of branchless banking and digital communication channels. FIF is utilizing SMS, WhatsApp, Viber and social media, including Facebook, Twitter, Instagram, LinkedIn and Odnoklassniki – a Russian social network – to proactively inform customers of branch hours, provide instructions on how to use mobile banking apps, how to access customer hotlines, and where to receive information on loan restructuring and grace periods. There are also channels where customers can reach out to us to ask questions and receive information. FIF’s subsidiary in Kosovo has seen a 2,000 percent increase in the number of inbound web chat inquiries, along with a 700 percent spike in Viber chats and Facebook Messenger inquiries.

For customers looking to make payments or access their savings, FIF is offering branchless banking options. The majority of FIF subsidiaries offer at least one type of branchless delivery channel -- such as mobile banking, agency banking, cash-in terminals or card payments. FIF is encouraging customers to use these channels if they need to make payments or access their savings, thereby avoiding commutes on public transportation, eliminating the need to wait in lines at branches, and minimizing the handling of unhygienic cash.
<blockquote>FIF is encouraging branchless banking in order to avoid public transportation, waiting in lines, and handling cash.</blockquote>
Further, customers can also access a range of other financial services from our branchless channels, such as sending money transfers to family members or purchasing airtime. Providing localized or remote access to these essential services means customers in rural areas can avoid travel to crowded urban centers to conduct these transactions.

FIF has also increased its investment in call centers to scale up functionality, making them our primary channel of communication with our customers. To protect the health of employees, we’re shifting call center work to our agents’ homes.

[caption id="attachment_38056" align="alignleft" width="600"]<a href="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/04/FINCA-Hondurus-waitingarea.jpeg"><img class="size-full wp-image-38056" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/04/FINCA-Hondurus-waitingarea.jpeg" alt="FINCA waiting area honduras" width="600" height="344" /></a> <em>Social distancing observed at an FIF branch in Honduras.</em>[/caption]
<h2>Health and Safety at Branches</h2>
For some customers, branchless banking remains inaccessible. FIF is continuing to maintain a physical presence in its subsidiaries to provide lifelines for low-income customers.

Subsidiaries are doing what they can to provide masks and gloves to customers and staff, offer hand sanitizer to each customer who enters the branch, and ensure that physical distancing is observed within the branch.
<h2>Prioritizing Rapid Internal Communication</h2>
This is a fast-moving situation and communication is critical. To ensure that every one of our 10,000 staff are aware of our operational response to COVID-19, we have issued guidance documents across the network, established weekly COVID-19 meetings, and distributed and translated an audio podcast recorded by our CEO. This approach ensures our entire team across 21 countries is working the to protect our clients and our network.

&nbsp;

How a Microfinance Network Has Changed Customer and Staff Engagement During COVID-19

The <a href="/about/what-we-do/hbs-accion-program-on-strategic-leadership-in-inclusive-finance">HBS-Accion Program on Strategic Leadership in Inclusive Finance</a> is the first executive education program of its kind to provide high-level management and leadership training to those shaping the microfinance industry, including CEOs of leading microfinance institutions and executives of mainstream banks entering the microfinance market.
<div class="sc-htpNat hKaJAO"><article class="text-block__article sc-TOsTZ dUoRvJ">
<h2>Dates</h2>
The 2020 HBS-Accion Program on Strategic Leadership in Inclusive Finance, originally scheduled to take place March 29 to April 3, has been postponed indefinitely due to growing concerns and travel restrictions across the globe related to Covid-19. Please contact <a href="mailto:mlongwell@accion.org">Maddy Longwell</a> if you are affected by this cancellation.
<h2>Deadlines</h2>
The application period is now closed. Applicants will be notified of their acceptance in February.
<h2>Fees</h2>
The program costs <strong>$8,850 USD</strong> including tuition, fees, housing and meals. Attendees will need to pay in full to be considered accepted into the program. Airfare is the responsibility of the attendee.
<h2>Scholarships</h2>
The <a href="https://www.citigroup.com/citi/foundation/">Citi Foundation</a> provides a limited number of partial scholarships to participants who otherwise cannot attend because of the cost. Please note that we are unable to offer scholarships to all applicants who apply. If you would like to apply for a scholarship, please indicate so in the application.
<h2>Questions</h2>
For additional questions, contact the Admissions Committee at <a href="mailto:hbsaccion@accion.org">hbsaccion@accion.org</a>. For questions about the 2020 cohort, please contact <a href="mailto:mlongwell@accion.org">Maddy Longwell</a>.

</article></div>

HBS-Accion Program on Strategic Leadership in Inclusive Finance 2020

This <a href="https://centerforfinancialinclusion.org/financial-inclusion-week-2019/">Financial Inclusion Week</a>, we’re asking ourselves what the purpose of our work is. For those of us who work with refugees, financial inclusion is often for rebuilding sustainable livelihoods, resilience, and self-reliance.

Driven by necessity and limited employment choices, many refugees decide to start a business once they settle in a host country. However, lack of financial capital represents a major stumbling block on the way to business success. Financial service providers (FSPs) in a number of countries are starting to become aware of the potential of this underserved market, but much of the work is still at an incipient phase. FSPs often have questions related to whether operations adjustments may be required, strategies to follow to reduce credit risk, and supporting non-financial services. While every context is different, some good practices are emerging among a number of FSPs, which have been extending credit and other financial services to refugees. Drawing on their experiences, here are four recommendations for FSPs on how to start including this underserved market in their microfinance portfolio:
<h2>1. Analyze market data for better targeting.</h2>
Refugees aren't a homogeneous group, so FSPs first need to understand the differences of their socio-economic characteristics to be able to make an informed decision regarding which sub-segments they wish to serve. Relevant data for a first screening may be offered by local development and humanitarian agencies, and – in addition to basic demographic information – should ideally include data such as vocational or business training received, access to start-up financing, access to bank accounts, description of enterprises, and membership to any existing saving groups. Sometimes this data may be unavailable or insufficient, and market feasibility studies may be required. Especially in countries with high concentration of refugees living in settlements where FSPs have no presence, this would require set-up costs for branches or delivery channels.
<blockquote>A study revealed that refugee communities had enough financial capacity to be good clients.</blockquote>
To identify the potential market of serving refugee entrepreneurs in the West Nile region, <a href="http://www.visionfund.org/2095/where/africa/uganda/">VisionFund Uganda</a> conducted an <a href="http://www.visionfund.org/222/media/news/article/report---serving-refugee-communities-in-uganda/">assessment</a> of 6,700 refugee members of existing saving groups. The study revealed that the refugee communities had enough financial capacity to be good clients, given the presence of daily and weekly markets in the camps, availability of fairly good network coverage, and mobile money agents and existence of entrepreneurial groups and business activity. The results from this assessment, when considered alongside data collected from a broader <a href="https://www.findevgateway.org/blog/2018/oct/getting-it-right-providing-financial-services-refugees">market survey</a> previously conducted by Microfinanza, convinced the MFI to set-up their first branch in the West Nile and start serving refugees.
<h2>2. Widen the range of acceptable forms of IDs while complying with regulation.</h2>
Depending on FSPs’ internal policies and the host country’s regulatory framework, adjustments to FSPS’ internal procedures may be required to serve refugees clients. <a href="https://corporate.mybucks.com/articles/worlds-first-refugee-camp-bank-a-resounding-success/13TBmOsflyCQsUqyeQoSMI">MyBucks in Malawi</a> is the first financial institution to provide a full range of financial services to clients at a refugee camp. Refugees in the Dzaleka camp had no access to FSP providers until last year and had to travel roughly 40 kilometers to the nearest city of Lilongwe to access financial services. The bank saw the business potential of this untapped market, but in order to serve refugees, MyBucks needed to tailor its offering by widening the acceptable forms of identification. Refugee clients often don't meet KYC policies required by the bank – such as a passport or national ID – and don't own land properties that the bank can use as securities. Therefore, in order to comply with the country’s regulations, MyBucks sought a waiver from the central bank to use refugee forms provided by UNHCR to allow refugees to open bank accounts. Today, the bank, which opened its first branch in April 2018, is offering a full range of banking services to refugees.

As of July 2019, 153 refugee entrepreneurs have received business loans from the bank, which relies on group lending methodology to lower credit risks in extending collateral-free loans to refugees. Each individual has to repay according to his/her amount and repayment schedule. The group guarantees for the members, in case a member can't repay on time. Repayment rates to date are 100 percent. MFIs in other countries which don't have to comply to stringent banking regulations, have also been accepting old refugee IDs and expired passports as means to verify identities. A number of new identification and verification measures through blockchain are also starting to emerge which provide innovative tools to verify people’s identities and monitor risk in financial transactions.

A <a href="https://www.makingcents.com/hawiyati-english">digital identity</a> for refugees has been piloted in Jordan and Lebanon by local MFIs. This provides their clients with a “portable identity” that verifies their foundational identification (government or UNHCR issued) digitally, records their credit history, and uploads other important documents. This identity will be especially useful in case a refugee wishes to access banking services upon return to the home country or in case of resettlement, and can also work as an incentive to repay the loan on time.
<h2>3. Establish alternative procedures to mitigate credit risk.</h2>
FSPs are used to the conventional eligibility requirements that proof of citizenship, identity, and residency cards reduce credit risk. Nevertheless, there can be other ways to monitor risk and to verify IDs by adding some flexibility to documentation required. <a href="https://www.almajmoua.org">AlMajmoua</a> is the biggest MFI in Lebanon, the country with the highest number of refugees relative to its population. The MFI serves over 9,000 refugee borrowers with a loan portfolio of over $9 million and repayment rates of almost 100 percent, making it the financial institution with the highest number of refugee borrowers served in a country. More than half of the loans disbursed by AlMajmoua to refugees are for income generation in the limited sectors were refugees are allowed to work in the country, such as field crops, cleaning services, sewing, selling clothes and hairdressing.
<blockquote>AlMajmoua serves over 9,000 refugee borrowers with a loan portfolio of over $9 million and repayment rates of almost 100 percent.</blockquote>
How did this MFI succeed in reaching thousands of refugee clients – many of which through individual loans, so where no social guarantee can be applied – with excellent repayments? To mitigate credit risk, the MFI primarily relies on a strong communication channel between their loan officers and clients by conducting regular business visits, which also allow it to find out whether refugees may have imminent plans to return to their home country or relocate. Additionally, AlMajmoua exceptionally provides loans up to $1,500 to refugees who don’t hold an active residency permit as long as they have a Lebanese, Palestinian or Syrian guarantor with a valid residency permit.
<h2>4. If you provide enterprise support services, consider what would be relevant for refugees new to business.</h2>
Sometimes credit isn't sufficient to initiate and scale up a business activity and refugees may need the support of incubators and start-up technical assistance. Some FSPs might already have their training curricula well developed, which might have to be adapted to the needs of the foreign-born clients. <a href="http://www.microfund.org.jo/">Microfund for Women</a> (MFW), Jordan’s largest not-for-profit microfinance institution, serves over 7,500 Syrian refugees, approximately 40 percent of whom are involved in income generation activities, mostly commercial and home-based services. For MFW, it proved particularly important to accompany loans with non-financial services tailored around refugee women’s specific needs (most of their Syrian refugee women clients were not working before the war started). The MFI has established a learning academy and developed training curricula for both beneficiaries and staff members related to market ofrientation, business management skills, financial literacy, and marketing. In addition. MFW offers free feasibility studies for start-up entrepreneurial businesses with loan amounts higher than $4,000.

When FSPs don't offer such services, they may be able to partner with organizations offering that do. For example, <a href="https://www.ilo.org/global/lang--en/index.htm">ILO</a> is adapting its <a href="https://www.ilo.org/global/about-the-ilo/newsroom/news/WCMS_560493/lang--en/index.htm">business skills development training tools</a> to the needs of the displaced population and the local context, and is now planning to train refugees and host communities to develop their own enterprises and facilitate access to finance. A first training has already been deployed in Kenya through the Danish Refugee Council in the Dadaab refugee camps.
<blockquote>When FSPs don't offer such services, they may be able to partner with organizations that do.</blockquote>
Hopefully, this post will spark FSPs to realize the important role they have in finding solutions to the refugee crisis. By extending their services to the refugee population in their country, FSPs won't only support the resilience and self-reliance of this widely underserved market, they will also assist in overcoming stigma and helping refugees contribute economically and socially to host communities.

How to Include Refugee Entrepreneurs in Microfinance

<strong>WASHINGTON, DC, August 27, 2019</strong> – The Center for Financial Inclusion at Accion (CFI) has launched an executive education program for financial service providers serving low-income communities in emerging markets. Through peer learning and exchange, the <a href="/about/what-we-do/board-leadership-for-impact-program">Board Leadership for Impact Program</a> will empower executives and board members to foster client centricity, lead digital transformation, sustain business growth and drive social impact. In partnership with the <a href="https://www.citigroup.com/citi/foundation/">Citi Foundation</a> and <a href="https://www.fmo.nl/">FMO</a>, the Dutch development bank, supporting program implementation and participant scholarships, the Board Leadership for Impact Program will offer multiple in-person workshops per year coupled with a robust virtual portal.

Derived from CFI’s five-year <a href="https://content.centerforfinancialinclusion.org/about/what-we-do/africa-board-fellowship-program/">Africa Board Fellowship Program</a>, which fostered the growth and development of more than 300 executives and board members of financial service providers serving more than 10 million clients in Africa, the Board Leadership for Impact Program will now expand to include early stage to mature companies offering financial services to underserved customers that operate in emerging markets around the world.

“Our experience with leadership development through peer exchange will inform our efforts through this new program to cultivate a community of leaders who have the skills and the network to help their organizations thrive,“ said <a href="/bio/deborah-drake">Deborah Drake</a>, Vice President, Center for Financial Inclusion at Accion. “Tackling challenges like achieving sustainable growth or pursuing digital transformation, particularly as a mission-driven organization, takes strategic leadership at the board level.”

Through role play, simulations and facilitated discussion, participants will gain new perspectives, skills, and knowledge on topics critical to social enterprise growth and impact, including risk management, board dynamics, digital transformation and inclusive digital finance. They will join an active community of alumni of the Center for Financial Inclusion at Accion’s <a href="https://www.centerforfinancialinclusion.org/get-involved#fellow-exec-ed">executive education programs</a>.

“By developing and strengthening leadership skills that drive business growth and social impact, our partnership with the Center for Financial Inclusion at Accion will help accelerate financial inclusion and economic progress around the world,” said Florencia Spangaro, Director of Programs, Citi Foundation.

“FMO is a proud partner of Accion for over a decade and we realize that creating a lasting impact starts in the board room. Strengthening the management of financial service providers and enterprises will help ensure business longevity and commitment to underserved customers,” said Gerbrich Salverda, Capacity Development Officer at FMO.
<p style="text-align: center;"><strong>###</strong></p>
<strong>About the Center for Financial Inclusion at Accion</strong>

The Center for Financial Inclusion at Accion (CFI) is an action-oriented think tank that engages and challenges the industry to better serve, protect, and empower clients. We develop insights, advocate on behalf of clients, and collaborate with stakeholders to achieve a comprehensive vision for financial inclusion. We are dedicated to enabling 3 billion people who are left out of – or poorly served by – the financial sector to improve their lives.
<a href="http://www.centerforfinancialinclusion.org/">www.centerforfinancialinclusion.org</a>
<a href="https://twitter.com/CFI_Accion">@CFI_Accion</a>
<p style="text-align: center;"><strong>###</strong></p>
MEDIA CONTACT

Center for Financial Inclusion at Accion
<a href="/bio/virginia-moore">Virginia Moore</a>
<a href="mailto:vmoore@accion.org">vmoore@accion.org</a>
+1 202.393.5113

The Center for Financial Inclusion at Accion Launches Executive Education Program for Financial Service Providers to Enable Business Growth and Social Impact

Picture this scene: hundreds of people cram into a financial service provider’s storefront, arriving seemingly out of nowhere, mobile phones in hand. They act excited, as if they are about to attend a dance party. Curious passersby stop to see what the buzz is about.

This technique, which organizers call a flash mob, is one innovative approach for generating sign-ups and interest in a new product aimed at underserved clients. The flash mob attracts people otherwise hard to reach to FINCA Pakistan’s mobile service, Sim Sim.

Creative approaches, powered digitally, are transforming the customer experience – hopefully for the better. Digital processes can dramatically increase convenience, speed and variety of the services available to the previously unserved. But digital products and processes succeed only with good design – and with the strategic use of human touch.

In our recent report, <a href="https://www.centerforfinancialinclusion.org/charting-the-customer-journey-in-the-digital-age">Charting the Customer Journey in the Digital Age</a> , Amin Khairy of the <a href="https://www.iif.com/">Institute of International Finance</a> and I explain how mainstream financial institutions create effective digital customer journeys for underserved clients. With support from <a href="https://www.metlife.com/corporate-responsibility/metlife-foundation/">MetLife Foundation</a> and CFI’s founding partner, <a href="https://www.credit-suisse.com/us/en.html">Credit Suisse</a>, this report explores how the three main phases of the customer journey evolve through digital transformation and provides examples of how innovative financial institutions are creatively addressing challenges for emerging customers. It’s the penultimate report from our two-year partnership, <a href="https://www.centerforfinancialinclusion.org/program_teams/mainstreaming-financial-inclusion">Mainstreaming Financial Inclusion: Best Practices</a>.

Creative Solutions to Digital Mainstreaming

<h1>Introduction</h1>
Financial services are going digital. Digitization will change the way financial institutions organize themselves to relate to their customers, and it will dramatically change how customers experience financial services. These changes will be especially profound for traditionally underserved customers who are the targets of financial inclusion efforts.

The good news is that digital delivery models make it possible—and profitable—for banks to serve many people who were previously excluded because their incomes were too low or their locations too remote to reach through high-touch models. The high operational costs associated with physical buildings and staffing only makes sense if the branches break even and provide a satisfactory return within an acceptable timeframe. Low-income customers with thin credit histories borrowing small amounts of money have long presented a challenge to the analog way of doing business. Thus, serving the underbanked customer segment through digital channels presents an opportunity—by lowering operational costs and increasing customer engagement—to transform financial inclusion into a sustainable business. Additionally, digitization allows thin-file customers to have their creditworthiness assessed through alternative scoring models that incorporate other types of behavioral records.

When done effectively, the returns to digital transformation can be significant. For example, DBS Bank, a financial services group in Asia named <a href="https://www.euromoney.com/article/b18k8wtzv7v23d/world39s-best-digital-bank-2018-dbs">“world’s best digital bank” by Euromoney in 2018</a>, has seen digitization contribute to rising shareholder value. DBS customers who process more than half their transactions remotely bring in more revenue than traditional customers. <a href="https://www.economist.com/finance-and-economics/2018/03/08/how-digitisation-is-paying-for-dbs">Two-thirds of DBS’s gross profit currently comes from digital customers</a>. A DBS staff member told us, “The cost-to-income ratio for digital customers is just 34 percent, compared to 55 percent for traditional customers. The return on equity from digital customers is, impressively, at 27 percent.” Numbers such as these make it attractive to reach new customer segments. But if the transition from face-to-face to digital is to succeed, financial institutions will need to understand and address the special characteristics of these segments and get the digital customer journey right—for both their own operations and the customers’ experience.
<h2>Walking vs. Flying</h2>
For customers, the difference between a traditional and a digitized customer journey can be as dramatic as the difference between walking and flying in an airplane. The traditional customer journey includes traveling to branches to talk with a customer service representative, assembling pages of paper documents to meet KYC requirements, and then waiting for days to receive decisions. With digitization, customers can discover and apply for products on their phones and receive funds into mobile wallets, all in a matter of minutes.
<blockquote>The difference between a traditional and digitized customer journey can be as dramatic as the difference between walking and flying in an airplane.</blockquote>
In order to produce such a streamlined journey, financial institutions must address technical and operational challenges and regulatory issues. And, as we discuss in this report, the journey they construct needs to work well for customers—especially when those customers are new to their services. Digitization can bring enormous gains in speed and convenience to customers, but it can also create gaps as it shifts from familiar, person-to-person interactions to interactions that take place on a digital device.

Charting the Customer Journey in the Digital Age

<em>This post was <a href="https://www.findevgateway.org/blog/2019/may/microfinance-digital-world-seven-questions-future">originally published</a> on the FinDev Gateway blog.</em>

In the early 2000s, the microfinance sector was on a roll. It was accessing capital markets for growth, securing regulatory legitimacy, developing savings and insurance products in addition to credit, demonstrating social performance, and working on institutional transformation.

Then, in 2007, M-Pesa was born, and things started to change. The attention and support of the international financial inclusion sector shifted abruptly from credit for the poor to payment and delivery channel innovation. And the low operating costs of the new models attracted new players with enormous resources, from telcos to tech platforms and beyond.

Away from the spotlight, microfinance institutions (MFIs) continued to grow, thrive and serve hundreds of millions of people, using their familiar methods and feeling little need to adjust. But as 2020 approaches, the digital juggernaut has changed the world around them in ways they cannot ignore. At the recent Microfinance Network’s 25th anniversary meeting, the CEOs of leading MFIs urgently discussed how to respond.

Looking at the next 10 years, and reflecting on conversations at the meeting, I offer my own take on seven questions MFIs face.
<h2>1  Are fintechs going to take over the microfinance market?</h2>
In the 1990s, if you wanted to be a social entrepreneur, you founded an MFI. Today, you start a fintech. Accion has become one of the world’s leading investors in “fintech for financial inclusion”, with investments in nearly 50 companies offering such products as payment networks, remittances, small and medium enterprise (SME) credit, consumer credit, PayGo applications, customer advice, insurance, and data analytics.

At first, many fintechs were out to disrupt traditional financial institutions, like MFIs, but they continue to confront two fundamental problems: customer acquisition and raising capital. This requires many fintechs to pivot towards partnering with traditional institutions, and that offers a path to the future for many MFIs:fintech partnerships can help MFIs make the leap from traditional to digital.

However, MFIs need to prepare to work with fintechs. They need IT departments that can connect seamlessly to the technology fintechs bring. They need to develop a culture of experimentation, in contrast to an organizational identity wedded to traditional methods. And they need to recognize that fintechs, with limited financial resources, need to get to market quickly, or they need financial support from prospective partners. To take advantage of what fintechs have to offer, MFIs must not only ask what they need from fintechs, but also be prepared to offer what fintechs need from them.
<h2>2  Will MFIs join the shift to digital lending?</h2>
MFIs swear by their traditional underwriting methodologies, whether they involve group guarantees or individual repayment capacity assessment. These high-touch methods often yield repayment rates that other lenders only dream of. A key to success is that the methodology not only predicts the ability of a customer to repay, it actually increases motivation to repay, through peer pressure personal contact and the promise of continued access to credit.

In contrast, the algorithms generated through big data and machine learning lack most of the motivational aspects and are designed primarily to predict repayment. As a result, much of the algorithm-based lending we see today features high default rates, which in turn requires high interest rates.

That said, once the initial set-up is in place, algorithm-based credit is so cheap to operate that its rise is inexorable. Just look at Kenya, where digital lending got an early start. There are over 6 million digital borrowers, and according to a draft study by MSC, nearly 9 out of every 10 loans in the entire system are digital. Algorithm-based lending is made possible by access to customer behavioral data, data analytic capacity and ability to reach customers digitally, all of which may be difficult for MFIs (another reason for partnering with fintechs).
<blockquote>MFIs may wish to explore hybrid models that combine tech and touch.</blockquote>
As they develop the capabilities that enable algorithm-based lending, MFIs may wish to explore hybrid models that combine tech and touch. They may find it possible to focus on market segments that are hard for digital lenders to reach. In all cases, they need to advocate for high standards of consumer protection to be enforced in their markets, to avoid being crowded out by predatory lending.
<h2>3  Can MFIs participate in the innovation happening in SME (small and medium enterprise) credit?</h2>
After decades of stagnation, SME credit is alight with innovation. This innovation is enabled by three economic structure changes that are moving previously informal businesses toward greater formality:
<ul>
 	<li><strong>Electronic invoicing</strong>: Across Latin America and other regions, governments are requiring SMEs to invoice electronically, mainly for taxation. Lenders like Konfio in Mexico use the resulting data trail as the basis for digital lending.</li>
 	<li><strong>Supply chain finance</strong>, led by the large companies that supply goods to local merchants or that purchase agricultural output, is emerging.</li>
 	<li><strong>Ecommerce</strong>, perhaps the biggest force, is connecting millions of SMEs to technology platforms.</li>
</ul>
Many MFIs have a ready advantage in connecting with these market opportunities as they already serve SME clients and are skilled at underwriting for at least the lower end of this segment. Going forward, they can develop lending methods that use electronic data trails. They can also partner with big distributors, agricultural buyers or ecommerce firms taking advantage of the fact that these platforms do not see lending as core to their business and often welcome partners with lenders.
<h2>4  Will insurance ever matter for MFI customers?</h2>
Most MFI clients who have so far received insurance coverage probably didn’t even know they had it, because the most common insurance product is credit life, integrated into their loans without them having to make a decision to purchase it. But innovation is finally coming to insurance for low income people.

For example, Accion’s Venture Lab has invested in several creative start-ups: Pula offers weather insurance together with seed purchases, thanks to a chip embedded in the seed bag; Toffee offers bite-sized insurance cover for specific, often short-term activities; and Lumkani packages fire insurance with fire prevention.

These and other insurance products upend conventional insurance wisdom in order to reach low income customers, by doing three things:
<ul>
 	<li>They reduce costs of sign-up by doing away with exclusions.</li>
 	<li>They reduce costs of claims payments by making them automatic.</li>
 	<li>Instead of insuring infrequent events, they build a culture of insurance by covering common problems.</li>
</ul>
These offers are facilitated by electronic distribution. MFIs can participate in this innovation, recognizing how important insurance can be for the financial health of their customers. Mitigating customer risks should be a good business strategy for MFIs, and at the same time, insurers still need good distribution and customer data partners.
<h2>5  Will consumers be adequately protected in a digital world?</h2>
We have to keep asking this question, as digital financial services bring new risks to consumers. Digital loans can be very easy to get, but also very expensive. In Kenya, where tiny digital loans are available via the phone, we get a good picture of the risks involved: 20 percent of customers in default, many digital loans used for sports betting, prices much higher than microfinance loans, and an enormous number of people added to the credit bureau blacklist.

Data protection is another rising risk: customers want assurance that their private data remains private, both as a fundamental right and because they are concerned about their exposure to hacking, fraud, and mistakes. As MFIs go digital, their exposure to cybersecurity risk rises.

Regulators are struggling to keep up with emerging risks, and MFIs can play an important role in ensuring that they meet high consumer protection standards and shaping high market conduct standards for other players.
<h2>6  How will payments and credit connect in 2020?</h2>
MFIs began with credit as a stand-alone product, but increasingly, digital payments are the gateway to credit because of the data payments produce, and this gives an enormous potential advantage to major payments platforms. These platforms already have massive customer bases that generate floods of data, which, properly analyzed, yield the insights needed to offer credit. The combination of payments and credit has the potential to be highly powerful. Major tech platforms could very well end up dominating lending, while smaller providers, such as MFIs, either remain very small or become dependent on the platforms.

The evolution of financial inclusion in Kenya shows how the future may unfold, with the market-dominating combination of M-Pesa payments with M-Shwari credit. Of the global big tech firms such as Amazon and Google, only Alibaba has moved into finance in a big way, but all the big techs are making moves. Ant Financial has become the lifeline for Chinese SMEs for both sales and working capital, and the model is spreading worldwide as Ant Financial invests across Asia.
<blockquote>Only Alibaba has moved into finance in a big way, but all the big techs are making moves.</blockquote>
This platform-dominated scenario is not present in most MFI markets yet, and it may not come to pass. But what is clear is the power and efficiency of payments data to inform credit decisions, suggesting that MFIs should be looking for ways to connect to and harness such data.
<h2>7  Is digital transformation feasible for traditional MFIs?</h2>
For MFIs to turn the challenges described here into opportunities, they must be willing to undergo digital transformation. In many cases, such as the MFIs that are members of the Microfinance Network, they are already moving along the digital journey, but few have completed that transformation. Many organizations have created digital tools for their loan officers, some have incorporated credit scoring tools into their underwriting processes, and many have switched to digital loan disbursements and repayments.

More fundamental digital transformation requires rethinking business models, including the role of the cadre of loan officers who constitute the backbone of the staff of most MFIs. This transformation entails difficult choices about retraining and employment, which need to be discussed more openly in the sector. Investments in data analytic capabilities are needed, and at the board level, expertise needs to be brought on to guide the transformation.

In conclusion, MFIs have the chance to use digital tools to pursue their missions in an increasingly digital world. If they haven’t started already, it’s high time to begin.

Microfinance in the Digital World: Seven Questions for the Future