<span data-contrast="auto">On the outskirts of sprawling Delhi, 34-year-old Maya opens her </span><i><span data-contrast="auto">kirana,</span></i><span data-contrast="auto"> a small grocery store, for the day. Sleeves of shampoo packets and dry snacks line the walls around the counter where Maya serves up to 80 customers on a good day. She accepts payments in cash as well as digital payments on her smartphone, thanks to India’s successful </span><a href="https://www.forbes.com/sites/zennonkapron/2023/04/10/is-indias-upi-real-time-payments-system-ready-to-go-global/?sh=298e95e94d14" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Unified Payments Interface (UPI) system</span></a><span data-contrast="auto">. However, while Maya’s name is registered as the business and bank account owner, she does not know much about the bank account or the business finances beyond her handwritten ledger book. Instead, her husband manages the banking relationship, and she must ask him for more cash or information about the account balance.</span>
<blockquote><span data-contrast="auto">Many registered businesses are owned and managed by women only on paper; their lived realities are much different.</span></blockquote>
<span data-contrast="auto">According to the Indian Ministry of Micro, Small &amp; Medium Enterprises (MSMEs), </span><a href="https://msme.gov.in/msme-annual-report-2022-23" target="_blank" rel="noopener noreferrer"><span data-contrast="none">women only own 20 percent of Indian MSMEs</span></a><span data-contrast="none">.</span><span data-contrast="auto"> While this is already a small figure, </span><span aria-label="Rich text content control"><span data-contrast="auto">​</span><span data-contrast="auto">​</span></span><span aria-label="Rich text content control"><span data-contrast="auto">​</span><span data-contrast="auto">​</span></span><span data-contrast="auto"><a href="https://www.centerforfinancialinclusion.org/fight-gender-inequality-prioritizing-womens-customer-experience-in-product-design-and-complaint-resolution-processes">interviews conducted in March 2023</a> with 38 women business owners in India suggest that this number may be even lower. Many registered businesses are owned and managed by women only on paper; their lived realities are much different.</span>

<img class="aligncenter wp-image-46289" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2023/08/Nina-Liew-blog-graphic.png" alt="" width="1009" height="235" />
<h1><b><span data-contrast="auto">Challenging Existing Norms</span></b></h1>
<span data-contrast="auto">Providing financial services to women in low- and middle-income countries </span><a href="https://www.povertyactionlab.org/policy-insight/designing-financial-services-and-social-protection-programs-enhance-womens-economic" target="_blank" rel="noopener noreferrer"><span data-contrast="none">does not necessarily result in economic empowerment</span></a><span data-contrast="auto"> if women do not or cannot make the decisions about their finances. Of the Indian women micro- and small-business (MSE) owners interviewed, over one-third relied on a man — typically a husband or brother — to manage or assist in their use of financial services, even if the woman was the registered owner of the business and bank account. When asked why, women said it was because of personal preference, a lack of confidence in operating the account, or that it was the man’s choice. This was true of interviewees with a master’s degree as well as those with lower levels of formal education, illustrating the pervasiveness of gender norms across education levels.</span>

<span data-contrast="auto">Managing the business’ day-to-day finances </span><span aria-label="Rich text content control"><span data-contrast="auto">extends to </span></span><span data-contrast="auto">resolving issues with a bank or fintech. Women who rely on their husbands or brothers to operate their bank accounts will often wait for them to contact the agent -- who is usually a man -- to resolve any complaints. This process is time-consuming and causes friction in women’s daily business activities. Consequently, these women may turn away customers if they do not have enough cash or lack information on accessing financial services for business improvement or growth.</span>

<span data-contrast="auto">For women in India to fully realize their economic contribution to the Indian economy, we must challenge and change existing norms. The current lack of equality represents a missed opportunity as bona fide access to formal financial services enables women to build their assets and wealth, improving their wellbeing and the wellbeing of their families.</span>
<h1><b><span data-contrast="auto">Benefits for Women and Businesses</span></b></h1>
<span data-contrast="auto">The burgeoning fintech sector has the pivotal opportunity to create better outcomes for women. India’s fintech sector is one of the fastest growing in the world, with approximately </span><a href="https://www.bain.com/insights/india-fintech-report-2022-sailing-through-turbulent-tides/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">USD $35 billion invested</span></a><span data-contrast="auto">, more than doubling India’s share of global fintech funding since 2016. However, many fintechs are “gender-neutral” and do not design intentionally for diverse genders, reinforcing discriminatory gender norms. For example, because women tend to have </span><a href="https://www.centerforfinancialinclusion.org/an-equitable-rebuilding-learnings-from-women-owned-msmes"><span data-contrast="none">lower rates of digital transactions or formal financial assets</span></a><span data-contrast="none">,</span><span data-contrast="auto"> it can be more challenging for them to meet loan eligibility requirements. When fintechs have a gender-neutral approach, the </span><a href="https://www.inclusivefintech50.com/2022-insights" target="_blank" rel="noopener noreferrer"><span data-contrast="none">gender gap is 28 percent higher</span></a><span data-contrast="auto"> than the gap for bank accounts or smartphone ownership.</span>
<blockquote class="pullquote--left"><span data-contrast="auto">Many fintechs are “gender-neutral” and do not design intentionally for diverse genders, reinforcing discriminatory gender norms.</span></blockquote>
<span data-contrast="auto">Advancing gender-intelligent changes and developing strategies to overcome women’s specific constraints can help fintechs tap into the </span><a href="https://financialallianceforwomen.org/download/how-fintechs-can-profit-from-the-multi-trillion-dollar-female-economy/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">$216 trillion global market</span></a><span data-contrast="auto"> controlled by women. Research by the Financial Alliance for Women shows that fintechs could see a </span><span aria-label="Rich text content control"><span data-contrast="auto">​</span><span data-contrast="auto">​</span></span><span aria-label="Rich text content control"><span data-contrast="auto">​</span><span data-contrast="auto">​</span></span><a href="https://financialallianceforwomen.org/download/how-fintechs-can-capture-the-female-economy/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">70 percent increase in revenues</span></a><span data-contrast="auto"> by </span><span data-contrast="auto">converting new women customers at the same rate as men. While building economic power for women on its own is a compelling reason to inspire change, this financial incentive is an additional driving force for investor-backed and profit-driven fintechs to prioritize gender-inclusive design and compete in an increasingly crowded market.</span>
<h1><b><span data-contrast="auto">Increasing Diversity Is a Crucial Driver of Change</span></b></h1>
<span data-contrast="auto">One fundamental way that fintechs can adapt their strategies to benefit women is by increasing their organizational diversity. From its interviews with the </span><a href="https://www.inclusivefintech50.com/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Inclusive Finance 50</span></a><span data-contrast="auto"> fintech winners, CFI found that women-led fintechs were </span><a href="https://www.inclusivefintech50.com/2021-insights" target="_blank" rel="noopener noreferrer"><span data-contrast="none">more likely</span></a><span data-contrast="auto"> to explicitly target and serve more women customers and report </span><span data-contrast="auto">gender segmentation data, which is necessary for gender-intelligent decision making. This staff diversity should extend to customer-facing roles, such as the agents and distributors interacting with women customers, and women business correspondents are critical in </span><a href="https://www.adb.org/publications/digital-doorstep-banking-female-banking-agents-lead-digital-financial-inclusion-through-the-pandemic-and-beyond" target="_blank" rel="noopener noreferrer"><span data-contrast="none">expanding financial inclusion</span></a><span data-contrast="auto">. Interfacing with women staff makes it easier for women business owners to manage financial matters as women place a higher value on building personal relationships with agents and building trust over time.</span>
<blockquote class="pullquote--right"><span data-contrast="auto">Women-led fintechs were </span><span data-contrast="none">more likely</span><span data-contrast="auto"> to explicitly target and serve more women customers and report </span><span data-contrast="auto">gender segmentation data.</span></blockquote>
<span data-contrast="auto">Investors and regulators can also incentivize and require fintechs to make these changes. For example, through </span><a href="https://www.womensworldbanking.org/what-we-do/gender-lens-investing/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">gender lens investing</span></a><span data-contrast="auto">, Women’s World Banking works toward higher social and financial returns. Their in-depth approach uses fintech data to develop customized, strategic Gender Action Plans, and their first fund saw an </span><a href="https://www.womensworldbanking.org/what-we-do/gender-lens-investing/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">83 percent increase in women reached</span></a><span data-contrast="auto"> by portfolio companies.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559740&quot;:360}"> </span>

<span data-contrast="auto">Although fintechs alone cannot bring about an overnight transformation in societal and gender norms, taking these steps represents a real and immediate opportunity to initiate change for the economic empowerment of women in India and beyond.</span>



<a href="https://www.linkedin.com/in/camilla-nestor-640b70"><i><span data-contrast="none">Camilla Nestor</span></i></a><i><span data-contrast="auto">, Advisory Council Member of CFI and CEO of MCE Capital, teaches a financial inclusion course at Columbia’s </span></i><a href="https://www.sipa.columbia.edu/"><i><span data-contrast="none">School of International and Public Affairs</span></i></a><i><span data-contrast="auto"> (SIPA). Each year, the course features a writing competition that gives students an opportunity to write a blog post on a topic of their choice related to inclusive finance. This piece was written by the winner of the 2023 writing competition, Nina Liew.</span></i>

<i><span data-contrast="auto">This work is inspired by a graduate research project conducted by students at Columbia University’s School of International and Public Affairs in consultation with CFI and with support from </span></i><a href="https://ifmrlead.org/"><i><span data-contrast="none">LEAD at Krea University</span></i></a><i><span data-contrast="auto">. Nina and the team of graduate students focused on digital financial inclusion and consumer protection for women MSE owners in India. They interviewed 38 women MSE owners, bank and fintech agents, and fintech executives in India in March 2023. </span></i>

<i><span data-contrast="auto">Note: The story in this post was created as an amalgamation of interviewees.</span></i>

Power in Practice – or Only on Paper? Addressing the Financial Gaps Affecting Women Business Owners in India

<i><span data-contrast="auto">This blog post was generated from a research project conducted by a team of graduate students from Columbia University’s </span></i><a href="https://www.sipa.columbia.edu/" target="_blank" rel="noopener noreferrer"><i><span data-contrast="none">School of International and Public Affairs</span></i></a><i><span data-contrast="auto">, in consultation with CFI and with support from </span></i><a href="https://ifmrlead.org/" target="_blank" rel="noopener noreferrer"><i><span data-contrast="none">LEAD at Krea University</span></i></a><i><span data-contrast="auto">. The team focused on digital financial inclusion and consumer protection for women micro- and small-enterprise (MSE) owners in India and interviewed 38 women MSE owners, bank and fintech agents, and fintech executives in India in March 2023. Please note: Akanksha is a composite character based on interview anecdotes. </span></i><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559740&quot;:360}"> </span>

<span data-contrast="auto">It is the middle of the day in Noida in Uttar Pradesh, and an angry customer storms into Akanksha’s small mobile phone and banking agent shop. The customer demands to know why his parents have not yet received the money he transferred to them at Akanksha’s shop yesterday. To calm him down, Akanksha explains that the bank app’s server experienced an electrical outage in the morning that stalled all transactions. However, the customer continues to demand an immediate fix.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559740&quot;:360}"> </span>
<blockquote class="pullquote--left"><span data-contrast="auto">As a woman, building trust with male customers has been particularly challenging, but she must do so since most customers are men.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559740&quot;:360}"> </span></blockquote>
<span data-contrast="auto">In addition to running her shop, Akanksha is an agent for banks and fintechs, offering mobile money transfers and various utility services. In this scenario, she faces a tough decision. Akanksha must choose how to address the customer’s complaint – she can try to resolve the issue via the bank app, contact her area distributor — the middleman between banks or fintechs and the network of local agents serving customers, or close her shop and visit the bank. How she handles this complaint is critical, as she must maintain her customer base and the hard-earned trust of her customers. As a woman, building trust with male customers has been particularly challenging, but she must do so since most customers are men.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559740&quot;:360}"> </span>

<span data-contrast="auto">Akanksha, a woman in her mid-thirties with a bachelor’s degree, is not confident in filing a formal complaint using the app, which only has instructions in English. She also does not want to file a formal complaint out of fear that staff may escalate her issue to upper management, damaging her relationship with bank staff or her distributor. She attempts to contact her distributor on WhatsApp, but he does not answer. Because her husband is busy at work, Akanksha has no choice but to close her shop early and walk to the bank to talk to a staff member in person. </span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559740&quot;:360}"> </span>
<h2 style="text-align: center;"><img class="aligncenter wp-image-46280" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2023/08/SIPA_quote1.png" alt="" width="1074" height="180" /></h2>
<h1><b><span data-contrast="auto">Minor Issues With Major Implications</span></b><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559740&quot;:360}"> </span></h1>
<span data-contrast="auto">While Akanksha’s story is fictional, it is not an uncommon situation for many women MSE owners in India. A team of graduate students from Columbia University interviewed 38 women in India who use digital financial services (DFS) to understand their user experiences with banking and fintech apps, especially concerning the complaints journey. The interviews revealed that a stalled transaction is just one of several common issues faced daily by women MSE owners and agents like Akanksha. Stalled transactions and outages are so common that one interviewee described this as “just a part of life.” Almost all interviewees (35 out of 38) experienced at least one minor issue like this when using banking or fintech apps. Because each instance takes valuable time to resolve and leads to lost revenue, the effects of “minor” issues can significantly impact MSE owners’ businesses. One interviewee reported closing her shop for 15-minute periods multiple times a day to walk to the bank and settle matters in person. </span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559740&quot;:360}"> </span>

<span data-contrast="auto">Akanksha’s experience highlights some of the barriers to complaints resolution and consumer protection for women MSE owners in India, driven by low confidence in DFS and a reliance on personal relationships with distributors and staff. In an interview with one fintech CEO – whose company was also among the </span><a href="https://www.inclusivefintech50.com/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Inclusive Fintech 50</span></a><span data-contrast="auto"> winners – she said, “Women do not come screaming and shouting; this never happens. Local partners are more approachable. It is a business relationship; if you go to that level, it is also a social relationship.”</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559740&quot;:360}"> </span>

<span data-contrast="auto">An example of this type of social relationship is how many women agents rely on and highly value their personal relationships with distributors who travel to different communities to collect and disburse cash to agents. One agent even described her distributor as her “mentor and guru.” However, this relationship can also be vulnerable; distributors can exploit agents who depend on them for operational needs and resolving issues. Furthermore, if complaints are made informally to the distributor, which is often true for women, distributors are not incentivized to formally record complaints. As a result, the absence of an official record limits management’s oversight of the challenges women agents face. </span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559740&quot;:360}"> </span>
<h1><b><span data-contrast="auto">Finding Solutions That Better Serve Women</span></b><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559740&quot;:360}"> </span></h1>
<a href="https://www.microsave.net/2018/10/24/consumer-protection-in-the-digital-age/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Existing literature</span></a><span data-contrast="auto"> points to factors such as literacy levels, a difficult interface, and a lack of trust that prevent the adoption and use of DFS. However, there remains a gap in understanding the challenges in post-adoption utilization of services, particularly in the face of weak consumer protection provisions by low-income women users. Therefore, in our study, we aimed to explore how consumer protection policies impacted the experiences of women MSEs in using DFS, particularly with complaint redressal.</span>

<span data-contrast="auto">We found that, generally, women were not comfortable with the process of submitting formal complaints. Despite fintechs and DFS providers having established complaints handling processes under their consumer protection policies, they are often inadequate in supporting their women users. This results in many women abandoning platforms altogether.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559740&quot;:360}"> </span>
<h2 style="text-align: center;"><img class="aligncenter wp-image-46281" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2023/08/SIPA_quote2.png" alt="" width="1075" height="180" /></h2>
<span data-contrast="auto">The interviews with women users in India showed that they highly value personal relationships and prefer in-person complaint resolution. However, women face higher challenges to complaint redressal because of their strong preference for resolving issues through social interactions and providers’ lack of gender-sensitive consumer protection policies. As such, to accommodate women’s user preferences, banks and fintechs need to adopt </span><a href="https://www.centerforfinancialinclusion.org/the-case-for-a-gender-intelligent-approach-an-opportunity-for-inclusive-fintechs"><span data-contrast="none">gender-intelligent</span></a><span data-contrast="auto"> strategies.</span>

<span data-contrast="auto">Through a gender-intelligent approach, banks and fintechs can better understand how women use complaint resolution processes and ultimately design offerings that address their specific needs. This approach can help </span><a href="https://www.centerforfinancialinclusion.org/the-case-for-a-gender-intelligent-approach-an-opportunity-for-inclusive-fintechs"><span data-contrast="none">change entrenched gender inequalities</span></a><span data-contrast="auto"> and </span><a href="https://financialallianceforwomen.org/download/how-fintechs-can-capture-the-female-economy/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">benefit</span></a><span data-contrast="auto"> companies’ bottom lines. Therefore, solutions should focus on directly addressing women’s specific needs while considering the ability to achieve scale.</span>

<span data-contrast="auto">Based on the research interviews, we recommend that banks and fintechs consider the following:</span>
<h3><b><span data-contrast="auto">1. Banks and fintechs should develop support features that strengthen women agents’ ability to use their apps confidently.</span></b></h3>
<span data-contrast="auto">This approach could include robust in-person onboarding, training, and support in learning to use the app’s features. While this element is considered “high-touch,” </span><a href="https://www.accion.org/the-path-forward-for-human-touch-in-a-high-tech-world" target="_blank" rel="noopener noreferrer"><span data-contrast="none">the tech-touch balance</span></a><span data-contrast="auto"> is vital in providing inclusive financial services. Women users also reported that certain apps and resources were only available in English. Consequently, financial service products should be available in local languages and cater to varying literacy levels.</span>
<h3><b><span data-contrast="auto">2. Banks and fintechs should formalize the full scope of the complaint process for their digital financial services.</span></b></h3>
<span data-contrast="auto">Our research found that many women agents resolve complaints through informal mechanisms such as calling, texting (including WhatsApp), or meeting in person with distributors. Therefore, banks and fintechs should update processes and incentives to record distributor interactions and include them in formal complaint resolution processes and metrics.</span>
<h3><b><span data-contrast="auto">3. Banks and fintechs should build user communities that enable high-touch and in-person support at scale.</span></b></h3>
<span data-contrast="auto">Due to the travel-intensive and vulnerable cash collection nature of the role, most distributors are men. However, there is an opportunity to engage women as distributors to support women agents – one example is creating an “ambassador” program where established and high-performing women agents onboard and help new women agents. The incentive for becoming an ambassador is recognition as an expert and leader within the community. While many of our interviewees said they did not know other women agents, we saw that those who had learned from other women had higher competency levels in using the bank and fintech apps.  </span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559740&quot;:360}"> </span>
<h3><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559740&quot;:360}">4. </span><b><span data-contrast="auto">There should be more physical meeting spaces or local offices for women customers to meet staff and raise complaints.</span></b></h3>
<span data-contrast="auto">For example, one gender-intelligent fintech established local meeting hubs to support women using fintech services. By providing a secure environment and personalized assistance, the space motivated women customers to raise issues and embrace a broader range of digital financial services, ultimately improving customer loyalty and lifetime value to fintechs.</span>

<span data-contrast="auto">These recommendations are merely the beginning of the transformative potential of digital financial services in advancing financial inclusion and consumer protection for women. By taking experiences like Akanksha’s into account during the product design and complaint resolution processes, banks and fintechs can forge a more inclusive complaints-handling strategy. Such an approach would enable women MSE owners and agents to thrive, expand their businesses, and achieve greater economic prosperity. When more women feel they can use DFS and fintech successfully, financial service providers can expand their business reach, demonstrating that gender-intelligent design is a win for all.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335551550&quot;:6,&quot;335551620&quot;:6,&quot;335559740&quot;:360}"> </span>

Fight Gender Inequality: Prioritizing Women’s Customer Experience in Product Design and Complaint Resolution Processes

The theme for Financial Inclusion Week (FIW) 2022 was “Inclusive Growth in a Digital Era.” For years, financial products and services have been moving digital, and the pandemic further accelerated the trend toward digitalization. As digital becomes the new norm, we must ensure that these services are safe and inclusive of all people and do not exacerbate the exclusion of marginalized and vulnerable groups. FIW 2022 explored how the global financial inclusion community can harness digital innovation to expand inclusive financial services for all people across the globe, ensuring that products meet customer needs, have appropriate safeguards in place, and contribute to inclusive economic growth.

FIW 2022 hosted 125 live and on-demand sessions, featuring nearly 400 speakers from around the world. With over 3,330 registered participants from 2,000 organizations and 146 countries, FIW 2022 was the largest event to date.

To capture the learnings and key takeaways from the many Financial Inclusion Week 2022 sessions, CFI is compiling short summaries that highlight content and ideas from FIW 2022 sessions on select topics.

FIW 2022 Recap

As each year comes to a close, it’s natural to reflect on the key moments and events that shaped the year. Beyond the political and economic events and trends – the war in Ukraine, the rise in inflation globally, the floods in Pakistan, and COP27 – the field of inclusive finance itself is reshaping its contours to meet the moment. We saw this very visibly in this year’s <a href="https://financialinclusionweek.org/">Financial Inclusion Week (FIW)</a>, the largest event we have hosted to date – with virtual participants from 2,000 organizations across 146 countries. The topics covered reflect the priorities of global actors in inclusive finance, pointing to the direction the field is going.

<img class="wp-image-45545 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/12/Screenshot-2022-12-12-at-11.27.19-AM.png" alt="" width="967" height="429" />

To me, the scale of this year’s FIW and the coming together of the minds of stakeholders worldwide during this difficult time signals an urgent need and momentum to accelerate our understanding of how inclusive finance must evolve to address global challenges. With over <a href="https://financialinclusionweek.org/2022" target="_blank" rel="noopener noreferrer">50 hours of live content and 70 on-demand sessions</a>, FIW has something for everyone. While it would be amazing to watch the hours of rich live and on-demand content oneself, we know few people have this luxury. We have been reflecting on this at CFI and will launch a blog series that highlights takeaways on key topics covered during FIW 2022.

<img class="wp-image-45546 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/12/4_Closing_Plenary-2-1.jpg" alt="" width="960" height="761" />

FIW 2022 left me with several reflections on the state of the inclusive finance sector and what needs to be prioritized. While FIW covered many sub-topics, the overall theme for the week was “Inclusive Growth in a Digital Era,” exploring how our community can harness digital innovation to expand inclusive financial services and contribute to inclusive economic growth.

In hindsight, as I reflect on the content, I would revise the theme and say that this year’s FIW was really about: “How we can create shared prosperity in our digital era.” Many of the sessions at FIW highlighted that, despite digital financial services’ promise to create inclusive solutions, there are serious shortfalls in how the digital economy is evolving, and new risks and gaps are emerging. We learned that while access and usage continue to rise, indicators linked to resilience have worsened. Even more concerningly, numerous examples of fraud and online harassment were spotlighted during the sessions indicating that the digital economy has yet to pan out as the equalizer that we thought it would be.

Some key messages I took away from FIW 2022 include:
<h3><strong>The future of micro and small enterprises (MSE) on digital platforms needs attention</strong>.</h3>
In a joint <a href="https://www.youtube.com/watch?v=0FCpTM0TAac" target="_blank" rel="noopener noreferrer">session</a> hosted by CFI and Mastercard Center for Inclusive Growth, panelists discussed the status quo – where platforms retain substantial bargaining power and most MSEs lack the skills or power to benefit fully from the economies of scale offered through platforms. While alternative business models, such as platform cooperatives or open networks, may be options worth exploring, integrating elements of these emerging models into today’s established business models is likely to produce the greatest benefits to MSEs and platforms alike. Sessions by CGAP on <a href="https://www.youtube.com/watch?v=8VlU8U3DOdI" target="_blank" rel="noopener noreferrer">digital platforms</a> and <a href="https://www.youtube.com/watch?v=iGzlBKRK-PU" target="_blank" rel="noopener noreferrer">fintechs</a> surfaced regulatory fragmentation, payment rails, and e-KYC norms as pressing issues limiting workers and MSEs from fully benefitting from the digital economy. Regulators, donors, investors, and other industry stakeholders should invest more explicitly to enable a rebalancing of power to favor MSEs.
<h3><strong>Trust needs to be earned; regulators, providers, and consumer organizations each have a role in making that happen.</strong></h3>
A <a href="https://www.youtube.com/watch?v=yXw-r70lLXc" target="_blank" rel="noopener noreferrer">session by Consumers International</a> shared evidence on both existing and emerging consumer risks. These included significant increases in consumer complaints in Fiji and major issues around trust in digital finance in India, where 60 percent of digital finance users surveyed stated that they stopped usage because of trust issues. While several digital financial services users sought redressal through customer care channels, 20 percent of respondents in India never had their issue resolved.

Regulators can play a critical role in shaping market conduct. Another <a href="https://www.youtube.com/watch?v=CJ9_P7bGOvA" target="_blank" rel="noopener noreferrer">session hosted by SPTF</a> provided compelling evidence of fraud and abuse in markets like Kenya and discussed what provider practices could help mitigate these risks. Fair Finance’s session brought up an example of how a regulator can step in to enable greater trust in the financial system for low-income consumers and businesses: they mentioned the Central Bank of Rwanda's approach, where they are working to build trust via a consumer protection law, retaining oversight of financial consumer protection, creating tools to compare providers, and establishing instant complaints systems that allow consumers to submit complaints through email and social media.

These sessions reinforced the need for rigorous research, progressive regulation, and market conduct supervision that incentivize providers to be responsible and strong consumer organizations who can advocate on behalf of the silent majority in most developing markets. Donors and investors working to support market development must ensure that these fundamental guardrails are in place before they scale innovations.
<h3><strong>Regulation and regulators are important in addressing gender inequity and creating trust.</strong></h3>
Gender inequity is perhaps the gap that received the greatest attention during FIW 2022. Toronto Centre’s panel on <a href="https://www.youtube.com/watch?v=ISoRGWNdaQQ&amp;list=PL30fMMRd3G_7IGUKLWAQm_Z3zDVIu6LCB&amp;index=28" target="_blank" rel="noopener noreferrer">Advancing Cybersecurity and Financial Inclusion</a> highlighted the large gender gaps – such as access to technology – and the greater vulnerability, whether harassment, gender-based violence, or outright discrimination, and looked at what regulators are doing to counterbalance the system that is stacked against women.

<a href="https://www.youtube.com/watch?v=FFIFIvuVo0U" target="_blank" rel="noopener noreferrer">CFI’s Edoardo Totolo</a> delivered one of the four keynotes and highlighted both the opportunities and the risks posed by new embedded finance players. He emphasized the increasingly important role unregulated non-financial actors play in the design and delivery of financial services and the regulatory ambiguity around who is responsible for what. His keynote ends with a cautionary note to regulators and policymakers to clearly define the regulatory perimeters, articulate the role of third-party actors, promote interoperability and open architecture, and above all, create a level playing field.
<h3><strong>One-size fits all solutions are insufficient; segmentation is necessary.</strong></h3>
Several panelists emphasized that low-income customers are not a monolith and recognized that low-income consumers occupy different societal groups, each with its unique strengths, challenges, and starting points. A key takeaway from these sessions is that when we design without understanding the specific segment we are trying to reach, we will de facto design products and services for men. Instead, we must be intentional and create solutions that address specific consumer needs.

<a href="https://www.youtube.com/watch?v=-jz8tnEuAIQ" target="_blank" rel="noopener noreferrer">AXA’s session</a> on developed markets, including Japan, the US, and France, provided a unique look at excluded segments and approaches providers were taking to be inclusive in these highly competitive and highly regulated markets. For example, French provider <a href="https://nickel.eu/fr" target="_blank" rel="noopener noreferrer">Nickel</a> noted their rapid trajectory of delivering a simple product with very clear and fair terms and relying on distribution systems that leverage existing points of sale used by low-income consumers. In another <a href="https://www.youtube.com/watch?v=jC2AmET0HXI" target="_blank" rel="noopener noreferrer">session by Mastercard Strive</a>, a panelist from <a href="https://www.withboost.co/" target="_blank" rel="noopener noreferrer">Boost</a> Nigeria noted that women-owned small businesses are not a homogenous retail segment. Recognizing that women business owners had varying levels of digital and financial capabilities, Boost adopted a range of strategies that tried to meet women where they were in their journeys. A <a href="https://www.youtube.com/watch?v=Yp5yhELqTqI&amp;t=12s" target="_blank" rel="noopener noreferrer">session hosted by the Kashf Foundation</a> noted that despite the progress prompted by the pandemic, the digital divide is a nuanced issue that merits attention. Affordability to broadband is perhaps the next frontier, particularly when women don’t always have full control of household income or phone ownership.
<h3><strong>We need to focus on climate adaptation; prioritizing mitigation is not enough.</strong></h3>
In his keynote, USAID’s <a href="https://www.youtube.com/watch?v=_hUipQztGXs" target="_blank" rel="noopener noreferrer">Songabae Lee</a> provided a realistic and sobering view of the limitations of development finance, noting that mobilizing capital is the current priority at the global level. Recognizing that private sector capital is best geared toward mitigation, while adaptation still requires grant funding, Lee urges the audience to take advantage of what’s currently open rather than beating on a closed door. The open door is to start by leveraging capital for mitigation and then work to advocate for and shift attention to adaptation.

A <a href="https://www.youtube.com/watch?v=IyUlwUPPY40" target="_blank" rel="noopener noreferrer">session hosted by BFA Global</a> on the business case for climate resilience adopts a more optimistic lens, where investors start recognizing the need to move faster toward adaptation. The session delved into the experiences of multilateral development banks (MDBs) in financing climate initiatives that can be leveraged for earlier-stage ventures, highlighted the creation of the <a href="https://gca.org/news/collaborating-to-accelerate-investment-in-climate-adaptation-and-resilience/" target="_blank" rel="noopener noreferrer">adaptation and resilience collaboration</a> with 18 organizations, and the importance of data and measurement to help move this agenda forward. The urgency of scaling climate adaptation finance was also highlighted in a <a href="https://www.youtube.com/watch?v=2qENaGgm_4k&amp;t=1s" target="_blank" rel="noopener noreferrer">session</a> organized by CFI, where panelists from SEWA, FSD Mozambique, and UNHCR unequivocally emphasized the threats and income shocks low-income communities and refugees were exposed to in the absence of solutions tailored to support adaptation and resilience building at the community level.

My colleagues will go deeper into some of these messages in the blogs to follow in this series. If you are interested in revisiting the recordings, all sessions from FIW 2022 are available online. Check out the full playlist <a href="https://financialinclusionweek.org/2022" target="_blank" rel="noopener noreferrer">here</a>.

For curated session lists by topic, please see the links below for the playlists we’ve developed thus far.
<ul>
 	<li><a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_7YYIjKT10xi4v5vjOKbuLl" target="_blank" rel="noopener noreferrer">Women’s financial inclusion</a></li>
 	<li><a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_4ysbJRWLiVICDCCHEKSTMY" target="_blank" rel="noopener noreferrer">Consumer protection</a></li>
 	<li><a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_434ImijU6wxmZro4JHG7vu" target="_blank" rel="noopener noreferrer">Climate and inclusive finance</a></li>
 	<li><a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_5l8T1UH24TIm7H-EM7gydP" target="_blank" rel="noopener noreferrer">Micro and small enterprises</a></li>
 	<li><a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_5Mn-Gm3O2hgxyaSo9ajB7a" target="_blank" rel="noopener noreferrer">Digital assets and digital currencies</a></li>
 	<li><a href="https://www.youtube.com/watch?v=-jz8tnEuAIQ" target="_blank" rel="noopener noreferrer">Developed markets and inclusive finance</a></li>
 	<li><a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_4yq2Ugx050YBIt4wwN5rMs" target="_blank" rel="noopener noreferrer">Impact measurement</a></li>
</ul>

End-of-Year Reflections

<em>CFI is focused on understanding how COVID-19 is impacting MSMEs and conducted a </em><a href="https://www.centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact"><em>longitudinal survey</em></a><em> to understand the scale of its impact. As part of CFI’s learning agenda on this topic, we welcome other perspectives and research on how COVID-19 impacted low-income entrepreneurs. This post shares research from Triple Jump’s assessment of how the pandemic affected borrowers, their businesses, and their capacity to service loans across five countries in Latin America and Southeast Asia.</em>

&nbsp;

Proponents of financial inclusion often argue that it <a href="https://nextbillion.net/relief-through-finance/" target="_blank" rel="noopener noreferrer">boosts borrowers’ resilience</a>, defined as “<a href="https://www.emerald.com/insight/content/doi/10.1108/JEC-06-2015-0033/full/html" target="_blank" rel="noopener noreferrer">reducing the financial vulnerabilities of communities at risk</a>,” notably by helping clients to build assets and gain access to credit. That theory was put to the test on a global scale during the COVID-19 pandemic, when lockdowns and changes in consumption patterns severely undermined the ability of many micro and small entrepreneurs to keep their businesses afloat.

Did financial inclusion really reduce entrepreneurs’ financial vulnerabilities in this context? To find out, Triple Jump and several partners conducted eight separate surveys of 1,638 microfinance borrowers across five countries in South America and Southeast Asia—Bolivia, Cambodia, Colombia, Myanmar, and Peru—during the second half of 2021, more than a year after the start of the pandemic. Analyzing the data from Triple Jump’s <a href="https://triplejump.eu/tj_coping_covid19_effects_sep2022/" target="_blank" rel="noopener noreferrer">findings</a>, three key lessons emerged.
<h1>Lesson #1: External Shocks Do Not Affect All Borrowers Equally</h1>
We found considerable differences between borrowers in terms of whether, and to what extent, they suffered financial shocks in the wake of the pandemic. In Peru, approximately one-third of borrowers reported that their financial situation had worsened significantly, another third had suffered a more moderate decline, and for the remaining third, the situation had not deteriorated at all.
<h4><em>Percentage of Borrowers Reporting Worsened Family Financial Situation</em></h4>
<img class="alignnone size-full wp-image-45325" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/11/TJ-blog-post1.png" alt="" width="2071" height="660" />

A closer look at the data revealed that borrowers whose families lived in poverty suffered a greater financial shock than those who were over the poverty line. Staying with the example of Peru, the financial situation of 78 percent of families below the poverty line declined even further in the wake of COVID, while this was true for 62 percent of families above it.

But again, there were significant differences at the household level, with a small minority of low-income clients even finding themselves in a slightly better financial position post-COVID than they had been before.
<h4><em>Changes in Family Financial Situation by Poverty Status in Peru</em></h4>
<img class="alignnone size-full wp-image-45326" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/11/TJ-blog-post2.png" alt="" width="2071" height="453" />

Thus, while it is true that, on average, some groups of borrowers will be worse affected by systemic shocks, lenders must bear in mind that the impacts on individual borrowers within any given group—even within especially hard-hit groups—may be very different.
<h1><strong>Lesson #2: The Formal Sector Only Forms Part of the Larger Resilience Picture</strong></h1>
Entrepreneurs in all five countries reported using a variety of coping strategies to respond to pandemic-related shocks. While some of those strategies involved formal sector lenders, most did not. When we looked at the data, three trends emerged.

First, drawing down savings and borrowing additional funds were only two among many coping strategies that respondents had employed. Other widely used coping strategies included reducing business stock, laying off employees, reducing business or household investments, selling and pawning assets, and cutting down on food consumption.

Second, most entrepreneurs across countries did not borrow additional funds from any source to help them weather the crisis. ‘Crisis borrowing’ was most frequently reported in Colombia with 56 percent of respondents having used the strategy. At the low-end of the spectrum, only 21 percent of Cambodian entrepreneurs had borrowed additional funds.

Third, when people did seek and secure a ‘crisis loan’, the role of banks and microfinance institutions varied widely between countries. In Peru and Colombia, around three-quarters of ‘crisis loans’ were provided by the formal sector, while in Bolivia, Cambodia, and Myanmar, informal sources of credit predominated.
<h4><em>Percentage of ‘Crisis Borrowers’ Who Borrowed from a Bank or MFI</em></h4>
<img class="alignnone size-full wp-image-45327" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/11/TJ-blog-post3.png" alt="" width="2112" height="724" />

Thus, while financial inclusion can, and often does, contribute to building resilience by allowing people to accumulate savings in times of plenty and access credit in times of crisis, entrepreneurs widely employ other strategies involving a diverse set of players to navigate crises.
<h1>Lesson #3: Need for a Nuanced Approach</h1>
Considering the above data, it appears that financial inclusion did indeed boost some borrowers’ resilience in the wake of the pandemic, and we found no indications that financial inclusion reduced the resilience of any borrowers. At the same time, many entrepreneurs chose to pursue alternative coping strategies that did not involve accessing formal financial services—ranging from reducing investments over seeking alternative or additional employment to cutting down on household consumption.

Thus, it appears that financial inclusion does boost borrowers’ resilience on average, but that this benefit is only sought and experienced by some borrowers. Future attempts to better understand the link between financial inclusion and resilience will need to focus on the individual business or household level.

&nbsp;

<em>This blog post is based on data collected for the report “</em><a href="https://triplejump.eu/tj_coping_covid19_effects_sep2022/" target="_blank" rel="noopener noreferrer"><strong><em>Coping with long-lasting effects of the pandemic: How financial institutions supported borrowers affected by Covid</em></strong></a><em>,” published by Triple Jump in September 2022. The report is the result of a collaboration between Triple Jump, Banco de Desarrollo de América Latina (CAF), and the Responsible Inclusive Finance Facility for Southeast Asia (RIFF-SEA); the latter is managed by the Social Performance Task Force. The underlying surveys were executed by 60 Decibels. </em><em>This article was commissioned by Triple Jump.</em>

Does Financial Inclusion Boost Borrowers’ Resilience? Three Lessons from the Pandemic

The use of digital payments surged during the pandemic, forcing many MSMEs to turn to a range of digital tools for their businesses, including payments via mobile money, marketing products on social media, and selling on e-commerce platforms. Digital tools helped many MSMEs address challenges in the wake of the pandemic and ongoing economic conditions, but digital adoption among MSMEs has been slow and uneven.

In this report, CFI explores how MSMEs used digital products during the pandemic, what barriers they faced with digital adoption, and what can be done to support the growth of MSMEs in the digital economy.

Digital Adoption of MSMEs During COVID-19

Accounting for about 90 percent of businesses and employing more than 50 percent of the labor force in some markets, micro, small, and medium enterprises (MSMEs) are the backbone of the economy. However, since the pandemic began, MSME owners have experienced severe crises and challenges to their businesses. To understand the impact of the pandemic on these businesses and households, CFI conducted a <a href="https://www.centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact">longitudinal survey</a> of over 1,600 MSME owners from June 2020 to October 2021 over six waves, and conducted focus groups of 130 MSME owners from march to April 2022 in four countries — Colombia, India, Indonesia, and Nigeria.

This publication provides insights into how MSMEs have navigated challenges presented by the pandemic and what support they had available. It also presents lessons learned to help prepare for future crises, as well as recommendations for what inclusive finance stakeholders can prioritize to improve MSME resilience.

Preparing MSMEs for Future Crises: Lessons From COVID-19

As we look back at the last two years of the pandemic, the disproportionate impact on women is striking. Because of COVID-19, many women left the workforce and shut down their businesses. As schools and care facilities closed, women took on additional responsibilities related to childcare, eldercare, and household chores. The World Economic Forum estimated that the global gender gap – as measured by the gap in health, education, economic and political attainments – <a href="https://www.weforum.org/press/2021/03/pandemic-pushes-back-gender-parity-by-a-generation-report-finds/" target="_blank" rel="noopener noreferrer">increased by 36 years in 2021</a> as the burdens of the pandemic took a toll on women.
<blockquote class="pullquote--right">We must first understand how women were impacted by the pandemic to support a gender-inclusive recovery.</blockquote>
Now, as we rebuild from the effects of COVID-19, we must remember that women are not a homogenous group. Women MSME owners have unique needs when it comes to financial products and services. We have a unique opportunity to build more equitable systems, but to do so, we must first understand how women were impacted by the pandemic to support a gender-inclusive recovery.

<a href="https://www.centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact">Data from CFI's longitudinal surveys</a> in Colombia, India, Indonesia, and Nigeria, illustrates how women-owned businesses have struggled to recover and rebuild – even more so when compared to those owned by men. This research is part of our partnership with the <a href="https://www.mastercardcenter.org/" target="_blank" rel="noopener noreferrer">Mastercard Center for Inclusive Growth</a>.

From our data, we see the following three trends:
<h1><b><span data-contrast="auto">1   Women-Owned Businesses Were Disproportionately Affected</span></b></h1>
<a href="https://www.centerforfinancialinclusion.org/the-precarious-state-of-msmes-understanding-the-impact-of-covid-19-and-opportunities-to-support-their-recovery"><span data-contrast="none">MSMEs in emerging markets</span></a> – particularly micro and small businesses – bore the brunt of the economic slowdown. Many businesses struggled to keep their doors open as consumer spending declined. Reduced business income severely impacted many business owners' household finances and dramatically affected their ability to respond to challenges. But the economic fallout was particularly drastic for women business owners.

In the first wave of surveys CFI conducted in the early months of the pandemic, 18 percent of women reported having closed their businesses, 6 percentage points higher than men. While both men and women respondents reported a decline in business profits and an inability to cover business expenses using revenue at similar rates in wave 1, in the latest survey conducted a year after the first wave, women reported declining profits and inability to cover expenses at a higher rate than men, highlighting the uneven nature of the recovery (see “Profit Trends” table).

<img class="wp-image-44192 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/03/Picture1.png" alt="" width="1064" height="659" />

Women business owners also experienced a greater impact on household resilience and higher rates of food insecurity than their male counterparts. Twenty percent of women business owners said someone in their household had eaten fewer or smaller meals compared to 13 percent of men business owners, according to data collected in the second half of 2021.
<h1><strong>2   Women Owners Are Less Likely to Transact Digitally</strong></h1>
Digital platforms allowed many business owners to continue operating during COVID-19 and enabled them to reach new customers despite movement restrictions. Data from CFI’s surveys shows that the use of mobile money was an effective tool in supporting the resilience of many MSME businesses. From our data, business owners who used mobile money were more likely to cover business expenses with revenue and to report increased profit levels.

But our data also shows that women are less likely to conduct financial transactions via a mobile phone, use mobile money, or own a mobile money account (see “Mobile Money by Gender”). Women are also less likely to know the benefits of mobile money or to know what a mobile money account is (see “Reasons for Not Owning a Mobile Money Account”).

&nbsp;

<img class="wp-image-44193 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/03/Picture3.png" alt="" width="921" height="506" />

&nbsp;

<img class="wp-image-44194 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/03/Picture4.png" alt="" width="941" height="678" />

&nbsp;

Globally, a significant gender gap in smartphone ownership and access to mobile internet remains. In 2020, <a href="https://www.gsma.com/r/wp-content/uploads/2021/07/The-Mobile-Gender-Gap-Report-2021.pdf" target="_blank" rel="noopener noreferrer">women were 7 percent less likely to own a mobile phone and 15 percent less likely to use mobile internet than men</a>. CFI's sample has little to no gender gap in smartphone ownership, yet there is a substantial gap in the use of mobile money between men and women, indicating that there may be other barriers to digital adoption beyond access.

One of the barriers for lower levels of digital adoption among women could be a lack of knowledge of digital tools and the <a href="https://www.centerforfinancialinclusion.org/if-you-see-something-say-something">available protection mechanisms</a> for digital transactions. Our survey data suggests that women were less likely to know the fees associated with mobile money accounts and less likely to understand how to report suspicious activity using mobile money.
<h1><strong>3   Women Saved More, But Informally</strong></h1>
We also saw a difference among men and women in their level of trust in formal financial institutions. A higher proportion of women reported saving during the pandemic (see “Savings Activity”) but preferred to save via informal means over formal bank or mobile money accounts (see “Savings Instruments”) as compared to men. Additionally, women revealed a high level of concern with financial institutions collecting their personal data. These findings support the hypothesis that the lack of trust in formal institutions and data privacy concerns can hinder the adoption of formal financial services and digital tools among women.

<img class="size-full wp-image-44236 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/03/MSME-graphs-5-and-6.png" alt="" width="1500" height="872" />
<h1><strong>Pushing for Gender Inclusive Recovery</strong></h1>
As we prepare for the post-pandemic world, we have an opportunity to build more equitable products, services, and systems. Donors and market facilitators must invest in building women's financial health and digital skills. Governments must prioritize policies related to childcare and education that support women’s participation in the economy. Financial service providers and digital platforms must integrate gender norms into their products and services. A gender-inclusive recovery can finally bring about a sustainable change by eliminating barriers to women's empowerment.

An Equitable Rebuilding: Learnings from Women-Owned MSMEs

With more than 1,000 civilians dead and over 10 million Ukrainians displaced from a war that shows no signs of abating, alarm bells of human suffering are going off just as the pandemic has started to quiet down.

Like many of you, I wonder what we as the inclusive finance community can learn and do. It’s a familiar act of introspection: two years ago, I wrote a blog post reflecting on my many years of <a href="https://centerforfinancialinclusion.org/pandemics-and-natural-disasters-what-can-we-learn-from-past-disasters-to-help-with-todays-pandemic/">working on conflict and in crisis environments</a>, asking what these experiences can teach us about the pandemic. In a follow-up post, I provided lessons on what <a href="https://centerforfinancialinclusion.org/how-should-fsps-respond-to-the-covid-19-pandemic/">financial services providers</a> could do to lessen the strain on their customers and themselves.

Nearly two years later and after a Herculean effort by governments, financial services providers, investors, and the donor community to support people’s ability to withstand the ebbs and flows of the pandemic, a new crisis is upon us. Although the conflict in Eastern Europe is far from the low-income countries that typically get our attention, the ongoing war poses numerous risks to the global community.
<blockquote class="pullquote--right">Although the conflict in Eastern Europe is far from the low-income countries that typically get our attention, the ongoing war poses numerous risks to the global community.</blockquote>
We’re already seeing the impact of the war on oil prices and there is cause for alarm that food insecurity could pose serious concerns for many. Countries that are particularly reliant on wheat imports from Ukraine or fertilizer ingredients from Russia will experience significantly more <a href="https://www.economist.com/finance-and-economics/2022/03/12/war-in-ukraine-will-cripple-global-food-markets" target="_blank" rel="noopener noreferrer">ripple effects</a> than those in the most developed nations. And Russian citizens are suffering from livelihoods impacts, cut off from the global financial system as the grip of sanctions tightens. However, there’s no such thing as a regional conflict and there are universal lessons that can be drawn.

So, what did we learn from the pandemic that bears on our understanding of the current Ukraine crisis, and how will it impact the lives of low-income people, especially women, who are disproportionately affected? Demand and supply shocks, financial coping strategies, cash transfers, and remittances are issues to keep a close watch on.
<h2>1   Demand shocks have a time-bound effect on low-income people.</h2>
At the onset of the pandemic, the lockdowns and other measures that were taken to reduce the health risks of COVID-19 severely disrupted demand. The net effect of these actions on the economy was a severe contraction of demand for non-essential goods and services. When lockdown measures were removed, demand resumed. This is best seen through data on micro, small and medium enterprises (MSMEs), the businesses where most low-income workers are employed. CFI’s data on these businesses shows that while they have not fully recovered, they remain on track to return to pre-pandemic levels of operation.

In the latest wave of <a href="https://centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact/">data CFI collected</a> in mid-2021, only 26 percent of businesses reported reduced profits compared to 83 percent early in the pandemic (see chart). More than a year after the onset of COVID-19, MSMEs in the four markets surveyed in the longitudinal study were operating at 80 percent of their pre-pandemic workforce.

<img class="aligncenter size-full wp-image-44171" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/03/MSME-graph-profit-trends-2-ukraine-blog.png" alt="graph" width="800" height="324" />
<h2>2   Supply shocks are likely to create larger and longer ripple effects on low-income people.</h2>
Because the situation in Ukraine is not a demand shock but a supply shock, the effect on low-income people is likely to be more severe. For one, low-income people spend a larger proportion of their income on food and, as food prices are expected to skyrocket, this will have a disproportionately negative effect on low-income people.

Egypt, which imports 80 percent of its wheat from Ukraine, is perhaps the most vulnerable country to supply shocks on wheat. Egypt also has a long history of “<a href="https://science.time.com/2011/01/31/bread-is-life-food-and-protest-in-egypt/" target="_blank" rel="noopener noreferrer">bread riots</a>” in 1977 and 2008, in other words, food insecurity quickly can turn to political insecurity. Other countries in MENA, already on the verge of complete collapse, like Lebanon and Yemen, are also heavily dependent on Ukrainian wheat. In a region with a history of political and social unrest, people’s ability to withstand further shocks is severely curtailed. Beyond the MENA region, <a href="https://www.investmentmonitor.ai/special-focus/ukraine-crisis/ukraine-wheat-invasion-agriculture-russia" target="_blank" rel="noopener noreferrer">Indonesia, Bangladesh, and Turkey</a> are also significant importers of Ukrainian wheat.

Additionally, the war’s impact on gas prices and fertilizer will also have a significant ripple effect on smallholder farmers globally, further impacting the world’s food insecurity and increasing the cost of living globally.
<h2>3   When people’s reserves already are strained from shocks, their ability to cope with challenges is curtailed.</h2>
Our research shows that MSMEs have coped with the pandemic in various ways, including: drawing down savings, laying off employees, raising or lowering prices, reducing food intake, and borrowing from friends and family. Our data also shows that MSMEs that had experienced <a href="https://www.centerforfinancialinclusion.org/the-precarious-state-of-msmes-understanding-the-impact-of-covid-19-and-opportunities-to-support-their-recovery">prior shocks due to natural disasters</a>, were slower to recover from the pandemic.

As businesses and people have been depleted over the past two years, their ability to rely on tried and tested coping strategies -- like using their savings or borrowing from friends -- are severely curtailed. This is a reality in developed countries as well as in developing ones. CFI’s data shows that, on average, MSME owners depleted more than half of their savings during the pandemic, and a quarter of the respondents relied on loans from friends and family to cover business or household expenses.
<h2>4   Rapid cash transfers and government assistance are important for low-income people to weather crises.</h2>
CFI has <a href="https://www.centerforfinancialinclusion.org/series/policy-responses-to-covid-19-their-impacts-on-low-income-customers">written extensively</a> about the importance of government transfers to lessen the impacts of the pandemic. Governments’ ability to identify vulnerable people and distribute cash assistance is one of the few silver linings of the pandemic. Decades of policy reforms and investments in digital infrastructure made this test case possible. Indeed, the latest Economist Impact's <a href="https://centerforfinancialinclusion.org/rethinking-the-global-microscope-for-financial-inclusion-2021-key-findings-report/">Microscope</a> showed that countries that had invested in digital infrastructure were more likely to distribute cash transfers during the pandemic.

However, data from the World Bank that <a href="https://blogs.worldbank.org/opendata/international-debt-statistics-2022-multilateral-institutions-paved-way-highest-level-net">monitors debt flows of low- and middle-income countries</a> (LMICs) shows that LMICs’ debt stocks are an all-time high, rising to $8.7 trillion by the end of 2020. Whether governments will be able to step in to distribute more cash because of the effects of this war is still to be seen, but the likelihood is low, putting low-income people at possible risk of being left with little relief if needed.
<h2>5   People need access to affordable and reliable remittances during emergencies.</h2>
Relief organizations like UNHCR, UNICEF, WFP, IRC, Save the Children, and others are already mobilizing to support the exodus of Ukrainians, offering protection, food, and shelter. But often humanitarian assistance is fickle and temporary. The conditions are ripe for something more dramatic and scalable. The unprecedented attention on Ukraine, the population’s digital readiness, Europe’s willingness to allow Ukrainians to <a href="https://www.reuters.com/world/europe/eu-plans-grant-ukrainians-right-stay-up-3-years-2022-02-28/" target="_blank" rel="noopener noreferrer">remain for three-year residencies</a>, and the lessons from COVID cash transfers point to the potential for a new global experiment: low-cost remittances to people affected by war.
<blockquote class="pullquote--left">The conditions are ripe for something more dramatic and scalable.</blockquote>
Reducing fees on remittances by even 2 percentage points could <a href="https://www.knomad.org/publication/russia-ukraine-conflict-implications-remittance-flows-ukraine-and-central-asia" target="_blank" rel="noopener noreferrer">save Ukrainian migrants $400 million</a>, and complement scaling up aid efforts. <a href="https://wise.com/gb/blog/update-ukraine" target="_blank" rel="noopener noreferrer">Wise waived their fees</a> briefly, but such relief is temporary. People are already using interesting workarounds like <a href="https://www.cnn.com/travel/article/ukraine-airbnb-donations-cec/index.html" target="_blank" rel="noopener noreferrer">paying for apartments on Airbnb</a> as a way to send money to people in Ukraine. <a href="https://www.reuters.com/world/europe/paypal-expands-payments-services-help-ukrainian-citizens-refugees-2022-03-17/" target="_blank" rel="noopener noreferrer">PayPal just announced an expansion of its services</a> to address the Ukrainian crisis, also waiving fees temporarily until June 30. What would it take to get low-cost remittances in the hands of the people who need it most, while protecting their identities and limiting opportunities for fraud?

It's too soon to know how deep this conflict will go, what measures Russia will take to inflict even more suffering on Ukrainian – and its own – people, and how far-reaching this conflict will be. People’s ability to find ways to cope in the face of seemingly insurmountable challenges always astounds me. But it leaves me wondering: why does it have to be this hard and what can we do to alleviate the impact on low-income people?

What Can COVID-19 Teach Us About the War in Ukraine? 5 Things to Remember

The impacts of COVID-19 on small and medium-sized businesses in Nigeria, Colombia, India, and Indonesia are changing all the time. But one thing has remained constant since March 2020: low-income people in emerging markets are still dealing with extreme challenges and major disruptions to their livelihoods. While business closures have declined since their pandemic peak and MSMEs are employing more people, recovery in areas such as household resilience and coping strategies has not brought things back to pre-pandemic levels and has not kept pace with recovery in developed markets.

Below is the first in a series of blog posts zeroing in on key takeaways from our <a href="https://centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact/">ongoing, longitudinal research in these markets</a>.

The first four waves of data from Lagos are analyzed in this post. Data visualizations from Wave 5 results from Lagos will be posted <a href="https://centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact/nigeria/">here</a> later in August 2021; Wave 6 will follow shortly thereafter.

In the coming weeks, the second and third posts in this series will feature COVID’s impacts in Indonesia and India, respectively.

This research is part of our partnership with the <a href="https://www.mastercardcenter.org/" target="_blank" rel="noopener noreferrer">Mastercard Center for Inclusive Growth</a>. See also the accompanying slides for additional charts and insights.
<h2>1. Nigeria’s economy was fragile before the pandemic began.</h2>
According to the World Bank, Nigeria’s economy had not fully recovered from the 2014-16 economic recession, which was driven by a decline in oil prices, by the time the pandemic struck. In fact, before the pandemic, the <a href="https://www.worldbank.org/en/news/press-release/2020/06/25/nigerias-economy-faces-worst-recession-in-four-decades-says-new-world-bank-report" target="_blank" rel="noopener noreferrer">World Bank</a> and <a href="https://www.imf.org/en/News/Articles/2020/02/17/pr2053-IMF-Staff-Concludes-Article-IV-Consultation-to-Nigeria" target="_blank" rel="noopener noreferrer">IMF</a> downgraded its economic growth forecasts from a projected 2.5 to 2 percent.
<h2>2. Restrictions on movement and simultaneous declines in oil prices lead to a reduction in aggregate demand and an economic contraction.</h2>
In response to the pandemic, Nigerian officials instituted widespread restrictions on movement throughout the country. This depressed aggregate demand by closing shops and preventing people’s movement, exacerbating the economy’s weaknesses. Data from the MAP surveys highlights this: nine percent of all businesses closed, and of those, government restrictions were the primary cause of closure for 55 percent of businesses. Additionally, the data indicated a significant drop-off in customer traffic to shops, and 80 percent of firms reported declines in profit levels in the immediate aftermath of the pandemic. Simultaneously, global <a href="https://markets.businessinsider.com/commodities/oil-price?type=wti?utm_source=feedly" target="_blank" rel="noopener noreferrer">oil prices</a> crashed from a high of $59/barrel in February to a low of about $19/barrel by April, reducing government revenues at a time when <a href="http://documents1.worldbank.org/curated/en/695491593024516552/pdf/Nigeria-in-Times-of-COVID-19-Laying-Foundations-for-a-Strong-Recovery.pdf" target="_blank" rel="noopener noreferrer">fiscal resources were needed for a response</a>. Oil prices have since recovered to above pre-pandemic levels to around $69.
<h2>3. The impact of this contraction on MSME owners was dramatic, making it difficult for owners to cover expenses and leading to significant layoffs.</h2>
The decline in profits mentioned above foreshadowed widespread inability by owners to cover their expenses from revenues alone: 45 percent of owners said they could not do this in the months following the start of the pandemic. Widespread layoffs were followed by a 55 percent reduction in the workforce by July of 2020. <a href="https://centerforfinancialinclusion.org/nigerians-are-in-desperate-need-of-relief-as-covid-19-reduces-wealth-and-stresses-coping-strategies/">Impacts</a> of similar types and magnitude were seen in surveys by BFA, i2i, and the World Bank.
<h2>4. Households suffered as incomes declined — they were unable to cover expenses for household essentials and experienced dramatic food insecurity.</h2>
<img class="alignleft size-full wp-image-42973" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/08/cover-household-expenses-nigeria.jpg" alt="cover household expenses nigeria" width="500" height="286" />The MAP surveys showed that owners’ households experienced declining fortunes along with their businesses. The share of business owners reporting they could not cover household expenses was 56 percent. Responses on food insecurity reflected this vulnerable financial position: 60 percent of owners reported they or someone in their household had eaten fewer or smaller meals since the pandemic began because there was not enough money to buy food; 34 percent of owners reported that they or someone in their house had gone to bed hungry in July 2020. These responses were emblematic of the pervasive challenges facing other Nigerians, with studies showing <a href="https://centerforfinancialinclusion.org/nigerians-are-in-desperate-need-of-relief-as-covid-19-reduces-wealth-and-stresses-coping-strategies/">widespread food insecurity</a> across the country.
<h2>5. Owners’ businesses and households partially rebounded as government restrictions eased.</h2>
Nigeria began easing restrictions in movement in July 2020, and data from the second wave showed that businesses partially rebounded. For instance, the MAP surveys showed that half of the owners with a closed business in Wave 1 had restarted operations or started a new venture in Wave 2. During the same period, the number of employees at MSMEs increased by 70 percent, and the share of businesses reporting they could cover their operating expenses increased from 54 to 60 percent. Marginal improvements in household resilience accompanied those advances, with the share of owners reporting their households could cover their essential expenses increasing from 44 to 56 percent, and the share of owners reporting the worst food insecurity declined by 8 percentage points.
<h2>6. However, these initial gains appear to be tapering off, raising the specter of persistently lower economic performance.</h2>
<img class="aligncenter size-full wp-image-42985" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/08/total-employment-levels-nigeria-v6.png" alt="total employment levels nigeria v6" width="600" height="188" />

Gains in the number of operating businesses between Wave 1 and Wave 2 were substantial. Increases in the percentage of businesses that were operating were smaller but steadily increased between waves 2 and 4. Wave 4 survey data from March 2021 shows that 1.75 percent of businesses were closed in compared to 4.25 percent in Wave 2. However, the share of owners reporting they could cover business expenses from revenue increased by only one percentage point between Waves 2 and 4; and employment levels remained largely unchanged (resting about 30 percent below their pre-pandemic peak). While the share of owners reporting their households could cover essential expenses improved from 56 to 67 percent, food insecurity declined only somewhat between Waves 2 and 4 (even in Wave 4, 20 percent reported at least one member of their household going hungry).
<h2>7. Business owners’ financial tools have been stressed by the pandemic, hampering their ability to bootstrap recovery.</h2>
<img class="size-full wp-image-42974 alignright" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/08/table-nigerians-going-to-bed-hungry.jpg" alt="table nigerians going to bed hungry" width="500" height="212" />In the year before the pandemic, an equal share of owners reported having made a savings deposit and a savings withdrawal. Between the start of the pandemic and the Wave 1 survey, the share of respondents reporting they made a withdrawal was more than double the share reporting they made a deposit (28 percent saved versus 64 percent withdrew savings), indicating a major drawdown of cash reserves. This pattern moderated in Waves 2 and 3, but only slightly. Data from the later waves also confirmed the extent of the spend-down with respondents reporting they had used around 60 percent of their savings by Wave 4. Borrowing has appeared to be the primary financial tool to fill this gap: the share of respondents reporting receiving a new, formal loan increased from 14 percent in Wave 1 to 41 percent in Wave 3. However, a large share (56 percent in Wave 1, 45 percent in Wave 2, 39 percent in Wave 3, and 31 percent in Wave 4) of respondents reported that they have skipped a loan payment as a coping strategy.
<h2>8. They also appear to have few lifelines available to help relieve stress on their finances.</h2>
The MAP surveys also show strong evidence that business owners have few mechanisms to ease pressure on their finances. As noted above, while borrowing has increased, there is evidence that the ability to repay is a challenge. About one-third of respondents have taken loans from friends and family — which tend to be shorter-term, cheaper, and more flexible than formal loans — since the pandemic began. Other support from friends and family is limited. For instance, MSME owners are much more likely to be the sender of domestic cash transfers to friends and family than recipients and only a small share of owners reported receiving international remittances. Government support has also been paltry, with only 5 percent of MSME owners reported receiving a government transfer of any kind since the pandemic began.
<h2>9. Consequently, owners appear to be relying on sweat equity, price adjustments, and payment arrangements to boost revenue.</h2>
With financial stress ongoing, owners have turned en masse to improving their fortunes by contributing sweat equity. With government restrictions lifted, a growing share of respondents (about 50 percent in Wave 1 and 64 percent in Wave 4) reported working longer hours to make ends meet and satisfy customer demand. Meanwhile, increasing shares of respondents are adjusting their prices — slashing prices on some goods, putting a premium on others — to move inventory, and respondents have grown increasingly likely to experiment with offering store credit or not. Not all these strategies are complementary, and there is some evidence that the use of a mismatched set of coping strategies is not helping businesses.
<h2>10. It remains to be seen if international aid agreements will fill the fiscal stimulus gap, accelerate growth, and aid MSMEs’ recovery.</h2>
Nigeria’s cash-strapped government has been able to offer limited fiscal stimulus to boost aggregate demand so far, hampering a recovery. The <a href="https://www.worldbank.org/en/data/interactive/2020/04/14/map-of-sme-support-measures-in-response-to-covid-19" target="_blank" rel="noopener noreferrer">stimulus</a> that has been offered has been relatively small, offered in the form of targeted credit facilities, and aimed at small and medium formal firms in specific, hard-hit sectors like aviation, hospitality, and manufacturing — none of which is likely to benefit MSMEs like those in the MAP survey. At the end of 2020, the World Bank announced a $3 billion agreement to support Nigeria’s recovery, including $750 million for the Nigeria COVID-19 Action Recovery and Economic Stimulus (CARES) program, which aims to get aid to provide social transfers to low-income households, improve food security, and support MSMEs. Future waves should hopefully show if this aid improves MSMEs owners’ financial well-being.

Keep following this space for more key survey insights from microfinance clients in Lagos as well as India and Indonesia.

10 Things to Know About Nigerian MSMEs’ Experience with COVID-19

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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.

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

Earth Day was held on April 22nd to celebrate and promote environmental protection, including climate action. In the past decade, it has served as a momentary reminder of the need to respond to the causes and effects of climate change.

For much of the world, though, a reminder is hardly necessary. Dramatic shifts in weather patterns yield bizarre, destructive conditions at an increasing rate. The impact of these shocks on low-income people is profound as this population is more likely to be affected by and have difficulty recovering from climate shocks. The evidence shows that financial tools can help low-income people prepare for and respond to these negative events. However, more work needs to be done to develop appropriate financial products that help low-income households, entrepreneurs, and smallholder farmers mitigate and adapt to climate risk, which is why this topic is one of CFI’s four <a href="https://centerforfinancialinclusion.org/crisis-and-opportunity-reimagining-inclusive-finance-after-the-pandemic/" target="_blank" rel="noopener noreferrer">strategic pillars</a>.

In an effort to build the evidence base on this topic, CFI launched a dipstick survey of urban MSME owners on their experiences with climate shocks. This is part of our broader four-country, longitudinal survey <a href="https://centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact/" target="_blank" rel="noopener noreferrer">monitoring the impact of COVID-19 on MSMEs</a>. The goal of the dipstick survey was to illuminate MSMEs’ resilience to climate change by examining the shocks that impacted them, the consequences of those events for their businesses, and whether there was a correlation between experiencing negative impacts in the recent past and the ability to recover from COVID-19 today.

CFI completed the first of these dipstick surveys with its panel of MSME owners in Lagos, Nigeria, in early March, and the data is striking, showing a large portion of owners have been negatively impacted by recent climate events and those that have been impacted are recovering more slowly from COVID-19 than their peers. This research is part of our partnership with the <a href="https://www.mastercardcenter.org/" target="_blank" rel="noopener noreferrer">Mastercard Center for Inclusive Growth</a>.
<h3>A quarter of MSME owners have had their business negatively affected by a climate shock in the past 5 years.</h3>
A coastal megacity, <a href="https://lcluc.umd.edu/hotspot/urbanization-lagos-nigeria#:~:text=Lagos%20experienced%20an%20influx%20of,urban%20area%20in%20the%20world." target="_blank" rel="noopener noreferrer">Lagos has grown dramatically</a> in the past twenty years, with surrounding wetlands paved in favor of poorly planned urban development. Simultaneously, weather patterns have shifted, making Lagos <a href="https://qz.com/africa/628387/an-unusually-intense-lagos-heatwave-reminds-nigerians-theyre-not-ready-for-climate-change/" target="_blank" rel="noopener noreferrer">hotter</a>, encouraging the formation of massive thunderstorms with <a href="https://qz.com/africa/1054825/climate-change-in-nigeria-floods-in-lagos-abuja-niger-delta-are-going-to-get-a-lot-worse/" target="_blank" rel="noopener noreferrer">heavy rainfall</a>. With no meaningful flood control system to speak of, these conditions have given rise to frequent, <a href="https://www.cnn.com/2017/07/09/africa/lagos-flood-storms" target="_blank" rel="noopener noreferrer">destructive urban floods</a>. Rising sea levels and increased vulnerability to storm surges <a href="https://guardian.ng/news/how-rising-seas-may-wipe-off-lagos-others-by-2050/" target="_blank" rel="noopener noreferrer">exacerbate the risk of flooding</a> throughout the city.

Over the course of the past five years, 24 percent of MSME owners in CFI’s survey reported that they had been negatively impacted by at least one of these trends, with flooding from heavy rains being the most common shock owners experienced. Of those owners who experienced a negative shock, most experienced a disruption to the supply of goods to their business and a reduction in customer traffic to their stores (see the graph below). Significant shares of respondents also reported longer-lasting, and likely more costly, impacts such as damage to or loss of inventory or their place of business.

<img class="aligncenter size-full wp-image-42354" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/04/Negative-Impact-of-a-Climate-Shock.png" alt="" width="800" height="204" />
<h3>MSME owners who experienced a major climate shock in the past 5 years are struggling more than their peers to recover from the COVID-19 pandemic.</h3>
A surprising finding from this survey was that there were no meaningful differences in the characteristics of owners—such as owner gender, industry, business size, and pre-pandemic profit level, among others—who experienced these shocks and those that did not, and yet these two groups are experiencing dramatically different outcomes during the COVID-19 pandemic.

<img class="alignleft size-full wp-image-42355" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/04/Covering-Expenses-Climate.png" alt="graph covering expenses" width="500" height="485" />For instance, MSME owners who experienced a climate shock were less likely to report that they could cover their operating expenses from revenue. In addition, owners who did not experience a shock were much more likely to report that their profits were trending upward compared to their peers, suggesting a stronger recovery from the initial pandemic-induced downturn.

Their households were struggling too. Owners who experienced a climate shock were less likely to be covering household expenses from earned income than an owner who had not experienced a shock. And strikingly, of the respondents who reported that they were experiencing extreme household food insecurity, all of them had been impacted by one of these shocks in the past five years.

This is correlation, not causation — based on the survey design, CFI cannot say that experiencing a negative impact in the past five years caused an owner to be less resilient to the COVID-19 pandemic with certainty. However, there is a large body of research on the <a href="https://openknowledge.worldbank.org/handle/10986/25335" target="_blank" rel="noopener noreferrer">compounding effects of disasters on well-being</a> — including livelihood opportunities, asset loss, and physical health — and the lack of resources available to low-income populations to recover from them. It is not hard to imagine that an MSME owner who leveraged her financial resources to recover from a flood is less likely to have resources available to respond to a future disaster.

<img class="alignright size-full wp-image-42356" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/04/At-Least-One-Household-Member-Has-.png" alt="table" width="400" height="234" />There is data from the survey to support the hypothesis that it is harder for low-income households to leverage their portfolio of financial resources to respond to a series of shocks, even when those shocks are years apart. For instance, MSME owners who experienced a climate shock in the past 5 years reported they would be less likely to use credit, savings, or cash transfers from friends or family to recover from a similar shock in the future. The COVID-19 data shows that this phenomenon is in play currently: owners who experienced a climate shock saved and borrowed less often than their peers who had not been impacted by a shock in CFI’s most recent survey wave. They are sending money to and receiving it from their social networks at similar rates, though. Use of insurance is negligible in both groups despite <a href="https://www.poverty-action.org/sites/default/files/publications/Building-Resilience-through-Financial-Inclusion-English.pdf" target="_blank" rel="noopener noreferrer">strong evidence</a> that it is an effective tool for helping people plan for and respond to economic shocks.
<h3>Stakeholders can help MSMEs build back better, but careful consideration will need to be given to the financial tools they need to make it through inevitable systems changes.</h3>
In the wake of COVID-19, there have been calls for communities to “build back better” by investing in development that makes them resilient to future disasters. For communities in Lagos, this data suggests that low-income entrepreneurs who have experienced a climate-related shock will need more support to build back better than their peers who have not experienced such shocks.

In the medium-term, this support will likely need to take the form of systems-level investments in infrastructure by the government to mitigate the risk of future shocks. Lagos needs improved flood control systems. But any large, public works project in densely populated areas is likely to disrupt MSME owners that live and work in affected communities. The government would need to consider how to keep an investment in resilient infrastructure from becoming another economic shock for these people. Offering grants or low-cost, government-sponsored loans to affected businesses during construction may help them survive.
<blockquote class="pullquote--left">FSPs, regulators, and policymakers will need to work together to ensure MSME owners have continued access to appropriate and affordable financial services.</blockquote>
In the meantime, financial service providers (FSPs), regulators, and policymakers will need to work together to ensure MSME owners have continued access to appropriate and affordable financial services. As climate science is mainstreamed into <a href="https://www.mckinsey.com/business-functions/risk/our-insights/banking-imperatives-for-managing-climate-risk" target="_blank" rel="noopener noreferrer">credit risk models</a> and <a href="https://www.swissre.com/risk-knowledge/mitigating-climate-risk/decoding-climate-change-what-does-it-mean-for-the-underwriter.html">insurance underwriting</a>, financial services will become more costly for low-income consumers living and working in risky areas. In their current iteration, certain financial products, like flood insurance, are likely to become unaffordable as the systemic nature of the risk grows. It will be critical for the government and the private sector to work collaboratively in such circumstances to ensure the supply of financial services to underserved communities. This could involve things like packaging government-sponsored flood insurance with private loans to de-risk lending and investment for FSPs and MSME owners, respectively.

This will not be easy to do. The government will need guidance on what policy measures are effective; FSPs will need to discover new, effective business models; and consumers will need additional support to ensure that they understand and are protected from risks associated with climate-focused financial products. These takeaways underscore the need for CFI’s focus on these elements as part of our climate agenda.

<em>For us, studying climate risk will not be just an Earth Day affair: we will continue our dipstick surveys in Colombia, India, and Indonesia in the coming months to study MSME owners' experience with climate shocks. Stay tuned for announcements of new data releases to CFI’s <a href="https://centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact/" target="_blank" rel="noopener noreferrer">data dashboards</a>. Follow us (<a href="https://www.linkedin.com/showcase/center-for-financial-inclusion-at-accion/?viewAsMember=true" target="_blank" rel="noopener noreferrer">LinkedIn</a>, <a href="https://twitter.com/CFI_Accion" target="_blank" rel="noopener noreferrer">Twitter</a>, <a href="https://centerforfinancialinclusion.us5.list-manage.com/subscribe/post?u=394352ae963270aef6c51680d&amp;id=9df382106a" target="_blank" rel="noopener noreferrer">newsletter</a>) on our journey of learning and advocacy.</em>

Climate Change is Exacerbating Obstacles to COVID-19 Recovery for MSMEs in Nigeria

Results from CFI’s second wave survey of the economic impact of COVID-19 on micro, small, and medium enterprises (MSMEs) are cause for cautious optimism, showing MSMEs are generally on an upward trajectory after weathering the initial economic devastation caused by the pandemic. While these indicators of recovery are promising, there are several signs that MSMEs, and their owners’ households, are vulnerable to another economic downturn. Given the volatility caused by COVID-19, what can policymakers and financial service providers (FSPs) do to bolster the recovery and decrease vulnerability?
<h2>Businesses Are Opening, Profit Levels Are Stabilizing, and Hiring Has Increased Dramatically</h2>
In the first wave, 15 percent of MSME owners reported their business closed at the beginning of the pandemic. As I wrote in <a href="https://centerforfinancialinclusion.org/on-the-economic-frontlines-of-covid-19-early-insights-from-msmes-grappling-with-the-crisis/" target="_blank" rel="noopener noreferrer">CFI’s brief examining that data</a>, most of these closures were the result of government restrictions on movement in response to the public health crisis, but by the time CFI completed its first set of surveys, governments in three of the four countries (Colombia, India, and Nigeria) had recently or were planning on loosening restrictions. Thus, it may be of little surprise to see that large shares of respondents with a closed business in wave 1 reported they were operating in wave 2. The declines in closures in each market were dramatic, falling by at least 50 percent.

<img class="aligncenter size-full wp-image-41996" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/03/table-1-share-of-closed-businesses-MSME-covid-blog-post.png" alt="table " width="700" height="179" />

As the business climate improved, so did MSMEs’ earnings. In the first wave, 83 percent of respondents reported their profits declined -- a staggering figure which was indicative of the liquidity challenges respondents were facing. Those declines have bottomed out for most respondents. In every market other than Indonesia, the share of businesses with profits that have stayed the same or increased was larger than the share of businesses with profits on the decline.

<img class="aligncenter size-full wp-image-42012" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/03/table2v2-profit-trend-since-wave-1-covid-MSME-blog-CFI.png" alt="table 2" width="700" height="221" />

There is evidence that the improvement in profit trends had a positive impact on business operations. As shown in Table 3, the share of owners reporting they could cover their expenses from operating revenue increased in each market, although those gains were not significant in Indonesia. In addition, there has been an expansive increase in the number of people MSMEs employed in Colombia, India, and Nigeria. Employment surged by 66 percent in Colombia and 42 percent in Nigeria relative to wave 1. In India, employment nearly doubled and was higher in wave 2 than it was at its pre-pandemic peak.
<p style="text-align: center;"><img class="aligncenter size-full wp-image-41998" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/03/Table-3-Share-of-businesses-covering-operating-expenses-covid-MSME-blog-post.png" alt="table 3" width="700" height="182" /></p>

<h2>But MSME Recovery, Household Resilience Are Vulnerable</h2>
This data is encouraging but there are still several indicators highlighting the fragility of the recovery. For instance, while it is positive that many businesses have re-opened, most of those are new businesses that entrepreneurs started as opposed to closed businesses that re-opened once pandemic restrictions were lifted. While the number of businesses in this scenario is too small for robust quantitative analysis, there are indications that these businesses are in a more precarious financial position than their peers that never closed. For example, in Colombia, new business owners reported spending down more of their savings (80 percent) compared to owners who never closed (70 percent). Meanwhile, the number and value of outstanding loans were similar in both groups. Similar patterns can be seen in Nigeria, too. Meanwhile, the improvement in profit trends is promising, but as Table 2 shows, there was a large minority of respondents -- and a majority in Indonesia -- who reported their profits were still on the decline.
<blockquote class="pullquote--right">There are indicators that MSMEs’ recovery -- and the resilience of respondents’ households -- is vulnerable to another economic downturn.</blockquote>
This fragility extends to MSME owners’ households: the data shows that there were no consistent improvements in household resilience. Colombia, India, and Indonesia all displayed similar patterns defined by meager, if any, changes in the share of respondents reporting their households could cover essential expenses, the duration for which they could continue doing so given no income, and levels of food security. Nigeria showed the most expansive improvement in household resilience relative to wave 1, with more respondents reporting their households could cover their essential expenses and that they could do so for longer if they lost all their income. However, food security -- even after a decline -- remained persistently high. Twenty-five percent of respondents reported they or someone in their household had gone to bed hungry since wave 1 because there was not enough money for food. And while there is some evidence that financial flows are increasing, households’ best buffer against an economic shock, savings, has largely been exhausted.

<img class="aligncenter size-full wp-image-42009" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/03/table-4-use-of-savings-pandemic-MSMEs-covid-blog-1-1.png" alt="" width="500" height="121" />
<h2>Policymakers Should Provide Direct Assistance, Regulators Should Continue Prudential Flexibility</h2>
In CFI’s <a href="https://centerforfinancialinclusion.org/on-the-economic-frontlines-of-covid-19-early-insights-from-msmes-grappling-with-the-crisis/" target="_blank" rel="noopener noreferrer">brief</a> examining the first wave of survey data, I discussed how most MSMEs in our survey were not recipients of direct assistance despite major expansions of social assistance programs in each survey market. That was also true in the second wave of survey data. The only country where respondents reported a significant difference in receiving public support was India. Levels of support remained limited and unchanged in the other markets.

For MSMEs in low-income countries, this appears to be a widespread issue with the World Bank reporting that <a href="https://www.worldbank.org/en/news/feature/2021/02/17/tracking-an-unprecedented-year-for-businesses-everywhere?cid=SHR_SitesShareLI_EN_EXT" target="_blank" rel="noopener noreferrer">only 10 percent of businesses in low-income markets said they received some sort of public support</a>. They also noted how the probability of receiving policy support was substantially lower for smaller firms, which comprise the majority of CFI’s sample, compared to larger firms.
<blockquote class="pullquote--left">To ensure the recovery continues, policymakers should provide direct assistance to MSMEs and regulators should continue affording prudential flexibility to FSPs.</blockquote>
Collectively, this data continues to support the need for expanded support measures that are structured to provide immediate relief to MSMEs. They also provide additional guidance on potential ways to design programs to be most impactful. For instance, efforts aimed at maintaining or boosting employment are less likely to have a major impact given the gains seen in wave 2. However, there appears to be a need to support MSME owners who have closed one business because of the pandemic and are now starting another. As this data suggests, this group is particularly vulnerable, so direct assistance that helps them improve their financial position (by providing grants, lower-cost debt, or other measures) would be particularly beneficial.

In addition to an expansion of direct assistance programs, I also wrote about the need in the medium-term for FSPs, especially lenders, to adapt their products and services to support MSMEs’ liquidity. Since then, <a href="https://centerforfinancialinclusion.org/regulatory-flexibility-during-the-pandemic-emerging-lessons/" target="_blank" rel="noopener noreferrer">CFI released a policy brief</a> which explored, among other topics, how flexibility of prudential regulations could serve as a powerful tool to help FSPs and their clients cope during the pandemic. With the ability to offer moratoria, pardon interest, and offer other restructuring, FSPs can meaningfully support the liquidity needs of their customers. Denise Dias, the author of the policy brief, notes that regulatory flexibility, which many regulators have adopted in response to COVID-19, allows FSPs to provide relief to borrowers without needing to automatically reclassify the loans as higher risk, which in turn preserves FSPs’ liquidity and supports their short-term viability.

There is ample evidence to suggest there is value in extending this flexibility into the future as many respondents’ ability to fulfill their debt obligations remains constrained by persistently lower earnings, declining profits, and an ability to cover operating expenses from revenue alone. It is, however, important to note that this is not a blanket approach and regulators need to evaluate the circumstances in their markets carefully. In Indonesia, for example, continued flexibility appears especially important as respondents in that market underperformed in the recovery relative to their peers. In India, however, additional regulatory flexibility appears less necessary as MSMEs there have generally been performing well.

Cautious Optimism: MSMEs Are Rebounding From the Impacts of COVID-19

When financial sectors are buffeted by sudden and dramatic external shocks, regulators strive to implement targeted regulatory responses to mitigate negative impacts -- and the shocks made by the pandemic were no exception.

The aim of this policy report is to examine the types of regulatory flexibility adopted in response to the pandemic and provide early evidence on the impact of these measures.
<h3>The Purpose of This Report</h3>
Based on desk research and interviews and exchanges with regulators and financial service providers (FSPs), this paper aims for the following:
<ul>
 	<li>Describe the main types of regulatory flexibility adopted in developing and emerging economies as a response to the pandemic.</li>
 	<li>Provide preliminary evidence of how regulatory flexibility has impacted low-income financial consumers and micro and small enterprises (MSEs), as well as the FSPs that serve them.</li>
 	<li>Draw some emerging lessons for regulators seeking to better prepare for the future.</li>
</ul>
This is the third in a <a href="https://www.centerforfinancialinclusion.org/series/policy-responses-to-covid-19-their-impacts-on-low-income-customers" target="_blank" rel="noopener noreferrer">series of policy papers</a> that aims to analyze policy responses to COVID-19 to assess the impact of policies, both in the short- and long-term, on low-income customers of financial services and the financial service providers that work with them.

Regulatory Flexibility During the Pandemic: Emerging Lessons

<h2>Our Guests:</h2>
<ul>
 	<li>
<h3><a href="https://www.mastercardcenter.org/our-team/payal-dalal" target="_blank" rel="noopener noreferrer">Payal Dalal</a>, Mastercard Center for Inclusive Growth</h3>
</li>
 	<li>
<h3><a href="https://www.cgap.org/about/people/rashmi-pillai" target="_blank" rel="noopener noreferrer">Rashmi Pillai</a>, FSD Uganda</h3>
</li>
 	<li>
<h3><a href="https://blogs.worldbank.org/team/syed-mohsin-ahmed" target="_blank" rel="noopener noreferrer">Syed Mohsin Ahmed</a>, Pakistan Microfinance Network</h3>
</li>
 	<li>
<h3><a href="https://www.centerforfinancialinclusion.org/bio/denise-dias" target="_blank" rel="noopener noreferrer">Denise Dias</a>, Financial Regulatory and Supervisory Consultant and CFI Author</h3>
</li>
 	<li>
<h3><a href="https://centerforfinancialinclusion.org/people/eric-noggle/" target="_blank" rel="noopener noreferrer">Eric Noggle</a>, Center for Financial Inclusion</h3>
</li>
</ul>
<h3>Moderator: <a href="https://centerforfinancialinclusion.org/people/mayada-el-zoghbi/" target="_blank" rel="noopener noreferrer">Mayada El-Zoghbi</a>, Center for Financial Inclusion</h3>

Live Discussion: COVID-19 Policy Measures and the Impact on MSMEs

The data from CFI’s surveys on emerging-market MSMEs tells a stark tale: COVID-19 has closed 15 percent of all businesses; 83 percent of operating MSMEs have seen a dramatic decline in profits, leading to struggles covering operating expenses; 46 percent of closed MSMEs report government-imposed restrictions on movement as the most direct cause of their business closure. There is no obvious "best practice" coping strategy MSMEs are using, and it’s a tough road for many MSMEs trying to return to pre-pandemic financial health.

Armed with the right insights and data, however, policymakers and other ecosystem actors can target interventions that help rather than harm.

This brief contains insights needed to support MSME recovery. It summarizes and analyzes the first wave of data from a research project on the financial health of MSME owners/operators during COVID-19. At the program's core is a longitudinal, six-wave survey in four countries: Colombia, India, Indonesia, and Nigeria. In each country, CFI is surveying MSME clients at one financial institution participating in our <a href="https://centerforfinancialinclusion.org/understanding-covid19s-impact-on-financial-health-of-msmes/" target="_blank" rel="noopener noreferrer">partnership</a> with Mastercard every other month for one year.

Visit the <a href="https://centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/" target="_blank" rel="noopener noreferrer">COVID-19 and MSMEs: Data and Analysis to Understand Impact</a> program page to interact with the data dashboards and read other analyses.

On the Economic Frontlines of COVID-19: Early Insights From MSMEs Grappling With the Crisis

Saida, a founder of an agricultural enterprise, started as a farmer in central Uganda growing sorghum, millet, and rice. A few years ago, she decided to buy equipment to process her crops. Demand increased, and she began buying raw materials from others and processing them as well, slowly growing her business year after year. Saida is now ready to grow even more: her plans include hiring more laborers, renting more storage units, and possibly buying a small plot of land from a neighbor.

Things are looking up for Saida and her family, but there is one challenge she has not yet overcome: financing for business growth. She is struggling to find a financial service provider that lends to small agricultural businesses and understands the opportunities that agriculture brings.

Agriculture plays a significant role in the GDP of Uganda, and ABC Finance, a lender operating in the country, sees broad investment potential. However, ABC Finance finds it challenging to lend to small, agricultural businesses because they cannot confidently measure the risks involved. They request a lot of information upfront to better understand these businesses, but oftentimes these small business owners are not able to provide sufficient documentation to move forward. As a result, ABC Finance continues to finance its existing pool of agricultural businesses, primarily those working with cash crops and in formal markets that request large loan amounts. Moreover, as a result of COVID-19, ABC Finance is focused on renewing loans for existing partners and only financing a limited number of new agri-SMEs because ABC are not able to conduct thorough, on-site due diligence.
<blockquote class="blockquote">A $65 billion financing gap for agri-SMEs means three out of four agri-SMEs don't have the necessary finance to grow.</blockquote>
Businesses like Saida’s are not alone in their struggles to secure loans. There is an estimated USD $65 billion financing gap for agri-SMEs, which means three out of four agri-SMEs don't have the necessary finance to grow. For those agri-SMEs that make it to a lender's radar, CFI and <a href="https://scopeinsight.com/">SCOPEinsight</a> research found that lenders spend an inordinate amount of time and resources sourcing businesses and assessing their bankability, making the process of pre-screening and assessment expensive and leaving out the opportunity for many agri-SMEs to receive lending.

Given some of these limitations, how can ABC Finance easily determine if Saida runs a “bankable” agri-SME?
<h2>The Challenges of Determining an Agri-SME’s Bankability</h2>
In 2020, CFI and SCOPEinsight, as part of our partnership with <a href="https://agra.org/" target="_blank" rel="noopener noreferrer">AGRA</a>, researched over 90 lenders and industry actors and mapped SCOPEinsight and <a href="https://csaf.org/">CSAF</a> data to understand the driving factors behind the significant financing gap. Our research pointed to information – the information requested by lenders and the ability of agri-SMEs to provide information to lenders – as one of the most important obstacles to assessing the creditworthiness of agri-SMEs.
<blockquote class="pullquote--right">Lenders tend to gravitate toward larger businesses and stick with lending to businesses they already know.</blockquote>
Lenders typically collect a long list of information during the pre-due diligence (i.e. screening) phase of a deal. That information often includes generic business metrics and other metrics related to the agriculture sector or social and environmental impact. Many agri-SME’s, particularly smaller enterprises and those that operate in informal markets, struggle to provide formal documentation of their business activities. This is further complicated by the fact that the type of information requested varies significantly from lender to lender, making it difficult for agri-SMEs to prioritize what they should be documenting. As a result, lenders tend to gravitate toward larger businesses operating in formal markets and stick with lending to the businesses they already know.
<h2>Bankability Metrics Address the Information Obstacle</h2>
To address this information challenge, we developed a set of standardized bankability metrics that can serve as a common language between lenders and agri-SMEs. The metrics are intended to be used during pre-due diligence, providing lenders with an overview of the agri-SME's activity that is enough for them to decide whether to continue with due diligence or not. At the same time, standardized metrics will provide agri-SMEs with clear expectations about lenders’ requirements and help them prepare for an assessment more quickly and efficiently. The metrics will reduce the time needed to conduct pre-due diligence and open opportunities to expand lending to the many high-potential agri-SMEs that currently struggle to secure financing.

The bankability metrics focus on business activity, financial performance, management capacity, and governance. The team analyzed the wide variety of metrics used by lenders to identify metrics with the greatest common ground and those that are most effective in screening for creditworthiness. Each lender has a unique risk appetite, so the metrics do not identify benchmarks for bankability, but rather provide a common set of metrics whereby each lender can apply their own assessment to determine creditworthiness.

The Challenge of Bringing Agri-SMEs and Lenders Closer Together

The majority of Kenyans have mobile money accounts; their activity demonstrates digital financial services’ potential. Accion helps Kenyan innovators harness emerging technologies to create new financial services.

Following nearly a year of limited direct access to the lives of the vulnerable people who are the subject of his research, Prof. <a href="https://wagner.nyu.edu/community/faculty/jonathan-j-morduch" target="_blank" rel="noopener noreferrer">Jonathan Morduch</a> -- economist, co-founder of the <a href="https://www.financialaccess.org/" target="_blank" rel="noopener noreferrer">Financial Access Initiative</a> (FAI), scholar of the lives of the poor and <a href="https://centerforfinancialinclusion.org/about/advisory-council/" target="_blank" rel="noopener noreferrer">CFI Advisory Council</a> member – has been working beside a white-hot forge of projects, continuing to help shape the global body of knowledge about the lives that inclusive finance seeks to improve.

“It’s been a very busy time, even though we haven’t been able to do what we really want to do, which is being in the field: doing surveys, doing research, getting to know people and better understand problems.”

For Prof. Morduch and his <a href="https://www.financialaccess.org/about" target="_blank" rel="noopener noreferrer">team</a>, co-led by Timothy Ogden, that’s meant building partnerships and assembling teams for four different projects focusing on people from a range of backgrounds: from ultra-poor workers migrating to Dhaka from northwest Bangladesh, to families in Compton, California, struggling in a pandemic-scarred economy.
<h2>Small Firm Diaries: Applying the “Portfolios” Model</h2>
Perhaps the most visible of these so far is the <a href="https://www.smallfirmdiaries.org/" target="_blank" rel="noopener noreferrer">Small Firm Diaries</a> project. Morduch, co-author of “<a href="https://www.amazon.com/Portfolios-Poor-How-Worlds-Live/dp/0691148198" target="_blank" rel="noopener noreferrer">Portfolios of the Poor</a>” and <a href="https://www.usfinancialdiaries.org/" target="_blank" rel="noopener noreferrer">U.S. Financial Diaries</a>, is part of a team that will apply the financial diaries model -- collecting data from hundreds of poor households frequently and regularly over a long period of time (at least a year) -- to firms with 1 to 20 employees, in contrast to CFI’s <a href="https://centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/" target="_blank" rel="noopener noreferrer">research</a> on MSMEs, which has been focused on collecting and analyzing survey data on COVID-19's impact on the financial health of owners of a broader range of business sizes.

“There’s a lot of great research available on small firms from different angles – liquidity, gender, how they use digital services... The diaries instead present a chance to look at firms holistically, without imposing a particular agenda from the start. The diaries are a way to understand the lives of firms and whom they employ, whom they serve – and whom they are served by – and try to understand them on their own terms.”
<blockquote>The diaries present a chance to look at firms holistically, without imposing a particular agenda from the start.</blockquote>
With financial support from the Mastercard Center for Inclusive Growth, the Bill &amp; Melinda Gates Foundation, and the Argidius Foundation, the team will collect data for one year from firms in Colombia, Fiji, Indonesia, Kenya, Ethiopia, Uganda and Nigeria. In addition to following cash flows, the researchers will also complete qualitative interviews in roughly 100 households per country from a variety of sectors.
<h2>From South Asian Cities: Researching Digital Remittances Back Home</h2>
A second project Prof. Morduch is leading is digitally connected and builds on a <a href="https://www.aeaweb.org/articles?id=10.1257/app.20190067" target="_blank" rel="noopener noreferrer">pilot in Bangladesh</a> that connected ultra-poor families – whose working-aged children were employed mostly in garment factories in Dhaka and who were largely excluded from technology -- with digital networks to send money home easily. This pilot intervention revealed a 25 percent boost in money going to home villages; the team also found that consumption was smoothed during the lean season and increased overall. The project was spearheaded to fill a knowledge gap in the impact of domestic remittances. Beyond the numbers, it has also changed the way Prof. Morduch has viewed microfinance interventions, which have traditionally been about bringing resources like microcredit to grow businesses in villages.

“This project shows other ways to improve rural conditions. One is to make it easier for younger people to move to cities where they can be more productive and earn higher wages. What about the people who are left behind in rural areas? They can benefit if migrants have reliable ways to send money home.” In addition to introducing the technology to urban migrants and their rural families, the team translated the digital interfaces (which were mostly in English) and gave users hands-on experience. The initial result? Active use of the product went from 20 percent to 70 percent.

The team hypothesized that urban-to-rural remittances would become more frequent as a result of the digital ease of transacting. Surprisingly, the frequency remained largely the same, but the amounts grew.

While the financial and usage results were positive, the treatment group of migrants reported worsened physical and emotional health. The team suspects that migrants started working longer hours as expectations to remit were increased by the digital technology.
<blockquote class="pullquote--left">The team suspects that migrants started working longer hours as expectations to remit were increased by the digital technology.</blockquote>
“It’s a reminder that digital financial services can disrupt social relationships. All of a sudden, migrants are available to their families all the time, both to talk and to send money. This changes how we go through life. These technologies can be powerful, but they disturb a social balance.”

With support from the Bill &amp; Melinda Gates Foundation, the team will replicate the work in six other sites in India, Pakistan and Bangladesh.
<h2>To the Homes of Compton: A Guaranteed-Income RCT</h2>
Prof. Morduch is also part of a group that’s working on a guaranteed-income randomized control trial in Compton, California, involving several hundred families whose incomes are below twice the U.S. poverty line. The purpose of this RCT is to test a premise about <a href="https://www.youtube.com/watch?v=Yw4jRO5rYf8" target="_blank" rel="noopener noreferrer">being poor and facing instability</a>: while financial services’ role in smoothing consumption via saving and borrowing is critical, the poor also need a “<a href="https://www.microsave.net/files/pdf/BN_13_Money_Managers_The_Poor_and_Their_Savings.pdf" target="_blank" rel="noopener noreferrer">usefully large sum</a>” from time to time.

As Morduch says, families need to both “smooth” and “spike” during the year.

“These are different savings problems. We tend to focus on smoothing, but both smoothing and spiking are really hard for poorer households, and they call for different solutions.” So for the duration of the experiment, some families will get a check every couple of weeks (smoothing), and another group will get a larger disbursement of funds less frequently, which Prof. Morduch and his collaborators hope will allow them to support important purchases.

Morduch points out that even though the U.S. has the Earned Income Tax Credit (a <em>de facto</em> lump sum payment in the form of a tax refund) and programs -- like SNAP -- to support food purchases for low-income families (a smoothing mechanism), “we never really step back and think about them as financial mechanisms, and that’s what the Compton project is all about.”

Indeed, thinking about stability’s role has been a common theme throughout his planning and executing of projects. “One of the great inequalities in life is that people who have better paying jobs also have more stable jobs. People who earn the least have the least protection and stability.”
<blockquote class="pullquote--right">"People who have better paying jobs also have more stable jobs. People who earn the least have the least protection and stability.”</blockquote>
With that instability and seasonality of employment for the poor, there needs to be more frequent measurements to understand poverty, be them quarterly, or monthly, as opposed to yearly. And the kind of instabilities we saw in "Portfolios of the Poor" are also faced by American workers as the power of labor (i.e., declining unions, <a href="https://www.investopedia.com/terms/m/monopsony.asp" target="_blank" rel="noopener noreferrer">monosponies</a>) falls away, Morduch points out. The Compton project could help inform ways to better collect data frequently.
<h2>A New Primer on Financial Inclusion</h2>
As if that weren’t enough to keep them busy, a new book is also in the works. "Financial Inclusion: What Everyone Needs to Know," by Prof. Morduch and Ogden, will be an explainer organized in Q &amp; A form, a chance for the pair to “pull together ideas and evidence that we talk about all the time, but that may be new to readers.” Prof. Morduch pointed out that while organizations like CFI implicitly explain topics by offering solutions, a book that explains the problems for a broader audience will help advance financial inclusion objectives even more. The book is slated for fall 2021 release.
<h2>CFI’s Strategic Shift</h2>
In some ways, Prof. Morduch’s strategizing and planning is similar to that undertaken by CFI, for whom he has advised for many years. And the excitement is shared.

“CFI’s strategic priorities show an organization that’s truly looking forward, while also looking back. CFI is not losing sight of unfinished agendas in women’s financial inclusion and consumer protection while looking forward to challenges like climate risk, where there doesn’t yet exist a well-formulated agenda.”
<blockquote>"CFI is not losing sight of unfinished agendas in women’s financial inclusion and consumer protection while looking forward to challenges like climate risk, where there doesn’t yet exist a well-formulated agenda.”</blockquote>
For the latter topic, Morduch urges CFI to make it clear why climate risk is important for people concerned with financial inclusion. “If everyone worried about finance also understands why they should get excited about climate risk, then they will follow CFI, and they will push CFI to push harder, and I am excited about that possibility.”
<h2>Wanted: Closer Public Sector Involvement</h2>
Whether it’s CFI, FAI or other organizations advocating for inclusive finance, Morduch believes that public sector interventions need more prominence.

“The microfinance ethos, in some sense, got us off on the wrong foot. It seemed very anti-government in the beginning -- a private sector intervention. Politically, that was aligned with the moment, but it cut off important conversations. Instead of minimizing connections to public action, financial inclusion should be coming alongside steps by governments to support citizens. That’s one of the great omissions of the financial inclusion conversation: it has been too optimistic about the power of finance alone to address inequality.”

We at CFI agree that the conversation must go beyond private sector interventions: “How are public policy, social safety nets, systemic discrimination or other underlying issues influencing people’s financial health circumstances?” Mayada El-Zoghbi, CFI Managing Director, <a href="https://centerforfinancialinclusion.org/covid-19-reveals-the-limits-of-individual-action-and-market-based-solutions/" target="_blank" rel="noopener noreferrer">asked</a> readers of this blog last June.

And we’re looking forward to learning and comparing what we’ve discovered.

Prof. Jonathan Morduch’s Four New Projects

The year 2020 will forever be remembered for COVID-19 and the changes that have ensued as a result. Each day we read about how COVID-19 is impacting low-income people, micro-and small enterprises, the financial sector and low- and middle-income countries; but more than just reading about it, we are all simultaneously living through the impact it is having on our day-to-day lives.

For me, as I reflect on the past year, I can’t help but be thankful for staying gainfully employed, quickly and seamlessly adjusting to working from home, and adjusting CFI’s work program to collect data and do our research using virtual tools. But the results of our research are a daily reminder that my lived experience is very different than the lived experience of the majority of people in developing countries. CFI’s research with micro and small enterprises in <a href="https://www.centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/nigeria" target="_blank" rel="noopener noreferrer">Nigeria</a>, <a href="https://www.centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/india" target="_blank" rel="noopener noreferrer">India</a>, <a href="https://www.centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/indonesia" target="_blank" rel="noopener noreferrer">Indonesia</a> and <a href="https://www.centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/colombia" target="_blank" rel="noopener noreferrer">Colombia</a> is showing the hardships that these often informal firms are going through.

Early in this pandemic, we wrote about <a href="https://centerforfinancialinclusion.org/pandemics-and-natural-disasters-what-can-we-learn-from-past-disasters-to-help-with-todays-pandemic/" target="_blank" rel="noopener noreferrer">what made this crisis different</a> from any other. The systemic nature of the crisis and the lack of clarity on its duration stood out and made this crisis a test of a lifetime. What have we learned from the responses to COVID-19 undertaken around the world and has inclusive finance risen to the occasion?
<h2>Cash Transfers for the Most Vulnerable</h2>
In June of 2020, I wrote a blog post about the <a href="https://centerforfinancialinclusion.org/covid-19-reveals-the-limits-of-individual-action-and-market-based-solutions/" target="_blank" rel="noopener noreferrer">limits of individual action and market solutions</a>. I made the case that this pandemic was different and that the duration of the lockdowns, the loss of incomes and jobs, the overall contraction of the economy and, in turn, demand for goods and services meant that public policy had to play a bigger role in the COVID response than in other prior crises.

This has been playing out in real time and it’s been incredible to see the enormity of the response across the globe. CFI’s brief on <a href="https://centerforfinancialinclusion.org/rapid-response-for-social-payments-during-covid-19/" target="_blank" rel="noopener noreferrer">social payments</a> features many examples of how governments were able to step up cash transfers to individuals and firms to help them withstand the enormity of the shock on their lives. The World Bank tracks the number of social protections measure undertaken around the globe, and in its most recent count in <a href="http://documents1.worldbank.org/curated/en/295321600473897712/pdf/Social-Protection-and-Jobs-Responses-to-COVID-19-A-Real-Time-Review-of-Country-Measures-September-18-2020.pdf" target="_blank" rel="noopener noreferrer">September 2020</a>, it identified measures in 212 countries or territories, covering 1,179 social protection measures. Of these, 158 countries have opted for cash transfers and 93 have offered in-kind food or food vouchers. Combined, 1.8 billion people have benefited from cash and in-kind transfers, of which 1.3 billion were cash recipients. This represents a 217 percent increase, globally and on average, in social transfer payments compared to pre-COVID levels.
<blockquote class="pullquote--left">We must build upon digitized cash transfer programs to build systems that can be leveraged in future crises.</blockquote>
While we don’t know precisely how many countries opted for digitized cash transfers, CFI’s research shows that many countries expedited regulatory measures to enable contactless distribution and rapid opening of transaction accounts. Undeniably there will be hiccups with such rapid shifts to digital channels, and more research is needed to better understand how and whether vulnerable people have been able to fully avail of this unprecedented outpouring of assistance. As we continue to investigate and hopefully refine these programs, we must also build upon them to ensure that this is not just a one-off logistical operation, but an opportunity to build systems that can be leveraged in future crises. Even more importantly, providers and others involved in these programs should focus on the beneficiary experience so that users see value in using these new accounts. Only when a service creates value in people’s lives will it displace what they are already using.
<h2>And What About Micro and Small Enterprises?</h2>
Cash transfers have been a lifeline for vulnerable people around the globe, but there are fiscal limits to how much this instrument can solve all COVID-19 wreckage. Cash transfers support the economy by putting money in the hands of people who will buy basic goods and services. This does support aggregate demand in the economy, but it has not been sufficient to preserve or create new jobs. For this, we need to rely on micro and small enterprises (MSEs), which, according to <a href="https://www.ilo.org/global/about-the-ilo/newsroom/news/WCMS_723409/lang--en/index.htm" target="_blank" rel="noopener noreferrer">ILO’s research</a>, employ seven out of 10 people globally. Medium and large firms are important drivers of employment, but for our purposes we focus on informal firms that serve and employ low-income people.

Yet when we look at how the COVID-19 response has addressed the needs of MSEs, the picture is precarious. CFI’s research shows that many of the MSEs in the samples we’ve researched are struggling. Half of them have had to lay off more than 50 percent of their workers, and revenue has been hit hard. When it comes to coping strategies, we see big differences across the markets which could be explained by differences in the samples themselves (gender breakdown, rural/urban breakdowns, etc.), but also in macro-level conditions, government responses, and a myriad of other factors. Although our samples are not nationally representative nor directly comparable, the MSEs we surveyed are customers of microfinance institutions in some of the biggest markets in the world, and therefore tell us something about the engines of employment in the developing world.<img class="alignright wp-image-40915" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/12/map-government-transfers-CFI-data-1024x686.png" alt="map government transfers CFI data" width="600" height="402" />

When it comes to government transfers, we see that 43 percent of the owners of MSEs in our research in Indonesia benefited from this support. This drops to 2 percent in Nigeria, and 13 and 14 percent in Colombia and India, respectively (see map).

The benefits of the digital economy have been magnified under COVID, but have these benefits trickled down to MSEs? Our research shows a mixed bag. Few MSEs in our sample have leveraged digital platforms to sell their products. Colombia is the only country in our sample where more than 10 percent of MSEs started to sell on digital platforms as one way of coping with the pandemic.
<h2><img class="wp-image-40916 alignright" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/12/MSEs-on-digital-platforms-map-CFI-data-1024x665.png" alt="" width="600" height="390" /></h2>
Our data shows that MSEs are adapting to market conditions in more analog ways. For example, many have added delivery services – 20 percent in Indonesia, 38 percent in Colombia, 60 percent in India and 28 percent in Nigeria. But more often, MSEs are cutting workers and their employees are working longer hours; they are offering customers credit, not repaying their loans, offering discounts, or increasing their prices. You can explore the full dataset <a href="https://centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/" target="_blank" rel="noopener noreferrer">here</a>.
<h2>Institutions That Serve MSEs</h2>
Supporting MSEs does not necessarily mean direct government transfers. In the long term, micro and small enterprises need access to capital, payments and other financial services accessible to them when they need it. They need access to new markets; and they need access to knowledge and services that improve their efficiency and reduce their operating costs. MFIs, cooperatives, fintechs, social platforms, and ecommerce platforms are all increasingly addressing one or more of these needs. While there are signs of hope, much more can be done to support MSEs to survive and thrive post pandemic.
<h3>Microfinance Institutions</h3>
MFIs serve an estimated <a href="https://www.convergences.org/wp-content/uploads/2019/09/Microfinance-Barometer-2019_web-1.pdf" target="_blank" rel="noopener noreferrer">140 million people</a>. Early in the pandemic, there was widespread concern that liquidity constraints could wipe out many of the financial institutions that serve low-income customers and MSEs. CGAP’s <a href="https://www.cgap.org/research/data/results-dashboard-cgap-pulse-survey-microfinance-institutions" target="_blank" rel="noopener noreferrer">Global Pulse Surveys</a> have shown that fears were exaggerated. However, <a href="https://centerforfinancialinclusion.org/are-moratoriums-good-policy-and-good-for-fsps/" target="_blank" rel="noopener noreferrer">moratoriums</a> around the world have put both repayments and new lending on hold. Once moratoriums end, will these institutions resume lending? Will their clients repay? Will their clients <em>be able</em> to repay? CFI’s research with MSE clients of MFIs shows that many have already skipped loan repayments as a coping strategy, from 55 percent of respondents in Nigeria and Colombia, to 47 and 48 percent of respondents in Indonesia and India, respectively.
<blockquote>Once moratoriums end, will these institutions resume lending? Will their clients repay? Will their clients <em>be able</em> to repay?</blockquote>
CFI’s engagement with the <a href="https://centerforfinancialinclusion.org/people/microfinance-coalition/" target="_blank" rel="noopener noreferrer">Microfinance Coalition</a> -- a group of 14 microfinance networks that have come together to advocate for microfinance institutions to regulators, investors and donors -- indicates that the future of these providers rests on how investors, both debt and equity, manage their responses to the crisis. As MIV loans come due, will they roll over their loans? Will they increase their lending, despite covenant infractions? The largest MIVs have taken a coordinated approach and <a href="http://www.e-mfp.eu/sites/default/files/news2020/2020-04-24%20MIV%20Covid-19%20coordination%20MoU.pdf" target="_blank" rel="noopener noreferrer">signed an agreement</a> to avoid a pre-emptive approach by one or more that undermines other investors. This is a good sign, but it has not yet been tested. As closed-end MIVs need to exit, will equity shareholders buy them out? Will new quasi-equity structures come in to smoothen these transitions?

Both MIVs and the Microfinance Coalition want development finance institutions (DFIs) to step in. DFIs have been busily serving their own investees (read these interviews with <a href="https://centerforfinancialinclusion.org/dfis-financial-inclusion-and-the-covid-19-response-a-qa-with-machal-karim-of-cdc/" target="_blank" rel="noopener noreferrer">CDC</a>, <a href="https://centerforfinancialinclusion.org/questions-for-eib-group-dfis-financial-inclusion-and-the-covid-19-response/" target="_blank" rel="noopener noreferrer">EIB</a> and <a href="https://centerforfinancialinclusion.org/dfis-covid-19-and-financial-inclusion-a-conversation-with-richard-greenberg-of-dfc/" target="_blank" rel="noopener noreferrer">USDFC</a>), and several have been in discussions to seek a collaborative response, although nothing yet has been made public. Experience from the 2009 financial crises revealed that the DFI-led emergency facility, the <a href="https://www.kfw-entwicklungsbank.de/PDF/Evaluierung/Ergebnisse-und-Publikationen/PDF-Dokumente-A-D_EN/Alle_Entwicklungsl%C3%A4nder_MEF_2016_E.pdf" target="_blank" rel="noopener noreferrer">Microfinance Enhancement Fund</a>, was too slow in the making and did not serve its original intent of shoring up liquidity when MFIs needed it most. In light of that, it might be too optimistic to expect that DFIs will be able to structure something in time, although many of us still hope for this outcome.

The institutions the Microfinance Coalition represents serve 80 million clients in 69 countries, 23 of which are least developed countries. While united in their advocacy, there is a great deal of nuance among their experiences and that of other MFIs beyond these networks. In some countries, MFIs that rely on local debt markets are less susceptible to cross-border capital. And in some markets, like India and Egypt, the regulators’ responses have allowed MFIs to operate despite the moratoria. MFIs that take deposits have also indicated that in some markets, deposits are up, not down, something that’s counterintuitive but has happened many times before in prior crises. Early signs show that MFIs are likely to be more resilient than expected, and those that have diversified funding sources, such as deposits and local debt, are likely to weather this storm better than non-bank lenders with cross-border debt obligations.
<h3>Fintechs and Platforms</h3>
Unlike in the 2009 financial crisis, today there are more diversified sources of capital, markets and business services for MSEs, including those offered by fintechs and big tech platforms. The <a href="https://www.jbs.cam.ac.uk/wp-content/uploads/2020/12/2020-ccaf-global-covid-fintech-market-rapid-assessment-study.pdf" target="_blank" rel="noopener noreferrer">Cambridge Centre for Alternative Finance</a> conducted a rapid assessment of fintechs globally and found that, on average, fintechs grew in the first two quarters of 2020, by 13 percent and 11 percent respectively. Customer bases and transaction volumes of fintechs operating in emerging and developing markets grew faster than fintechs in developed markets; however, we don’t have sufficient information to assess whether MSEs or low-income people more generally are being served. Data from the <a href="https://static1.squarespace.com/static/5bede261f2e6b1e5ead0a0ba/t/5fce636a74a40730fbccc79b/1607361396896/MIX+IF50+Whitepaper+2020.pdf" target="_blank" rel="noopener noreferrer">Inclusive Fintech 50</a> competition, which narrows the lens to fintechs that serve low-income people and small firms, finds many more fintechs identified MSEs as their primary target market in 2020 than in 2019, signaling that fintechs see an opportunity for growth with this segment. Most of these fintechs offered credit services, but an increasing number also offered insurance to MSEs (see graph below).

<img class="aligncenter wp-image-40936" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/12/Graph-IF50-serving-SME-market--1024x484.png" alt="graph" width="701" height="331" />

It is difficult to unpack the data on platforms and its potential impacts on MSE. <a href="https://i2ifacility.org/system/documents/files/000/000/133/original/Africas_digital_platforms_trends_report.pdf?1587129896" target="_blank" rel="noopener noreferrer">Research by i2i</a> in Africa finds that platforms grew by 18 percent in 2019 across the continent, but it is unclear which types of firms are driving this growth. The largest of these platforms -- Jumia, Takealot, and Konga -- represent ecommerce, which could bode well for small producers selling on them. Anecdotal evidence in some countries could be indicative of something bigger happening with MSEs moving to digital platforms. For example, in Indonesia, platforms like <a href="https://www.thejakartapost.com/news/2020/09/14/bukalapak-gains-3-million-new-merchants-mostly-in-smaller-cities.html" target="_blank" rel="noopener noreferrer">Bukalapak</a> indicated that they have registered 3 million new merchants in the first seven months of 2020.
<h2>So What?</h2>
As I reflect on all of these developments during 2020, I think there is much to be thankful for. There is also some concern that the aggregated results may not be enough to cushion the pain of the pandemic for low-income people and MSEs in developing countries. On the positive side, government transfers to 1.8 billion people has bought some time. But the more fundamental and structural support that enables firms to retain their workers -- and to recover -- are not yet visible.

We have a lot to do in 2021.

Have We Passed the Test? Reflections on the Test of a Lifetime