PART II – Thoughts on How Financial Service Providers Can Respond to the COVID-19 Crisis by Robert Christen

The COVID-19 is unprecedented in terms of its global scale and depth of impact on economic activity. In many countries it has hit the real economy where our clients live and operate directly and ferociously. This is particularly true during the lockdowns. Also they may be affected by voluntary social distancing measures. Many of our clients have no choice but to try and carry on as normally as they can in order to survive. But, our own staff will have heightened expectations as to how we will keep them safe. And this, can seriously restrict our normal way of doing business. At a global level, COVID-19 is unlike any other crisis we have seen in our lifetimes. We will need to conjure a great many specific responses for the exact impact of the crisis on our and our clients’ operations.

Nevertheless, when we think about how to respond on a local or national level to the effects of COVID-19, the nature and impacts of prior crises can tell us a lot. Over the past 40 years, we in the microfinance community have weathered any number of these. Many start in the financial sector and eventually work their way through into the real economy. The examples of the Bolivian or Peruvian hyperinflations of the 1980s, the collapse of the Indonesian Rupiah in 1997, the 2008 global financial crisis provoked by the sub-prime housing debt bubble, or the Ruble crisis of 2015 come to mind. Some of these have relatively lesser impact on the informal sector and its real economy given the extremely limited bank penetration and amount of private credit in the lower income levels of the economy.

Other crises are born out of natural disasters like the double events in Haiti of the severe earthquake of 2010 followed a couple of years later by the devastating hurricane Matthew; or like Typhoon Haiyan in the Philippines of 2013; and the floods in Bangladesh of 1997 or Pakistan in 2010. These can have a devastating and immediate impact on our clients’ lives since many reside precisely in the areas that tend to get hit the hardest, and the governments of the poorest countries are often unable to render much assistance.

And still others have their origins in epidemics like the HIV/AIDS crisis in Eastern and Southern Africa of the 1980s, bird flu in East Asia in the 1990s, H1N1 swine flu in Mexico in 2009, and more recently, Ebola in Western Africa. In these cases, the impact develops more slowly, but in a way that changes life in profound and sometimes permanent ways. These diseases and their outbreaks can alter the normal operations of MFIs for months or even, years.

[1] This is the second in a series of notes on responses to the pandemic. They are both available on the Boulder Community Corner.

“Flood affected women gather for food relief at a distribution area within a relief camp on August 28, 2010 in Hyderabad”. Photo: Asianet-Pakistan / Shutterstock

Although some of these were more damaging than others to national economies, in almost every case I mentioned, some major MFIs confronted existential crises. The economic impact on their clients’ livelihoods was such that cash flows from repayments to MFIs were put in jeopardy. And consequently, earnings, capitalization ratios, and funding were threatened to a point where the continuance of the organization was put in some doubt.

I mention these cases because, although the COVID-19 pandemic is a different beast, when you look at its impact on a local or national level we can still learn from these other events about ways we might respond. In almost all of these cases, the livelihoods of our clients were eventually impacted in a negative way. As well, we saw our own financial results suffer. Most importantly, our ability to have a positive impact on the lives of our clients was also degraded because our weakened financial position can end up taking extra resources away from any non-financial response we might have wanted to put in play.

When I look back on my 40 years of experience in microfinance, in more than 50 countries, I have seen or helped organizations through plenty of those crises and have a few thoughts I would like to share.

But first, given the specifics of the COVID-19 virus, it is our obligation to understand as much as is possible about this particular pandemic, its nature and its impact, and mitigation measures to keep ourselves, our staff, and our clients as safe and healthy as possible. There are a number of world class authorities on these matters, and while there is some debate on specific measures and timing, the basic measures of social distancing, use of masks, and frequent and thorough hand-washing to flatten the curve are clear. Unfortunately, these are not always practicable in our clients’ lives around the world. Nothing in this series of notes should take the place of an understanding you might be reaching as to how the virus plays out locally and how you should respond.

The single most important conclusion I came to many years ago is that we must always remember that even the most severe crisis will impact each of our clients differently. This our greatest area of opportunity; to respond accordingly to each client’s own situation! 

I first read about this phenomenon in a paper by the President of the Central Bank of Ceylon, Sri Lanka today. Nimal Sanderatne wrote the paper about defaults on farm loans in the 1970s and demonstrated through the use of localized data across the entire country that the impact of particularly difficult weather events did not track closely with defaults, nor ultimately, with farmers’ incomes. In heavily impacted areas, the losses were not total and higher prices earned due to the lowered production levels significantly balanced out farmers’ incomes. This suggests that the widespread use of forgiveness programs was probably unnecessarily costly and that a more targeted approach would have been better.

I learned this more personally when I was sent to Bolivia to set up one of the very first microcredit programs (PRODEM) in the middle of one of the world’s historically high hyperinflations. Prices were increasing at the rate of 100 percent some weeks and the annual total was 110,000 percent. The most significant import during that period was new printed currency which came in plane loads to replace the inflated-out currency.  For a while, we were reduced to bartering for basic foodstuffs since these were relatively unavailable in the local markets. But, even in these circumstances, my study of the economic activity in the massive and very dynamic market areas of La Paz revealed that in the chaos, there were winners and there were losers.

Inflation is the average of the increase in prices of a basket of commonly used goods. Since it is an average, some goods increase at higher rates and others at lower rates. This means that some microentrepreneurs can raise prices at a faster rate than others; and some activities stop altogether while others constitute essential parts of daily living even in the worst of circumstances. Potential clients who were selling basic foods did really well, while those who embroidered the massively expensive costumes used in the annual carnival activities did very poorly! 

So, as a first step we need to understand how each crisis affects each one of the broad segments of our clients more specifically. We need to be able to decide on different policies in different regions. Or tailor them for different economic activities, or for different degrees of impact and not simply make national level decisions without first understanding whether this makes the most sense for virtually all client segments.

Let’s return to the example of Bolivian hyperinflation I mentioned above and look at the cases of the bread makers and the embroiderers. If in our response to the crisis, we were to suspend all loan payments or renewals for a couple of months to help our clients deal with their loss of income, we would help the embroiderers a lot, while starving the bread makers of capital when they most need it! Or, as in the case of the farmers Sanderatne wrote about, if the bank that unnecessarily forgives loans is less willing to provide additional funding the next year to those same farmers. Consequently, those who could actually have gotten by with a minor adjustment in their loan terms might be deprived of funding altogether.

In the case of the COVID-19 pandemic, many microenterprises will suffer a relatively minor loss of income due to social distancing policies, while others will face a very real choice between eating or engaging in whatever economic activity will continue to let them generate the income they need to survive. If their activity depends on continued loans, their suspension aggravates the situation when the microenterprises most need the support. In the other cases, clients may need to borrow to keep food on the table, trusting that they can repay at a later point when their business can resume. These different scenarios present very different risk profiles and call on MFIs to develop a far more nuanced approach when deciding how to engage more flexibly with clients.

The second most important conclusion that I came to over the years is that we must have developed a full arsenal of financial products that allow us to offer clients alternatives to manage the impact of a crisis on their individual lives. Sometimes the impact is that they lose income for a period; such is the case for a hospitalization. Unless they run an enterprise that keeps generating income during that period, they may need interest forgiveness, and even potentially an additional amount on top for medicines. Or, maybe the business simply runs more slowly due to the absence of the owner and they just need a rescheduling of payments. Additionally, we can hope there would have been an insurance in place for such eventualities. That insurance would also have had the added effect of protecting the MFI’s loan portfolio.

Or, maybe the microenterprise is in greater demand than before and it needs refinancing to grow. This could be the case of some small shops where people under quarantine can go out locally and buy basic goods to avoid the long-distance travel to larger wholesalers or supermarkets. There may be a run on certain goods that require restocking well before the prior loan has run its course. In other cases, very adaptable microentrepreneurs need to finance an entirely new line of COVID-19 related business, like making masks or hand sanitizer! They might need to repay a prior loan with the proceeds of a new loan and have money on top to get the new business rolling.

“Bangladesh – March 30, 2020: Demand for face masks in Dhaka has intensified amid public concerns over the outbreak of the deadly coronavirus covid-19 worldwide.” Photo: Jahangir Alam Onuchcha / Shutterstock.

In short, MFIs need to have the ability to extend loan terms, suspend interest payments or commissions, refinance with additional funds, restructure, provide loan forgiveness in the case of real inability to ever repay. And they need to be able to offer insurance for a broader range of events and savings to provide a cushion for random, yet likely needs.

In addition to its traditional credit, savings and insurance services, MFIs can provide one of the most effective distribution mechanisms for governments to distribute cash support to low income neighborhoods and villages.[2] There are relatively few, if any reliable organizations that have the penetration in low income parts of the economy. MFIs usually operate in a non-political and technically sound way, and understand the financial capability of poor families. And, many MFIs have retained connections to a broad range of non-profit and relief agencies with whom they may partner in providing non-financial support or cash transfers.

A crisis always generates significant opportunities. Less well-run micro-businesses may well collapse while others will see opportunity to grow or change their line of business. A funder needs to be prepared to address the specific client dynamics of either case. This requires a far higher degree of attention and management than in normal times. In the present pandemic, it seems like most microenterprises will be negatively impacted, but to what degree will vary greatly among them.

[2] The first article in this series focused more on the non-financial support organizations might offer. https://www.bouldermft.org/blog/2020/05/07/114/

“People buying and selling in front of a collapsed building in Port-Au-Prince, Haiti on August 21 2010”. Photo: rindambanerjee / Shutterstock

This suggested approach is particularly hard for MFIs that continue to operate with a mono-product approach and whose back-office systems cannot easily accommodate the one by one responses we just suggested. The dilemma for mono-product organizations that face a broad economic impact like the COVID-19 is that the solidarity mechanism upon which they rely on can also become degraded; in some countries possibly degraded to the point where it might not survive. We will take this up in a future note!

The third most important conclusion that I came to is that a crisis requires intense management from the senior and mid-level teams; far beyond normal levels. I remember in 1997 visiting the CEO of ASA in Bangladesh right after the massive flooding throughout much of the country. As I recall, their repayment rate ended up dropping only by one percentage point from around 98 to 97 percent – which under that circumstance seemed incredible. Other Bangladeshi MFIs were claiming far greater losses from the flooding. He said that the key to their success was that their loan officers were working 50% harder than normal. They were effectively working 12 hours a day for weeks on end. They needed to spend time with clients, listen to their stories, work with them to figure out solutions and maintain loyalty to the program. And, management was supporting their loan officers with equal levels of commitment to succeed and to set expectations. According our observations and conversations with leaders of MFIs, this approach also proved effective in West Africa during the Ebola crisis.

“Ebola response epidemic disease in Africa. The burial team takes a dead person from the interior of a house in Lunsar, Sierra Leone”. Photo: Belen B Massieu / Shutterstock

We are never really fully prepared for these crises; their character and timing is never perfectly predictable. Human nature is such that we do not expend unnecessary energy on low probability events. So, that means that when they arrive, they require extraordinary effort. And, they typically require extraordinary discipline because the most appropriate response often requires us to manage a greater level of flexibility. The flexibility is necessary to accommodate the different impacts a crisis has on different individuals and their economic activities. An undisciplined response runs the very real risk of both unnecessarily giving away income that could have been derived in spite of the crisis and failing to more precisely serve the needs of those for whom the crisis represents more of an opportunity. And MFIs need to respond quickly and effectively if they are going to offer real solutions, and not get mired in paralysis by analysis!

COVID-19 has the potential to lead to a great deterioration in the performance on loan recoveries which in turn, can lead to a dramatic weakening of an MFIs financial results. This, in turn, can have the knock-on effect of reducing their access to external funding. Many sources of external funding can be quite conservative with those MFIs they feel represent increased repayment risk, and they will reduce their exposure. This puts further pressure on microfinance portfolios. An MFI that is too highly leveraged may face regulatory pressure to add capital when it is least attractive for investors to do so.

Nevertheless, a highly disciplined organization, and especially one that either has a head-start on contingency planning or a highly capable director-level team, can actually come out of a severe crisis like COVID-19 in a far stronger position in relation to others in the sector. Most of the times, these organizations will find ways to protect their relationships with critical segments of clients, even while diminishing the size of their overall portfolio and their expenses. The contraction of a loan portfolio, if accompanied with a contraction in the levels of staffing, while painful, is often the healthy way to stay in the market while a crisis works its way through the system.

An adequate response from an MFI typically requires flexibility in the management of normal business. As I mentioned above, we need to segment clients and adapt our individual responses. In highly standardized operations like ours, senior management needs to dedicate substantial time and energy to re-engineer the back-office support for this flexibility. It needs to communicate repeatedly the instructions to front line staff on how adjusted policies and new product alternatives will be deployed. You can’t just send the memo, especially if you want line staff to do things differently than in the past!

Front line staff will always perceive a risk in these suggested changes. As humans, our status quo bias leads us to be naturally cautious in the face of the unknown consequences of changes when we are being asked to do things in a different way than we have been accustomed. To line staff, this needed flexibility will constitute a weakening of the tight discipline our they have developed with their clients. This natural caution requires senior managers to invest in a major effort to engineer solutions up-front so that new procedures, possible scenarios, and consequences for all sorts of client segments can be carefully thought through and accommodated ahead of time, before they ask loan officers to change the way they manage clients in the field.

The fourth most important conclusion I come to is that COVID-19 represents an opportunity to establish your MFI as a compassionate, permanent support in the lives of your clients. MFIs need to segment their responses to the distinct impacts on groups of clients, and within that, develop the product mix that allows them to respond individually to the specific circumstances of each family in a practical manner. If they can do so, they will stand out among their peers in the perception of the market. If an MFI supports its clients in their time of need, then perhaps, in the minds of their clients, it can be relied upon at all times. And this in turn will generate a substantial loyalty. If an MFI is viewed by the general public to have behaved in an honorable manner – within the reasonable bounds needed to maintain its own economic viability – then it can build additional political capital and keep more fully to the original social purpose for which so many of us entered into this field.

To get there, we need to be able to pass a simple test. Clients have often been with us for many years and contributed mightily to our bottom line and may well be suffering from a rare, but profoundly negative economic distress. Have we responded in a compassionate way, that respects the value of a long-term relationship?   Ultimately, we will be measured by the quality of our response, especially since in many countries we are already being questioned for the relatively high rates of interest MFIs charge for their services.

In this socially connected world, the general public has a quick and powerful way to express outrage through social media. In global level corporations, cognizant boards of directors are paying far more attention to the overall perceived value to society of their companies and not just quarterly earnings reports and share value. This means that they are recognizing that it is no longer sufficient to just give back in the form of corporate social responsibility or philanthropy. The general public is increasingly measures the total value to society of all of a company’s activities.

They ask questions that are broader than in the past. Are the company’s clients treated ethically and with respect? Do they have recourse and are they being communicated with in a transparent manner about the nature of the relationship in which they are engaged? Are its products or services exploitative or otherwise harmful? Are its HR policies in keeping with human dignity and a living wage?  Is the company a careful custodian of the planet – do its processes cause irreparable harm to the environment in which we live? These are the sorts of questions boards must increasingly confront, especially during a crisis that affects the company as a whole.

Financial services have always had a fraught relationship with the general public. Since the time of Aristotle and in most faith traditions, making money with money (interest) is either prohibited outright or seen as unseemly. Across the globe, we periodically experience waves of interest rate repression, debt forgiveness, and other policies that express the frustration of the general public with banking. We can’t live without it, and we resent it at the same time, especially if we are having difficulties with our own personal finances. So, in the face of widespread economic difficulties, it is relatively easy to scapegoat banks and financial institutions if the general public perceives that they are putting unreasonable demands on their ability to get by. 

Many of our MFIs have been enormously profitable over the past decade. We will need to examine the manner in which we should respond ethically to the COVID-19 challenge. Simple debt or interest forgiveness, applied broadly, may seem like the easiest and most sufficient response. It may also be the most limited in terms of taking advantage of this moment to re-establish a more compassionate and supportive relationship with our clients well into the future. Perhaps, we should take a more nuanced and sophisticated approach.

A final note on digitalization is in order. We have appropriately placed a lot of emphasis on the digital transformation of financial services for the poor. In this age of social distancing, it is clear that we need to be doing as much as we can with our clients through digital communications. Our staff will demand it in many countries. How far we can go will depend greatly on the degree to which our clients have access to smart phones and cheap data plans. In some countries, most clients may already have Facebook accounts and smartphones and it would be relatively easy to move all our communications to WhatsApp. WhatsApp has proven to be quite successful since even illiterate clients can communicate by voice, as we saw in West Africa during Ebola. Elsewhere, it may not be as easy, but it is certainly worth exploring. We may need to challenge our assumptions about the willingness or ability of our clients or their families to engage digitally.

But, too much of our attention has been on the digital origination of loans and the development of payments infrastructure, often to the detriment of the opportunity to individualize and deepen our personal relationship with clients. In a time of crisis, clients turn to us for support, and that means talking through financial situations, options, products, or scenarios. Maybe we just need to listen to their difficulties with a sympathetic ear.

Some years ago in the Dominican Republic women responded to a survey by a bank that the service they would most appreciate is simply support in dealing with the challenges of raising children alone and the everyday problems of juggling their domestic duties with their businesses – rather than another loan. Maybe, the time our loan officers save by not traveling can be spent communicating with clients about the situations in which they find themselves.

As I mentioned earlier, many of our MFIs have direct links with the non-profits or foundations that birthed them. And, they have relations with others too. This might be a great time to focus on broadening the impact areas of our organizations without detracting from our core competency. So, in addition to broadening the design of our financial products to more fully encompass the diverse situations in which our clients find themselves, we also have an opportunity to link clients with other services they might find useful at this moment. Digitalization of information, data on clients and their specific circumstances, and real-time communications platforms all provide a far more tailored, powerful way to engage with the families we serve. And we serve in a deeper way for far more families in most countries than almost any other group! This is a historic opportunity to impact the lives of our clients more profoundly.

*I especially want to thank Consuelo Mu?oz, of the Boulder Institute, for her extensive comments on both of these first two notes about our response to the Pandemic.

REFERENCES:

Here are some references you might find interesting about prior crises with impacts and responses from microfinance institutions: Most of these have links on the internet, a couple are book chapters.

Brown, W., Nagarajan, G. (2000) Bangladeshi Experience in Adapting Financial Services to Cope with Floods: Implications for the Microfinance Industry. U.S. Agency for International Development, Bureau for Global Programs (2000).

De Haas, A., Luttikhuis, T., Van Raaij, R., Strootman, R. (2017) The Development Impact of Local Currency Solutions. TCX / Carnegie Consult. (Currency crisis in Azerbaijan)

Donahue, J., Kabbucho, K., Osinde, S. (2001) HIV/AIDS -Responding to a Silent Economic Crisis among Microfinance Clients in Kenya and Uganda. MicroSave.

Foucalt, H., Herns, L., Clérismé, C., Jacobsen, K., Marshak, A. (2013) Disaster Risk Reduction and Financial Strategies of the Poor: Demand for, Access to, and Impact of Cash in Haiti following the 2010 Earthquake. Feinstein International Center Tufts University / Inured.

Gonzalez, G., Villafani, M. (2011) Microfinance in Bolivia: Foundation of the Growth, Outreach and Stability of the Financial System. The Handbook of Microfinance, World Scientific Publishing Co., 203-212.

Laurine, C., Farai, K. (2013) Surviving the Challenges of Micro Lending in a Hyperinflationary Environment: Zimbabwean Case. Entrepreneurship and Innovation Management Journal Vol.1, Issue 1, 115-122.

Robinson, M. (2002) The Microfinance Revolution Vol. 2: Lessons from Indonesia. The World Bank / Open Society Institute (2002), 365-408. (Indonesia Rupiah devaluation crisis discussed extensively)

Sanderatne, N. (1978) An Analytical Approach to Small Farmer Loan Defaults. Savings and Development, Vol. 2, No. 4 (1978), 290-304. (Farmer defaults due to weather in Sri Lanka)

Swiderek, D., Wipf, J. (2015) Aiding the Disaster Recovery Process: The Effectiveness of Microinsurance Service Providers’ Response to Typhoon Haiyan. Microinsurance Network.

Woodworth, W. (2006) Microcredit in Post-Conflict, Conflict, Natural Disaster, and Other Difficult Settings. Marriot School, Brigham Young University – US.