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

by Robert Christen

Robert Christen is President and founding member of the Boulder Institute of Microfinance. Mr. Christen has held several positions including Deputy Director General at Banco Compartamos in Mexico,  Professor of Practice in the Maxwell School of Citizenship and Public Affairs at Syracuse University, Director of Financial Services for the Poor at The Bill & Melinda Gates Foundation, and Senior Advisor for CGAP at the World Bank.   He has had a prolific career advancing the work of leading microfinance institutions in diverse regions of the world including Mexico, Brazil (Banco Noreste), Tanzania, Chile (Banco Estado), China, South Africa and more.

Surely the pandemic has arrived in your country with its border closures, orders to shelter in place, social distancing, shutdown of non-essential businesses, and government programs to mitigate its’ consequences. 

The ability of the low-income families to accommodate these health recommendations varies greatly across the globe as does the ability of national health systems to handle the epidemic once it gains ground. Among the poorest families the choice is whether to follow health recommendations, or work for their daily ‘bread’. A great many do not have several days store of food, although these may well not be our typical microcredit clients since they are probably poorer.

As the pandemic gains ground, it will generate a substantial impact in our clients’ economic circumstances. Their vulnerabilities will be exposed as never before. They will carry the fullest brunt of the pandemic. They have the weakest immunity, the least access to quality health care, water and sanitary facilities, the fewest assets to fall back on, and won’t be able to engage in the most basic of protections – social distancing over the course of many months. Many of the low-level salaried positions among their extended family members will be eliminated as formal companies downsize. The crisis will increase absolute poverty levels as many families drop below the line and there will not be very many opportunities to climb back out for many months.

“The pandemic will generate a substantial impact in our clients’ economic circumstances. They have very little opportunity to engage in the most basic of protections – social distancing over the course of many months.”

Unlike many other crises, the pandemic threatens the broad economy and, in some countries, the economic activities of as much as 80 percent of the employable population. It will affect not only those families who have a sick family member but will also affect the general population through the prohibition against gatherings of more than a certain minimum of persons. That, in effect, will shut down markets, small businesses, and public functions that are considered non-essential where so many of our clients generate their incomes.

How should we react?

First, as a Financial Service Provider we need to ensure that we and our staff are as safe as possible. Engaging in social distancing, wearing masks when outside, frequent handwashing with soap for a minimum of 20 seconds, and keeping your hands away from your face are indisputable tactics to reduce contagion – and not so easy to adopt rigorously. Preaching constantly and otherwise facilitating each of these measures to the maximum extent possible would seem to be necessary to keep staff as healthy as possible, even though many live in homes where these practices may not be honored. This educational campaign should be accompanied by supportive materials that help them in their home environments to keep their extended family as safe as possible. 

This is especially critical if they have family members who have been declared as essential workers and are continually exposed to the virus during their daily activities. Ask your staff to reflect on these measures. Can we help our clients ensure that these family members be somewhat isolated from others who are more vulnerable? Can they disinfect themselves and their clothes as they arrive home? Can they wear masks? In short, can we encourage families to take measures that can diminish transmission risk in tight quarters?

“Engaging in social distancing, wearing masks when outside, frequent handwashing with soap for a minimum of 20 seconds, and keeping your hands away from your face are indisputable tactics to reduce contagion – and not so easy to adopt rigorously.”

Second, can we help our clients, to the extent possible, apply these same criteria in their extended families. It is almost impossible to quarantine infected family members when they are asymptomatic, but can that be done once they show signs of the illness so as to prevent contagion when they are at their most infectious? MFIs should provide educational materials to clients and engage in conversations with them to reinforce messages?

Aside from this educational role, MFIs need to consider how they can substitute much, if not all, of their direct contact with clients and groups of clients. In many cases, clients may already have limited their meetings to some extent, even before the coronavirus and may be using social media and chat to communicate among themselves and with loan officers. This varies by country, but there may be great opportunities to build on informal mechanisms that already exist and simply need to be brought out into the open as an acceptable form of a new group lending methodology.

Without question, the COVID-19 pandemic represents a most significant driver of the need to digitally transform the operations of MFIs. The pandemic and its effects are likely to linger for at least two years or until widespread vaccination is available in our target markets or these gain herd immunity through widespread exposure and illness. We will not return to normalcy in less time and our staff will be unwilling to expose themselves to illness if they have a choice. Providing a safe environment may well be necessary to retain quality staff. In many countries, clients may end up less willing to join group meetings, especially if competitors don’t require them to do so. Moving to a digitally enhanced method for managing loans may turn out to be a necessary survival technique for the MFI.

Third, MFIs represent one of the very few organizational structures available to governments to distribute cash, food, or other support to poor neighborhoods. In many countries as many as one third of our clients are poor enough that they qualify for government conditional cash transfer programs, in spite of the fact that they are creditworthy and have a steady enough income to support regular loan payments. They also live in close proximity to families who are even lower on the income scale; in fact, many of their extended family members may fall into that category.

“MFIs represent one of the very few organizational structures available to governments to distribute cash, food, or other support to poor neighborhoods”

So, MFIs are a perfect vehicle for governments, as long as the support is not to be distributed in a way that distorts who can receive it in an overtly political fashion to reward loyalty to a specific party. And, to the extent microfinance has developed agency relationships with payments networks of local shops, post offices, or other retail infrastructure, they can distribute funds or species close to where clients live and work. Hopefully, this can reduce the need for these families to travel greater distances to get support, and preserves social distancing, to the extent possible. This is an opportunity we should explore, even though governments are usually too bureaucratic for our normal operations.

Fourth, many of our leading MFIs remain closely connected with nonprofits in the development or philanthropic arenas. These organizations may need the support of MFIs to get their social services out to target families. MFIs can connect families to curated social services that alleviate, to some degree, their situations, and can thus reinforce their social impact. Larger MFIs have been quite profitable over the past decade and it is an ideal moment to communicate to the general public that our origin and part of our reason for being continues to revolve around the progress of low income families and addressing the sources of their vulnerability. As many of us have gotten closer to the world of consumer finance – which is an inevitable progression in the evolution of financial markets globally – this distinction must represent an intrinsic advantage and calling card.

“MFIs can connect families to curated social services that alleviate, to some degree, their situations, and can thus reinforce their social impact.”

?Fifth, we need to adjust our product methodologies (techniques and policies) to achieve more flexibility in managing the situations of individual clients and client segments. If done responsibly, allowing for restructuring, refinancing, suspending interest and commissions payments, and, in extreme circumstances, pardoning loans altogether, compose the repertoire of effective tools for portfolio management. In addition, encouraging savings accumulation and offering a number of insurance products can also address areas of vulnerability ahead of potential events such as the COVID-19 pandemic.

MFIs that continue to offer only one product and maintain extremely rigid loan management policies and procedures are at a disadvantage in the face of the flexibility that is needed to manage the impact of the pandemic. The pandemic will strike different regions, different client segments, and individual families in diverse ways. If MFIs cannot develop regional level or even client level responses, they run the risk that whatever response they come with will favor some to the detriment of others. They will unnecessarily forgo income they could have generated from clients for whom the crisis has provided an opportunity and will potentially prejudice others for whom the crisis has a devastating impact. Some clients will want to keep their loan cycles going normally while others, will need to restructure. This will be critical to best serve the needs of clients in these extreme circumstances while everyone around them experiences something similar. At an extreme, in some countries, rigid adherence to group lending methods and an over insistence on solidarity as the risk mitigation strategy can degrade the concept of solidarity permanently and require the MFI to evolve to more individually based methods.

Finally, the COVID pandemic will provide ample opportunity to separate well run organizations from the pack and consolidate services in the hands of those MFIs whose services prove to be most desired by their clients. The crisis may well extend for many months or even a couple of years before we can get a vaccine into broad use or attain herd immunity. The next phase of microfinance must be about more completely serving the poor in their phases of life, vulnerabilities, and opportunities. It must be about designing products to the specific goals and cash flows. Organizations that discover how to fill in the major gaps in the provision of financial services will prevail. And, there are many! COVID-19 has provided a grand motivator to focus more on the individuals in our portfolios and their economic lives.