[Fireside chat] How microfinance can help remake the post-Covid world

  • Paul DI LEO, Grassroots Capital Management PBC
  • Renée CHAO-BEROFF, CIDR PAMIGA / Convergences
  • Ira LIEBERMAN, LIPAM International Inc.

Referring to their book The Future of Microfinance, Paul DI LEO opened the session with an introduction to the writers of the book and then provided some insights into the effects of the pandemic on the MFI target group. He mentioned that surveys on the clients of MFIs showed that there had been a dramatic increase of 30-50 percent in food insecurity and that many of the clients were using their savings to sustain a minimal standard of living. According to Di Leo, microfinance can play a key role in the resilience of their clients to the crisis. To better understand this role and the future of microfinance, he asked the other panellists to first explain how the microfinance sector developed into its current state.

Renée CHAO-BEROFF explained that the microfinance sector started as development projects which were challenged to become more financially sustainable in order to bring impact at scale. Commercialisation of microfinance improved the financial sustainability, but led to a discussion on its mission. To secure its social impact, the sector set social performance standards.

Ira LIEBERMANN illustrated the initially donor driven development of the microfinance sector with the foundation of CGAP. CGAP was supported by 26 donor institutions that provided US$ 300-500 million of subsidies to the sector a year. A decade later, the emphasis on sustainability had taken root and the sector currently consists of many institutions with millions of clients.

As Liebermann anticipates the crisis to continue into 2021 and 2022, he foresees that the microfinance sector will need to go back to basics to support their clients. The sector will have to accept higher risks to be able to serve their clients.

Sub-Saharan Africa is a particularly challenging environment for MFIs, and Di Leo asked Chao-Beroff to share her experiences with supporting companies in that region. Chao-Beroff first shared her insights into the effects of the pandemic on the companies. Rural clients were hit by an economic crisis following the pandemic, as prices for their products went down and logistical problems caused a lot of product losses. As a result, many companies will default on their loans and MFIs will face liquidity and solvency problems. In response, MFIs will have to help their clients to build financial and technical capacity to find new business models. For example, exporting companies facing a decrease in demand due to the pandemic will have to serve local markets.

In order to become more resilient in the long-term, companies will have to find business models that can survive different types of crises. Besides the current health and economic crisis, many countries are also facing environmental crises, such as droughts.

Di Leo then asked the panellists to share their views on the roles of different actors in dealing with the crisis and ensuring that microfinance can continue to contribute to the well-being of their clients. Liebermann identified three important actions to support clients during the crisis. Firstly, moratoria are expiring and may need roll-overs to give people breathing room. Secondly, lifelines of people must be supported. Finally, donor institutions need to provide emergency funding to address liquidity problems in the sector. Chao-Beroff added that the liquidity support from donors is particularly important for smaller MFIs, as large banks will be supported by their governments. Di Leo pointed out that there may not be enough money around to serve all institutions that are decapitalized. Finally, Chao-Beroff identified a fourth action to deal with the crisis. In her view, MFIs need to develop digital delivery channels to deal with the effects of COVID. The digital solutions should be client-centric and the MFIs will need technical assistance to develop such digital solutions.

According to Liebermann, previous crises have shown that MFIs will also need to participate in systemic workouts. He foresees that vaccines will not be readily available in the developing world soon and that, in some cases, extended workouts of 5-6 years are needed instead of rollovers. This may imply that some MFIs will not survive the crisis. In their turn, investors will have to focus their support on MFIs that are viable in the long term.

Di Leo then asked Chao-Beroff to explain the difference between financial access and financial inclusion and if the differentiation helps the microfinance sector to focus its efforts. Chao-Beroff explained that financial access relates to the quantity of people reached with financial services. Financial inclusion is a more qualitative approach to financial services delivery. Financial inclusion focuses on the most vulnerable people and the constraints that exclude them from accessing financial services.

Di Leo was also interested to hear from the panellists how smaller MFIs with less resources can implement digital tools. Liebermann warned that development of digital tools is expensive and time-consuming, and that this is not an opportune moment to focus on development of digital financial services. MFIs must first deal with rollovers and losses. Chao-Beroff agreed that MFIs without the capacity to deliver digital financial services should not start now. However, she added that MFIs that have already started a digital transformation could use it to their benefit, as it will help them to bring costs down. Donors should provide support to accelerate the digital transformation.

Audience member Sahanna ARUN pointed out that digital transformation involves building a strong strategy and that the importance of such a strategy is often times underestimated. Chao-Beroff responded that digitalisation does not imply high tech and low touch. High touch may still be needed to deliver better client services. Di Leo added that clients often do not even notice digitisation as it takes place in the back-office.

Finally, Di Leo asked the panellists to share their views on the value of microfinance in the years ahead. Should investors anticipate less profitability and focus more the sustainability benefits of microfinance? Lieberman argued that demand for services from the microfinance sector could increase as the number of poor people increases. However, he anticipated a moderate to low profitability in the short-term and a need for workouts and rescheduling. Chao-Beroff added that this is the right time for blended finance. Donors such as the EU are providing money to cover first losses and to enable other social investors to take higher risks. Additionally, donor funds can play a key role in financing technical assistance. More collaboration between the different players to improve the microfinance system will ensure that the microfinance sector will continue to grow and improve its services to clients.