Davide CASTELLANI opened the session, introducing himself and co-moderator Max NIÑO-ZARAZÚA. Both are part of the Action Group on Research (AG), that aims to bridge the gap between research and practice on financial inclusion and microfinance. AG conducted research on the consequences of COVID-19 to the financial inclusion value chain. Castellani and Niño-Zarazúa shared the theoretical background and some preliminary results in a short video.
The financial inclusion chain was heavily impacted due to lockdown policies and mobility restrictions. Small retail businesses and smallholder farmers in commodity value chains were most strongly affected by the lack of access to finance. Moreover, trade was restricted, and the food value chain was disrupted. The agricultural sector turned out to be most resilient; in Tajikistan, for instance, the agri-loan portfolio outperformed consumer and business loans.
The most pressing risk stemming from the pandemic has probably been the shortage in liquidity due to factors such as increased withdrawals and less funds from investors. Credit risks are a second priority, due to movement restrictions and clients being unable or unwilling to repay loans. MFIs also face operational risks due to sick employees or fraud and procedural errors, for example.
These risks have led to challenges for financial service providers. Several MFIs have moved to digital channels to communicate with their clients, or have developed digital products and services to acquire new clients. However, digital services can exclude the poorest clients, as such services may be costly and less accessible to them due to the lack of good network. To resolve this, MFIs may use mixed models, such as through mobile lending agents. An important risk for investors is whether they eventually will be reimbursed, or whether they will be able to provide new funds.
Niño-Zarazúa introduced the panel and opened the floor for discussion. He explained that the session would take Mexico as a case to discuss how different stakeholders in the financial inclusion value chain responded to the COVID-19 crisis. He mentioned Mexico to be an interesting case since the country has a mature finance sector with a strong focus on financial inclusion.
José Manuel GONZÁLEZ, from Te Creemos Holding, presented the situation from an FSP perspective. Te Creemos is a regulated financial institution that was established in 2005. It has a large credit portfolio, specialising in micro-credit. The main liquidity risks that González sees as a result of the pandemic are credit recovery, finding funds, expenses, and savings permanence. The Mexican security commission involved the whole sector to design different tools to face liquidity and credit risks. He also noted that Te Creemos created a weekly liquidity committee to closely monitor the different flows in the organisation. The institution was in contact with different funders to ensure greater continuity as well as with the Mexican development banks so that they could face any potential liquidity risks.
Credit recovery is crucial for Te Creemos; González explained that they wanted their clients to be able to comply with this difficult situation. Therefore, the institution allowed clients to pay 50 percent of their periodical quota, also helping them to advance the loan, and to renew operations by granting them a grace period to pay back loans. In addition, Te Creemos implemented a loan model that included a savings program. The savings accumulated by the clients have been crucial in facing the compliance of their loans, and savings capacities of their clients were increased. In terms of the operations of the institution, staff changed to virtual meetings and found that they could carry out more tasks in that way.
José Antonio QUESADA, from the Mexican Banking and Securities Commission, then shared how a regulatory authority responded to the crisis. The institution just released a second flexibility package to restructure and renew the banking sector. Although the sector in Mexico still has a long way to go to recover from the pandemic, Quesada highlighted some positive developments. Due to the crisis, and in close cooperation with the sector, they were able to take measures that would otherwise have taken months or years to implement. He explained that regulators provided more liquidity support by fostering the use of digital transactions, which helped people to continue with transactions. Digital channels are now being expanded to the whole population. He appreciated how clients are more at ease to use such digital means.
Maria Teresa MEDINA, from Global Partnerships, presented lessons learned during the pandemic from an investor’s perspective. She explained that investors with the best result had great communication with all stakeholders, handled liquidity to preserve their cash flows, and frequently assessed operational scenarios. Global Partnerships decided that regular consultation with all their partners was key to face the crisis in Latin America. Main concerns were understanding the exact compulsory measures that the governments took; how the crisis impacted MF clients; what challenges MFIs faced; and, what actions their partners were taking to deal with the crisis and help their clients recover. Medina added that Global Partnerships did not open credit lines to new partners, and specifically focused on liquidity and leverage of existing partners. They tried to renew, or in a few cases increased credit to support those partners that did not suffer strong debilities from the pandemic, and they rescheduled capital payments due in 2020, by offering a term extension to all partners that requested it. Global Partnerships aligned more frequently with other funders, to ensure that they had the same level playing conditions for all MFIs.
Niño-Zarazúa then asked the panellists to discuss opportunities that this pandemic could offer. González explained that Te Creemos had already been looking at tools for remote proximity services, in order to reduce costs and lower prices for clients. They redesigned products, and focused on savings related to credit. The institution also looked at group credits used to protect clients against natural disasters, and piloted a new platform for this type of insurance that would not have been possible in the past. To consolidate in the market, they joined forces with other financial institutions to create a stronger position.
Medina agreed that consolidation strategies are an interesting opportunity. Financial institutions that have not been able to face the crisis have joined forces and were able to gain access to other points of financing, as well as additional services and an improved portfolio. She added that digitalisation has been sped up by the pandemic and has become more efficient.
On the regulator’s side, Quesada reminded the audience that not everyone has the same opportunities to digitise. Although digitalisation should be encouraged, he also added that clients need to understand the risks and advantages of digital channels. Financial inclusion is still high on the regulation agenda, especially stressing digitalisation and ensuring that the whole population has access to digital channels and that they are protected. González added that, in order to make use of digital opportunities, digital education is key, as well as improving operational capacities of MFIs.
Medina explained that flexibility has been an important characteristic to survive in this crisis. As rural agricultural and micro portfolios performed better than city portfolios, she concluded that MFIs should diversify their portfolio to reduce risks. Quesada concluded the session by suggesting to add such segmentation in policies and rules of regulators.