Valeria PUJIA, Consultant Financial Inclusion
This session reflected on the study that was conducted by the e-MFP ‘From Research to Practice and Back Again’ Action Group (AG). The study analysed the challenges and risks faced by the financial inclusion value chain actors during the COVID-19 pandemic. It took into account the view of clients, FSPs, investors and donors, as well as policymakers and regulators, in order to identify new arising opportunities and lessons learned that can be generally applied to similar crises.
AG co-head Max NIÑO-ZARAZUA opened the session by first presenting the main objectives of the AG, being: the promotion of learning; identifying research needs and sources of data; and, translating research results into practical guidance and solutions.
Next was Valeria PUJIA to present some of the main research findings on ‘COVID-19 and the Value Chain of Financial Inclusion’. Based on mostly qualitative insights, the report is rich in examples and references (forthcoming, with an executive report), summarising the challenges and risks, and the opportunities and lessons learned from the perspectives of regulators, investors, financial service providers, and their clients. The impacts of COVID-19 are still unfolding for clients, based on their particular circumstances, and will probably lead to difficulties honouring their loan commitments and increased financial demands. At institutional level, numerous welfare initiatives had to be undertaken by governments, in many cases through digital channels. Given the limited means, policy makers and regulators had a challenge to identify where to best intervene.
For FSPs, measures undertaken were mostly in the areas of portfolio and risk management, and they registered problems with loan collection and limited loan disbursements. For investors, main areas of intervention were in debt relief instruments, capital injections, and other means of support. In turn, they requested more frequent reporting of FSPs, and better coordination with other lenders. Pujia mentioned 3 main risk areas that may affect the financial inclusion value chain: operational and credit risk; liquidity and solvency risks; and mission drift and client protection risks. On the other hand, Pujia also pointed to opportunities in digitalisation and innovation of products and services.
As for lessons learned, Pujia referred to actions before, during and after a crisis. This includes having a business continuity plan and risk management system in place, as well as a social performance and client protection policies and procedures. She continued with the importance of monitoring the problem and having a flexible approach during the crisis, and after the crisis to put the customer at the centre, and to provide them with tailored solutions and innovations.
The other AG co-head Davide CASTELLANI then took the floor to reiterate the risks and challenges that clients, FSPs and investors are still having to deal with. He wondered how successful they have been in tapping into new opportunities. For this purpose he then presented and introduced the other members of the panel, to talk about these challenges and how they should be addressed.
Anup SINGH was the first to respond, and he explained how MicroSave Consulting had done research in several countries in Asia and Africa to identify the effects of the crisis and they found that incomes of low and moderate income clients had gone down, leading to economic hardship and also domestic violence. Yet, he also reported some opportunities in innovations to maintain and grow business, such as through diversification and the use of social media. MSMEs struggled with declining demand and customers because of the economic hardship, as well as caused by disruptions in the supply chains. Support for recovery is therefore needed, as the situation is rather bleak.
Stanley MUNYAO next presented the case of Musoni as a digital microfinance service provider in Kenya, cashless and paperless in an effort to promote financial inclusion. This helped them to continue their operations and services despite the COVID-19 pandemic, although in a somewhat adapted manner. They also witnessed their customers quickly adapting to the new norm, and with increased use of the digital platform services, helping them to more or less keep their business as usual. Nevertheless, as some point the national COVID-19 containment measures started to have an adverse effect on their business, at some point operating at 30% of their normal capacity. They took measures to ensure customer protection and restructuring of loans, and managed to recuperate together with their customers based on the trust that was gained.
Waleed SAMARAH, regulatory specialist at the Central Bank Jordan, explained that there was no specific risk for them due to the pandemic, also due to some specialised financial programmes that were put in place. They were however, as a regulator, faced with new economic and customer behaviour that they had to adjust to. This was an opportunity and a risk at the same time, for which they had to put up a digitalisation framework for inclusive transformation, including measuring the effects on social performance (with indicators and tools), gap analyses and capacity building. In this sense, the pandemic has caused a shift to the social role of the MFI, which before was more focused on profit-making.
Castellani summarised the important issues that so far were mentioned, in particular digitalisation, transformation and the effects on inclusion and social performance. He subsequently passed the floor to Jean-Marc DEBRICON of Alterfin, to give the perspective of an investor. Debricon responded that the biggest risk for investors is when we fail to work together to face the challenges. This risk is perceived to continue even after the crisis is over. It is important to maintain the original objectives, as there is a lot of cash to invest, but that cash seems to be channelled primarily to Tier I MFIs and not to Tier II or III MFIs, which are less equipped to deal with the effects of the pandemic in the first place.
The members of the panel continued to reflect on the opportunities to transform. There are certainly opportunities in multi-agency platforms and grant-mechanisms to build back better, requiring digital systems and services, as well as capacity building to improve effectiveness. There is however still a lack of commitment and passion to work together between financial institutions and the bottom of the pyramid, who are increasingly using a wide range of digital services for a variety of purposes.
Opportunities that exist downstream are the MSMEs that require stimulus packages and support to bring them back on their feet. Upstream there is a struggle for liquidity, even if there are good business plans. This calls for support and stimulus packages with a responsible purpose to ensure financial inclusion, social performance and sustainability (of the financial ecosystem). In this respect, Debricon pointed to the current debate on sustainability and responsibility in the way we produce and consume food. This creates new opportunities like in regenerative agriculture, producing good food with true value, digital services and media. Samarah added that for this purpose, the technical capabilities of MFIs need to be strengthened.