“Grant me the strength to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference.” - Reinhold Neibuhr
The Serenity Prayer may be best known as a mantra for recovering alcoholics, but it contains a truth that goes far beyond those support circles. Within its triptych is the axiom that some things are changeable and others are not; there are extraneous factors - and those we can control. After dozens of interviews, patterns begin to emerge, and it's possible to start separating out those factors which are the result of the things one cannot change, from those which are proactive responses to those that can.
In Part 1 we laid out the ‘three-legged stool’ of underlying institutional resilience, proactive response, and the external factors over which Sentinels have no control. At the risk of being reductive, we’ll call this ‘luck’. It is this factor which we’ll investigate in this piece. How devastatingly has the virus taken hold? How did national and local policy-makers react, with new regulation, moratoria, cash protection for households and businesses? What has been vaccination availability and uptake? And on how many fronts, perhaps against climate-driven crises, does the institution have to fight at once?
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The most obvious context when operating in a pandemic is the pandemic itself - and by extension the government response meant to mitigate its effects. Given the timing, it seems fitting to start with what, we hope, may be the final stage of the pandemic: vaccinations.
Among the Sentinel countries a couple have reached or are close to what are effectively maximum vaccination levels, after accounting for hesitancy. In effect, this is creating a post-pandemic environment, in that there’s not much more to be done beyond finding ways to co-exist with an endemic virus. The hesitancy can directly affect how an FSP manages its staff, though the options may be limited. As a North African Sentinel puts it: “We have a lot of anti-vaccination people and half the staff are still not vaccinated, so we may have to take more drastic measures. For the moment we are encouraging them, but it is difficult to force them.”
However, few Sentinels are in countries where the limiting factor in vaccination is demand; most remain far behind because of vaccine supply issues, with vaccination levels that range from the single-digits to up to 30%. Nevertheless, even at these modest levels, people have started to move on, as one Latin American Sentinel puts it: “psychologically many people have become more relaxed and are willing to come to work in person.”
This relative normalization in the individual is also reflected at the collective level - the evolution of countries’ pandemic responses. In the words of one South Asian Sentinel, “the use of lockdowns has become more localized and shorter in duration” - an experience reported by most Sentinels. This is also accompanied by curfews and other more limited restrictions, to which poor households have been increasingly adapting. The same South Asian Sentinel describes “closures of markets on weekends, reduced opening hours of shops during lockdown, and the resultant reduction in sales of the clients. But the effect has been minimal so far, clients seem to have adapted to reduced working hours and don’t report reductions in overall revenues.”
The sector that clients work in is an enormous factor too. A Central American Sentinel says most of its clients are in commerce, “which is flexible and adapts easily…when there is no school, a woman doesn’t sell candy outside a school, but she sells tacos outside a construction zone. Shoes and cosmetics [may] fall, but they have started selling other things.” Being flexible and having adaptable and convertible assets also helps. A South Asian Sentinel recounts that many of its members (mostly men) took the lockdowns in stride, pivoting to a new profession during the period to ensure liquidity. “An auto-rickshaw driver decided to convert the auto-rickshaw into a mobile fruit shop. Since transport and sale of food items were allowed, the customer’s household managed to maintain some liquidity.”
Nevertheless, adaptation has its limits. The normalization of shorter operating hours, lower productivity, localized lockdowns and travel restrictions mean lower mobility and, as a result, lower business potential. And the localization of restrictions has other consequences: one Latin American Sentinel describes how localized limitations on movement “led to huge fear, where some areas were paralyzed and people in towns would not accept physical visits to their homes.”
All of this creates an environment of uncertainty which makes everything harder - for both households and institutions. In one Eastern European country whose vaccination rates have been lagging, a Sentinel bemoans that “people are still not ready to invest any money, even to restart existing businesses. Everybody is in a wait and see mode.” For another Sentinel, speaking in September, the uncertainty stems directly from the government’s pandemic response: “Last month the government said the lockdown would remain until Aug 31, so the business sector was preparing for partial reopening. Then the government cancelled it, delaying until Sept 15…what is hurting the economy is the revolving lockdown and the ongoing investigation into corruption and [misappropriation of COVID relief payments].”
What’s all this got to do with luck? Having one’s government strike a sustainable balance between fighting the virus and mitigating damage to the economy - between lives and livelihoods, in effect - is critical, while its absence can be catastrophic. A CEO is limited in her toolkit of responses when businesses are shuttered and uncertainty is rife. As a Latin American Sentinel says “the government was very weak in providing subsidies to people - they were too small to help because the federal government feared over-borrowing. This was a huge mistake, it generated panic and didn’t restart the economy”.
And even this isn’t the most negative outlook among Sentinels. The Eastern European Sentinel gives a particularly gloomy assessment of the situation there, which “is getting worse, unfortunately…we can expect this worse, worse scenario to prolong and to continue for the next couple of months, because still many people are getting back from holidays, all types of public activities are still allowed, the school year is starting while the vaccination process is not going as fast as the authorities would like, so we have many signals that the situation is not going to be better over the next couple of months.” Some of them just can’t seem to catch a break.
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Other factors mean that some are more fortunate than others. One major theme that has emerged from the Sentinels is the split between rural and urban areas, with the impact of the pandemic and its economic effects being far milder in the former than the latter. In the words of Sentinel in Central Asia, “about 95% of our branches are located outside of the capital where there are comparatively less COVID cases. In this regard, the impact to our clients is not significant.” In South Asia, a Sentinel says that in rural areas “most of our borrowers were engaged in agriculture, animal husbandry, etc. which were allowed to carry out business during the lockdowns, the impact on their cash-flow was minimal. However, in urban areas, the primary occupation of the borrowers was not protected, hence, the impact on their cash-flows were significant, leading to more uptake of the moratorium”. Meanwhile, for a Latin American Sentinel, the pandemic for agricultural clients “had a positive impact. People ate more because they were at home. People gained weight. This helped our agricultural clients, and we had no impact in the agricultural portfolio.
And it's not as if the pandemic is the only external challenge that MFIs are facing - they have other crises to face. Some Sentinels are in countries with stable economies and currencies; others face increasingly severe crises in other forms, notably climate change exacerbating natural disasters. As the pandemic becomes normalized, other crises loom. Two Sentinels report severe impact from storms and flooding, and given the seasonality, are expecting more on the way. But the pandemic has eroded the proverbial levies: with lower levels of client resilience, one Sentinel is seeing higher demand for emergency loans following a large storm: “Usually, people get right back to work to survive after this type of event . . . however it can go a different way where struggling businesses are hit by these events and do not survive.”
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So the context that the Sentinels have to operate in remains varied and in flux. Is the same true for their clients? The length of the pandemic has led to more predictable behavior by borrowers, at least for most Sentinels. One South Asian Sentinel reports a strong (and expected) relationship between localized lockdowns and portfolio quality: “Wherever there were lockdowns, collections suffered. Generally, after 2-3 weeks of the lockdowns being lifted, the customers started repaying.” Localized restrictions mean localized impact on clients, but their shorter duration may mean faster recovery.
The majority of the Sentinels report overall repayment rates that are at least tolerable (including loans that have been rescheduled in some way), given the circumstances. Repayment numbers still show a major operational challenge, but not an imminent existential crisis. A typical case is a Sentinel in North Africa, “the current concern is to get the money back. [But] the overall picture is not bright: 1 in 3 customers do not pay the same day; 1 in 4 pay after 15 days; 1 in 6 pay after 30 days. We have quite a lot of slippage in daily recovery rates.” For this Sentinel, “the main message is uncertainty. We thought we would be further ahead by now but we are still in the middle of it.”
Some are seeing a brighter picture. A South Asian Sentinel had seen on-time repayments rise back up to 95-96%, before declining to 83-84% in the aftermath of a second wave. But this Sentinel fully expects these to rebound again. And a Sentinel in Central Asia is seeing minimal impact - with repayment rates approaching 97%.
On the other end of the spectrum is a Sentinel that’s just struggling to survive through the end of the year. So even if the average is a manageable status quo, as is so often the case, the average can’t convey the full picture.
The passage of time has also given greater clarity on who are the permanent defaulters -- those who stopped paying in the early pandemic days and never resumed. For one Latin American Sentinel, this represents some 10% of clients, “who stopped operating their businesses and did not recover.” But for another Sentinel in South Asia, these clients represent something other than business failure: “These are willful defaulters, as the distress caused by COVID-19 is not severe enough for someone to skip all repayments in the past year.“ Whatever the reason, unlike the far larger number of clients under some type of rescheduling, these ‘can’t or won’t pay’ clients leave little doubt as to the expected losses.
For a South Asian Sentinel, there has been an unusual change in repayment rates, with individual loans outperforming group loans - in clear contrast to the pre-crisis patterns. However, crises can sometimes generate such unexpected behaviors, with borrower groups potentially exerting pressure in the opposite direction - to not pay - than what is intended. But some things do remain the same: for this Sentinel, loans with higher frequency repayments (weekly or bi-weekly) have been performing better than those with lower frequency (monthly). The high-touch, high-frequency model still has its benefits - even during a pandemic.
Other behavior changes are beginning to be visible as well: “Savings went up - there was more liquidity in the system. We didn’t have a huge increase in the country as a whole, but we did see an increase in client savings”, says a South American Sentinel. It remains an open question, however, to what extent this reflects increased savings by low income households, or wealthier households (whose accounts typically comprise the bulk of MFI deposits) keeping their money tied up for lack of spending and investment opportunities in the midst of a standstill economy.
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MFI staff have had to shoulder huge burdens as well this past year and a half. But as before, the human resources challenges faced by Sentinels are as diverse as the organisations themselves. An African Sentinel recognises their staff’s “anxiety about how to turn around our performance, and job insecurity is the top”, a result of deep cuts and a round of voluntary redundancies that cut staff levels by a quarter in 2020. “So we’re trying to demystify [staff] about the future of the market and the future of the company. And getting them to understand the painful processes we had to go through.”
The need to ‘level’ with staff about the seriousness of the challenges is a repeated theme. An East Asian Sentinel describes the deep human pain that has come with this pandemic. “Right now, more than 245 employees are affected by Covid. Every week we get notice that an employee’s family has died, and 30 staff are under quarantine at any one time.” But, he says, cohesion and support is the only way to cope: “We’re telling them that we have to move forward, and so we must be accessible to them at all times…we are one family supporting one another”.
Fear among staff is a common theme too. A South Asian Sentinel describes the very low morale (as well as a number of deaths) among staff during the second wave of the pandemic and that fear among staff was considerably greater than during the early 2020 phase. Fear spreads like a virus too, of course. The same Sentinel says that certain villages, afraid, forcibly stopped loan officers from entering.
Another Sentinel from the same region says that morale, while low, picked up - a result of free medicines provided by the MFI, and no salary reductions. But with lockdowns ending, there’s evidence of growing staff turnover and difficulties attracting replacement staff, a problem which may become very serious for some organisations. Yet another Sentinel, from East Asia, says “people are taking new jobs, moving, starting their own businesses….the loan officer job right now is a terrible job. You’re a frontline worker, face-to-face with clients all day. If you want to do loan recovery you have to go and meet the client, have to have a relationship.”
In practice this means workload is up, delinquencies are up, and staff are taking risks and burning out. This - the imperative to increase efficiencies and therefore squeeze more productivity out of fewer staff - is now a common theme among Sentinels. How do you attract people to do a job that is both harder (and riskier) than ever before, and also at risk from some of the digitalization trends underway?
As before though, what’s true for one Sentinel is not for another. A Latin American Sentinel says that in the last two years, “we have had the lowest turnover in history”, a result, they say, of “generous benefits” (although the unattractive prospect of moving jobs during a volatile pandemic is probably a factor as well). An Asian Sentinel is equally unconcerned: “We have developed standard operating procedures to deal with the situation and the effect has been minimal in terms of client visits to the branches, or of the loan officers to client homes”.
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There is a lot to unpack in all of this. The Sentinels’ experiences over the past 18 months have been stories of grand failures, minor triumphs, fear, uncertainty, frustration and resilience. There is no meaningful ‘line-of-best-fit’ to illustrate the typical experience of a CEO of a market-significant MFI, because the challenges they’ve faced are driven by multiple factors, both within and outside their control. There is no ‘typical’.
At the beginning of this piece we described the ‘three-legged stool’ of survival - underlying resilience, luck, and proactivity of response. In many ways, what we can take from the interviews with the Sentinels to date are the additive qualities of those first two: resilience and luck have a compounding effect on an institution. If you’re strong - with flexible funders, good financial ratios, healthy portfolios, diverse products and strong relationships - then you can weather some turbulent misfortune. And if luck goes your way, your institution’s crisis experience is quite different from that of others. A Sentinel in Latin America says “The effect of the pandemic is mild. While we still have some lockdowns, non-performing loans are no longer affected. Our microbusinesses are resilient and have adapted to a new context.”
By contrast, an institution with poor underlying resilience will need considerable luck to avoid disaster. “I suffered a lot. I thought for many days that the company would fail and I didn’t know what would happen”, says a different - and clearly emotional - Latin American Sentinel.
In the next piece, we’ll turn to the third leg of the stool, to explore what certain Sentinels have done, proactively, to respond to this complex crisis. How have they innovated, adapted and taken risks - and what success, if any, have those responses had?
