We opened the previous piece in this series with the Serenity Prayer, which asks for the strength to accept the things one cannot change and the “courage” to change the things one can. That installment explored the first limb - what are the external factors that affect how institutions cope with crises? This piece examines the second bit: what can financial providers do to respond to a crisis. This is, in particular, the heart of the Sentinel Project. What are the tough decisions that microfinance leaders are making, how are they resolving their challenges, and how are they making those decisions? Many of these choices are at least in part irrevocable. That’s why we aim to capture them as they are made, rather than with ex-post justification or explanation. Doing nothing is also a choice (and sometimes just waiting things out is the best choice), and so it does take something like courage to act, and some measure of resolve to follow through.
There are many possible actions and choices to consider: re-negotiating and re-structuring funding, executing operational changes, business ‘pivots’ and the launch of new products, among them. What emerges from the many months of interviews with Sentinels to date is a fascinating breadth of responses to the challenges the pandemic has presented.
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When it comes to managing the liabilities and equity side of the balance sheet, the Sentinels show a broad spectrum of responses, driven mainly by their specific pre-pandemic financial situations and the degree of impact from the pandemic itself. And despite the seasonal title of this series, the Sentinels’ responses mostly span the full period of the pandemic, although for many it has taken until this summer for the consequences of the early stages of the pandemic to become clear.
One element common for nearly all Sentinels has been greater emphasis on liquidity. With the onset of the pandemic, every Sentinel able to do so has increased their liquidity buffers, recognizing that extra cash during times of uncertainty increases institutional resilience. The result is that for all but one Sentinel, insufficient liquidity has been a risk that was successfully avoided.
On the other hand, a larger number of Sentinels (though not the majority) have faced significant capital losses. For two Sentinels (in North Africa and South-East Asia), a key part of the financial response was participation in a sector-wide effort to lobby their respective governments as well as international funds for direct financial assistance. The resulting response is somewhat similar - both Sentinels’ governments have created funds, either in the form of a “bad bank” or a guaranty fund, that enable affected MFIs to cover some of the loan losses stemming from the pandemic and associated restructuring and moratoria. In this way, they mitigate the erosion of equity, and one also helps improve liquidity as well. As of September 2021, only one of those funds is fully operational, while the other is in the process of being established.
For a Sentinel in Africa, the past year or so has been characterized by lengthy restructuring negotiations with international lenders - both a blessing and a curse. This Sentinel’s organization is “not dependent on local funding from commercial banks, which has mostly been a blessing.” His team submitted to its (mostly European MIV) shareholders a revised budget for 2020 with heavily adapted annual projections, and those revisions showed that it would need additional equity. Based on the institution’s pre-pandemic situation and forecast losses resulting from the pandemic, in spring 2020 it approached its shareholders to ask for various measures, including upstream moratoria, and generally, “the response was positive”.
The year from summer 2020 to summer 2021, this Sentinel says, has been “a process, driven by the lenders, to finalize restructuring and what haircuts the lenders will take”. As of July, they were at the tail end of this process, and “largely [the lenders] have been responsive to our needs. 80% would fall into this category. The other 20% is the challenge and this has made the restructuring process longer and more challenging than it could have been”.
In spring 2021, this Sentinel described his organization as “fortunate”, with “stable shareholders, generally reasonable lenders, and I don’t want to imagine the situation we’d be in if we were exposed to commercial banks rather than ostensibly social lenders”. By summer 2021, however, the process was dragging. He explains there are ten lenders, it is “not an easy process”, and the need for shareholders to put in additional equity was “making the process both very complex and very slow…made worse because there are 15 parties who all have to consult backwards – none of them can make a decision ‘at the table’, they’re all representing other lenders beneath them. Finding a “convening point”, he complains, is hard.
By mid-summer, this Sentinel was almost despairing. “Honestly, I’m starting to think that those who borrowed from local banks have actually done better; local lenders reacted quickly to local customers, and there were [central bank] guidelines they could follow. So while the bargain might have been a harder one, it would have been faster with more clarity”. By late summer, re-structuring was complete, but at a cost. New majority shareholders were in place, and leadership of the Sentinel had been changed (we won’t be receiving future updates from this MFI).
Other Sentinels have felt less pressure to seek funding support or restructuring. Two Sentinels in South Asia sought to take a more ad hoc approach; during the moratoria in early 2020, they rescheduled loans with some (though not all) of their creditors, but since the start of this year, the focus has been more forward-looking, including taking on new debt and, in case of one institution, a significant equity investment from a new shareholder. In doing so, these MFIs were both preparing for future waves of Covid and also laying the foundation for post-pandemic growth.
Other Sentinels’ institutions either began the crisis with a particularly strong financial position or had the good fortune to be in an area where the impact of both the pandemic and its economic effects has been mild. One Sentinel in Latin America had just completed a merger prior to the crisis and entered it with plenty of cash on hand. This extra liquidity removed the need to request funders for loan extensions or tap costly lines of credit. A Sentinel in Africa had a somewhat similar situation, having issued a large bond just prior to the pandemic.
Two other Sentinels, one in Eastern Europe and one in South-East Asia, both report having access to more funding than they can use. According to one, they have witnessed a common reaction to economic hardship, “the flight to quality.” The pandemic has reduced the number of ‘safe’ FSPs, so those who do have strong financials have the flexibility that comes from security. Regardless of the reason, the situation for these two MFIs is that they’ve had the luxury of being more concerned about the cost of excess liquidity than about not having enough.
Finally, the Sentinel in Central Asia reports essentially a return to “business as usual”, with new investors coming on board with sizable loan agreements.
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Naturally, the pandemic has mandated changes to how MFIs engage with their clients and forced them to adapt existing, or introduce new, products to respond to their needs. The pandemic has accelerated, seemingly, some general trends in terms of developing products that more clearly focus on key needs of borrowers, especially a focus on liquidity rather than traditional “investment.”
A South Asian Sentinel is among several that introduced new products during the pandemic. For them, it was a new loan category - “business-enhancement loans”. Under these loans, the initial repayment burden (for the first six months) was kept very low (40% that of joint liability loans), with repayments gradually increasing thereafter. The idea? To ensure that customers receive sufficient liquidity without having to use the loaned capital to pay it back in the first few months.
At a different South Asian Sentinel, customization of existing products has been a major focus. “We introduced a consumption loan - a small loan (US$50-60) to be repaid in 3, 6 or 9 months. These were to meet food or other immediate needs of the clients; eligibility criteria were relaxed a little, we don’t monitor how these loans are used.” This is being piloted in several dozen branches, with the plan to roll it out to all by early 2022.
In South-East Asia, an NGO Sentinel with a strong social mission has felt desperate throughout the pandemic - heavily dependent on (scarce) government funding, largely unable to access new funding sources, and facing repayment rates among existing clients that are intolerably low. This organization has experimented with a vast array of new initiatives. There is a social protection loan, in effect a credit product for a multi-part microinsurance scheme that combines 2 or 3 insurance products, including life insurance, credit life, funeral and health add-ons, along with registration with government insurance programs. This product is cross-sold by remote-working loan officers, who also recruit client leaders from the MFI’s cooperative - who can earn income. 10,000 social protection products were sold last year and triple that are forecast for 2021.
Another form of product shift is a pivot from traditional microentrepreneurs to supporting MSMEs--another trend with both recent and historical analogues. “In terms of loan renewals we would like to [at least] help some of our clients, so we’re developing from micro to SME. We are focusing on graduating some clients who have the potential…they need business guidance in order to grow”. This Sentinel sees the institution’s role “not as providing funds but as consultant and mentor to clients''. This graduation strategy is taking place with support from government schemes and the private sector. Some of this is done through the MFI’s cooperative, recruiting new members to increase the supply of deposits, rather than aggressively pursuing new loan clients during the pandemic.
In Africa, a Sentinel’s organization describes a strategy of focusing on repeat borrowers. By early summer 2021, PAR was coming down by 2% per month, and that decline is restrained by new disbursements being much lower than normal, resulting in a large overhang of pandemic-affected loans. This Sentinel says the focus is on getting “good quality loans” from repeat borrowers, but whose credit profile has been compromised by business cash flow challenges and servicing other debt. There is a balancing act required, meaning matching loan sizes with their reduced cash flow, and offering repayment holidays.
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A common theme among Sentinels is the importance of communicating and engaging with clients. This is closely related to development of new products and new human resources practices, of course. A South-East Asian Sentinel describes how, going forward, the MFI intends to “intensify its touch-experience” with customers, “whereby loan officers are not only concerned with disbursements and collection, but also the well-being of the households. A more human touch would ensure that the customer always prioritizes the institution to make repayments”.
A different Asian Sentinel points to the decision to re-start its disbursements in June 2020 (much earlier than many others) as having restored client confidence. “It led to a belief in continuity”, and a current portfolio that is greater than pre-Covid. This wasn’t without pushback from clients. “We were also in touch with them throughout. They were not happy with us not restructuring loans for a full year, but our loan officers were able to explain the cost that would be imposed in terms of accumulated interest”. Paying close heed to cultural and seasonal needs has left them in good stead too. This MFI, recognizing that during the two Eid periods in the year, lockdowns are stricter and expenses are higher, is piloting a product for clients to that, like others cited above, is attuned to customer liquidity challenges: borrowers pay only a small service charge during those months, with repayments adjusted for the other ten months.
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Gigabytes have been written about the catalysing impact the pandemic has had on digitalization within the microfinance sector, both the digital transformation of MFIs and the client-facing financial services they provide. Often driven by necessity, these changes, for some Sentinels, will be ‘sticky’ - a new normal that will endure. For others, there has been skepticism and frustration among the client base.
After a year and a half to reflect, some Sentinels bemoan being left behind. A Latin American Sentinel says that “many MFIs were taken by surprise and did not have a digital presence. The banks ‘beat us’ by having greater advances in digital financial technological development…[but] in response, we have invested a lot in technology and processes.” A South-East Asian Sentinel has effectively gone ‘all-in’ on digitalization: extensive branch mergers and staff layoffs have been combined with retraining and new sales targets for existing (remote) loan officers, and the launch of a new digital platform. As of early summer, 3000 clients were using the platform, but the critical factor will be training them on the use of digital technology.
In South America, a Sentinel from a microfinance bank says the organization is “very worried about digitalization and has realized that they can't be multi-channel but must be omni-channel”. The bank has “aggressively implemented a new plan, to be a ‘Digital Microfinance Bank’, reflecting the immense change that the pandemic has brought on operations, costs, client expectations and staffing.
These Sentinels started from the back of the field, and they have had to strive to make up time - or risk being left behind. By contrast, two South Asian Sentinels went into the pandemic with a head start, and have leveraged that advantage well. One NBFI describes a mobile App under development to offer “passbook-like features to clients, and to allow for digital repayments”. The development and roll-out of this App were expedited during 2020, and expanded to allow digital payments via card payments, integration with the national real-time payments infrastructure, and standing orders. This Sentinel says the process has been a considerable success, with strong customer outreach, education and pre-existing familiarity with digital repayments leading to good uptake of the product and steady increases in digital payments.
Elsewhere at a different NBFI, another Sentinel also took advantage of two years of prior development to launch a ‘passbook’ mobile App in which clients could see their loan terms, and past and future repayments, the development and roll-out of the app were expedited considering the situation. Additional functionality, the Sentinel says, was allowing one client to pay the bills or repayments of other clients, bypassing some of the typical digital literacy barriers that limit uptake and usage. Uptake of this third-party repayment feature has been high among borrower groups, with one member handling repayments for the rest - a de facto agent for the group.
In Latin America, a Sentinel from a large microfinance bank describes a more improvised, ad hoc transition brought about by the pandemic - but one which also has borne fruit. Early in the pandemic, clients were organized into WhatsApp groups (a common response among many Sentinel organizations to maintain communications with clients and groups) - but this was temporary and transitional. Resources were poured into a “more formal, structured, digital process” (no longer WhatsApp-based) and which has endured after the lockdowns ended. This has led to what the Sentinel describes as a “more hybrid model”, with elements of high-touch human operations mixed with formal digital processes, that the Sentinel describes as a strategy of “institutionalizing digitalization…for example with our own secure App that allows for data sharing and can be integrated into the institutional process”. Sending information on WhatsApp - while secure - is “not a proprietary channel and not controlled by the bank”. The transition to the new App will be very important, the Sentinel says, adding “security, agility, and ability to respond to questions and concerns.” But the limiting factor will be the need to “drag the regulators… technology advances at a brutal speed and the capacity of the regulator cannot keep up”. This particular concern--the interface between regulation and digitalization--is yet another long-seething concern brought to the forefront as the pandemic has forced MFIs to change faster than they have in the past.
Regulatory torpor is one restraining factor on digitalization, but there are other logistical, structural and cultural barriers that put the brakes on the digitalization process. In North Africa, a Sentinel says their market is far behind, because merchants "don't want to play the ‘mobile money game’ and think they are going to be taxed or prosecuted. It's not taking off. The banks have the market, so it's difficult to get a foothold.” In one sense, this Sentinel says, the expansion of mobile money during the pandemic has been restrained by a well-established physical money transfer network: “The mobile wallet features are already in physical form and people are not willing to take the step.” The population, this Sentinel says, “just doesn't want to move to mobile money - they’re traditional "diehards…we’ll have to wait another five to ten years”.
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As we’ve described in some of the previous pieces in this series, human resource management has been one of the greatest challenges for financial providers during the pandemic. It’s a complex and often stressful topic; beyond the operational and fiscal trade-offs to be made, these are difficult decisions to be made about colleagues - real people, sometimes even friends. Protecting, compensating and re-training existing staff and attracting new ones to a job that has become much more difficult than it was before - these are challenges that can feel tortuous.
Change management is a real challenge. In South America, a Sentinel paints a picture that managers all over the world have experienced. “Your boss is no longer sitting at a desk near you. Your tool is your computer at your house. You no longer have your own loan portfolio. The bank needs to grow with new clients because they have lost too many. So they need each loan officer to be more productive. But the loan officer just relends to the same people, without adding oxygen to the portfolio. At best, they take 2-3 referrals. They have become too comfortable”.
This Sentinel describes the institution’s response - and the consequent loss of staff. During a period of virtually no collections, loan officers were moved from being portfolio managers to ‘promoters’, “charged with walking the streets.” 5% quit their job immediately. Another 10% followed after. Women in particular are quitting, this Sentinel says, finding it impossible to balance family life in a society with entrenched gender norms and with fears about contracting Covid. This is not just true for loan officers, but managers too - and not just because their job descriptions have changed, either. “Many staff who have left had started home-based businesses when they were in quarantine working from home. The informal sector is also a big part of their lives. They have enough to live and won't be interested in the base salary [~US$500 per month] without commission”.
Like many Sentinels, this person sees recruitment of new clients (rather than just retention of existing ones) as key, and the (generally younger) promoters are best at this. But with fewer loan officers to appraise new loans, there needs to be rationalization of processes. “We need to teach [promoters] to approve their own loans without going to committee. They are the best fit for the job”.
But ‘best fit’ or not, the job itself has changed - and so have the roles higher up the org chart. A South-East Asian Sentinel explains the need for experience in managerial positions; attracting “seasoned talent is pivotal to ensure that they can cope with any emergent situation, instead of attracting talent without much experience in the sector”.
And part of that experience is about managing fewer junior staff who will have to break productivity barriers. Elsewhere in South East Asia, where the Sentinel’s organization is facing very severe financial losses, it’s all about doing more with less. Many staff have left and others have been made redundant, leaving loan officers to serve more clients while also training clients on the use of new financial platforms and telemarketing promotion of other products. This puts immense strains on morale - already damaged by the stresses of the pandemic. Incentives have been increased, so the staff who are left can earn more - but at a cost.
Another Sentinel also speaks about how the roles of loan officers have evolved, and what needs to be done. Observing clients’ reluctance to switch to an App for the routine interactions previous handled by a loan officer, the Sentinel says its loan officers are “agents of change - not just loan disbursers,” adding that this is going to be more and more their organization's “value-add” in a changing environment of more e-banking and fintechs - to which their clients are resistant. “Of all the reasons that people took another loan with [us] was their relationship with the loan officer…they say things like, ‘I really like the loan officer. He's very respectful, he talks to me like a brother... I want to build on that”.
An East African Sentinel also tells of the challenges of forced downsizing. In Spring 2020, they let all temporary staff go and abruptly ended a successful internship program. The contracts of branch support staff were not renewed. All remaining staff took a 25% salary cut for 8 months, and an aggressive voluntary early redundancy (VER) program reduced overall staff by around a third, necessary - the Sentinel says - because of the need to be ”aggressive on recoveries but conservative on new lending”, with business growth only forecast to resume from 2022. By mid-summer 2021 the staff reduction process was completed; 80% of those offered VER took it, and the remaining reductions were forecast to be achieved through natural attrition.
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Of all the long-term impacts of the pandemic, the one most likely to persist is the innovation and adaptation it engendered. The dozen or so institutions taking part in the Sentinel Project exemplify changes implemented by many financial providers over the past 18 months - from how they manage operations, to important shifts in relationships with staff and clients, major innovations in financial products and services offered, and of course the ubiquitous and accelerating shift to digitized processes.
Necessity is the mother of invention - or so the saying goes. In the examples seen in this piece, and expanded further in those to come, the invention - adaptation to a changing context, a resource investment, a painful cut or strategic pivot - has indeed been often driven by necessity. But just because change is necessary does not mean it doesn’t require courage. Choices must be made; trade-offs weighed; risks taken. This is why we‘ve called this piece ‘The Courage Factor’: we’re genuinely inspired by how these Sentinels - and their colleagues - have coped with what’s been thrown their way.
