In late January, I kicked off the new year with a blog outlining how CGAP would be pivoting from the access and usage paradigm that has defined the last decade of the financial inclusion movement, toward a new framework focused on what financial services can do to help the world’s poor meet their basic needs across three dimensions: income generation, essential services and resilience. In February, we announced that we would be hosting a meeting of the financial inclusion community in Copenhagen to revisit the first pillar of that framework: income generation.
Needless to say: a lot has happened in the 10 weeks since that blog came out.
As much as half of the world’s population is now in lockdown, with entire sections of economies grinding to a halt. While we “bend the curve” on new COVID-19 cases, the costs are being measured in stark economic terms: precipitous drops in the stock market, capital flight from emerging markets, negative growth projections and rates of unemployment not seen since the Great Depression. In emerging markets, poor people are left entirely without incomes, living in circumstances that make social distancing an impossible proposition. Parts of the financial inclusion ecosystem that we had perhaps taken for granted are now at risk, thanks to economic lockdowns in many countries. Credit-issuing organizations, like microfinance institutions, off-grid energy providers and fintechs, are bracing for an economic storm that is rapidly engulfing them. Foreign investors and donors are looking for ways to provide support, despite the fact that their own countries are deeply affected by the pandemic. Meanwhile, mobile money providers are exploring ways to use their distribution capabilities to get help to those who need it, while at the same time navigating how to operate effectively in the face of highly unusual market conditions. We are only at the beginning of this crisis, but it is challenging us in ways that are unprecedented in modern times, not least of which because it is breaking everywhere at once.
So CGAP is adjusting its plans.
While we still intend to follow our new constellation of guiding stars, the work we are doing to combat the effects of coronavirus is refocusing those efforts in new and unanticipated ways. Knowing that resources will be scarce in the face of the coming storm, CGAP spent time thinking about how we can add unique value to a coordinated crisis response. We have decided to focus our attention on four main initiatives, all anchored in CGAP’s role as a convener and knowledge resource for the financial inclusion community, its position inside the World Bank, its strong relationships with a large and active community of donors and implementation partners, and its sharp focus on ensuring the poor and the institutions that serve them are not overlooked in the face of a deep and potentially protracted crisis.
CGAP will focus its COVID-19 response work in the following areas:
1. Microfinance Sector Support
The formal microfinance sector serves over 140 million low-income clients with credit and savings services globally. As of 2018, it had a combined portfolio of $124 billion in outstanding loans and $80 billion in savings. Microfinance has become a specialized impact investing category, with $17 billion in investments in microfinance institutions around the world. The reach of the sector is likely much larger when we further consider NGOs, cooperatives and informal savings and loan groups. CGAP played a formative role in the growth of the microfinance sector and sees significant risks that the gains of the last four decades of building affordable financial services for the poor could be set back significantly by the pandemic.
And the risks are not just confined to traditional microfinance. Digital payments have enabled a whole new breed of fintech credit providers, also funded largely by donors and impact investors. There is reason to believe that factors inherent in their business models may make them vulnerable to a sudden deterioration in credit quality. For example, pay-as-you-go (PAYGo) solar providers, which serve approximately 2 million households, mostly in sub-Saharan Africa, often allow customers not to pay when they do not require service. A severe economic contraction could put these providers’ credit quality immediately at risk, with households forced to choose between eating and keeping the lights on.
At a time when many borrowers are quite simply unable to pay their loans, the global microfinance sector is at risk, and there are two important constituencies whose actions will have an outsized impact on lenders’ ability
to ride out the crisis: regulators and investors. CGAP is focusing its attention on both to ensure as much of the sector as possible makes it through this crisis intact.
Our work on the regulatory response involves gathering information on the actions being taken by governments to provide relief to borrowers and lenders – from debt moratoriums, to temporary relief from prudential ratios, to subsidized credit channeled via the financial sector, to planning for bailouts and consolidation. There is a risk that relief measures will be extended to consumers, without taking into account the impact on lenders. And even when relief extends up and down the full financial services value chain, we may find that large parts of the microfinance sector do not fall within the safety nets being put in place to support the financial sector. CGAP is trying to understand how different regulatory responses are being applied to microfinance providers and to make sure that best practice is well-understood by regulators. We are also working to make sure that awareness of the needs of microfinance lenders is embedded in the financial sector policy responses supported by the World Bank.
Our work with investors focuses on building a coalition of investors — microfinance investment vehicles (MIVs), development finance institutions (DFIs) and donors — to align behind a coordinated response to support the microfinance sector, based on a common set of principles for collective action and an equitable distribution of potential losses. The MIVs are the first line of defense: they are able to move quickly, and we are hearing that they are working closely with their investees to inject liquidity and defer payments on existing loans. But the ability of the MIVs to provide support is constrained by the risk appetite and available resources of their shareholders, which may be limited. Behind them sit the DFIs, bilateral and multilateral. The DFIs have deeper pockets and a strong development focus that enables them to backstop more commercial investors. The DFIs are already mobilizing resources, and we expect that they will be instrumental in bolstering the balance sheets of more commercially minded investors. But the DFIs are also meant to generate a return, so they can’t be expected to support losses indefinitely. That is where the third line of defense comes in: donors. Donor support may be needed to backstop more commercial sources of finance, and a few are already working with DFIs on blended facilities that will provide vehicles that can absorb greater risk in the face of crisis. Beyond this, the sector needs to prepare for the possibility of bailouts and consolidation of weaker institutions if the crisis persists, and there will be both financial and technical assistance needs to get through that process. CGAP is bringing different investor groups together to forge a common and collective response that layers in differing degrees of risk appetite in a way that enables all to hold the line until we get to the other side of the crisis.
2. Digital Government-to-Person Payments (G2P) and Distribution
Digital payments can distribute resources quickly and have proven effective during other health emergencies. They can support essential personnel and services at the front lines of this crisis – particularly health workers, but also teachers, first responders and police officers. A second, equally important focus of G2P in crisis is for income replacement or supplementation. Many governments are looking to channel income support payments via digital infrastructure to low-income populations in lockdown. But this may not be as simple as it sounds, even in markets with mature mobile money operations, because mobile money relies heavily on the ability to turn cash into digital money and back into cash again, which means that they rely on agents.
Cash-In, Cash-Out (CICO) is often overlooked in discussions of digital payments but represents a critical infrastructure to deliver digital financial services in most parts of the world. The GSMA estimates that there are 7.7 million mobile money agents in operation today, concentrated in Sub-Saharan Africa, South and East Asia. Together, these networks have over 1 billion registered users and process more than $2 billion in daily transactions. They will provide a crucial interface between poor communities and those trying to provide relief during the crisis, but they are going to be put under considerable strain. We are already seeing evidence of this in a number of areas: agents being shuttered as part of lockdowns; governments limiting the fees that mobile money services can charge, with fee reductions and caps placed on person-to-person transfers and even cash out; and agents holding liquidity to support their core businesses and their families. Given the strain that large flows through the system will create, governments and providers must design solutions together that will incentivize payments along the entire value chain — helping providers to manage liquidity surges and agents to stay open despite the risks to their health. In a few mature markets, the crisis may even present an opportunity to leapfrog to fully digitized merchant payments, as customers seek to minimize contact with cash. But these are likely to be the exceptions, not the rule.
The challenge will be even greater in markets that do not have well-developed distribution infrastructure, which is difficult to build in the best of circumstances, but nearly impossible to build during periods of crisis and quarantine. But there is low-hanging fruit in several large emerging markets. For example, current Indonesian regulation limits CICO to agents managed by banks, greatly constraining delivery capacity in that market. Large private-sector groups are licensed as e-money issuers (EMI), enabling customers to put cash into e-wallets and pay for e-commerce and ride hailing services, but they are not permitted to provide cash-out services. A policy change would allow EMIs to convert much of their 6 million-strong agent networks into CICO points, which would potentially increase six-fold the number of bank-managed cash-out points. In Nigeria, overcoming long-standing opposition to granting mobile network operators full e-money issuing licenses would help accelerate the development of CICO infrastructure by enabling tested operators to roll out at much larger scale than they have been permitted to do so far. Beyond these few markets, however, distribution infrastructure will have to be built from a very low starting point in hazardous conditions. In Lebanon, for example, the army is being mobilized to deliver cash to communities in need.
CGAP is working with members seeking to implement cash transfer schemes to share knowledge developed over the last five years on the design of G2P cash transfer schemes, in markets as diverse as Bangladesh, Pakistan, Indonesia, India, Peru, Ecuador, Tanzania, Kenya and Zambia. CGAP has also worked on digital payments with non-governmental actors, including the digitization of cash transfers for humanitarian agencies providing relief for forcibly displaced persons in markets ranging from Bangladesh to Jordan to Kenya. CGAP is working with the World Bank on several of its country operations and convening a working group of other members interested in sharing tools and best practice in the design of digital payments delivery.
3. Customer Intelligence and Protection
Poor customers are at the heart of everything we do at CGAP. Our COVID-19 response during both the crisis and recovery phases needs to be informed by the impact the pandemic is having on people living in poverty. Working with partners in the field, we will seek to: 1) understand the immediate impacts of the crisis on poor people and how they are coping; 2) understand how effectively key actors like financial service providers, governments, humanitarian relief agencies and non-profits are addressing the crisis and driving innovations; and 3) synthesize the effect these interventions are having on the lives and livelihoods of people living in poverty, deriving lessons for future interventions.
In addition, CGAP has for some time monitored consumer protection challenges inherent in digital credit provision that need to be even more closely watched in times of crisis. We are already seeing the emergence of new scams aimed at using the fear generated by COVID-19 to sell fake cures, obtain personal information and otherwise defraud the vulnerable. Households and businesses entered the crisis with record levels of debt in many countries — a problem that regulators and industry are now taking steps to address through various forbearance measures. It is critical that these programs are implemented swiftly and compassionately. Transparency of information to consumers from authorities and providers will be crucial, as will ensuring that mechanisms are in place to channel customers’ voices through call centers, chatbots and other mechanisms for responding to consumer complaints and inquiries. CGAP is working with consumer associations, which play a key role in monitoring the effects of COVID-19 response measures on consumers, sharing information and representing consumers’ interests to ensure equitable access to relief programs.
As a member-based organization, CGAP plays an important coordinating role for donors and funders, who already are pivoting their resources toward the COVID-19 response. Providing them with insights on best practice and evidence-based research to guide their investment decisions is crucial to minimize duplication and ensure resources are directed effectively. To this end, CGAP is creating a platform for information exchange and coordination through Webex discussion forums and topical coordination meetings for donors and other sector actors.
CGAP also has deep communications assets that we are leveraging in our response to the crisis. Our own website CGAP.org and the independent platform for the global inclusive finance community that we manage, FinDev Gateway, together reach over 1.5 million visitors annually. CGAP is mobilizing these platforms to create an information exchange with the wider financial inclusion community, including:
- Knowledge Hub: CGAP has launched a collection of its own research and other publications on lessons learned from previous crises that can inform today’s response. The list is regularly updated. FinDev Gateway has a more extensive COVID-19 Resource Hub available in English, Spanish, Arabic and French. FinDev regularly posts news updates and has launched the FinDev Guide to Data: Tracking the Global Response to COVID-19, a one-stop-shop for the numerous trackers of government actions around the world.
- Discussion Forums: FinDev Gateway is hosting a discussion forum for microfinance practitioners to share information on how their clients and organizations are responding. The CGAP-hosted FinEquity community of practice likewise has a gender discussion forum on the crisis. We plan to organize additional webinars for practitioners and donors to promote knowledge exchange on crisis response.
- Data Collection: CGAP is planning surveys of microfinance institutions, investors and funders to assess the impact of the crisis on their portfolios. We also are leveraging our global network of technical experts for proactive research and are in discussions with partner organizations on how we might cooperate to generate data and information that is essential for informed decision-making.
We don’t yet know where this crisis will take us or how long it will last. What we do know is that there are real risks to four decades of progress in financial inclusion. But there are also opportunities, arising from technological innovation and our proven ability to act as a unified community of donors, investors, regulators, practitioners and support organizations committed to building inclusive and responsible financial systems that serve the poor. This pandemic will surely produce advances as well as setbacks. Much depends on how policy makers respond to this unique global challenge and how the international community organizes itself to deliver the best possible outcomes. We must mobilize all the tools in our arsenal to provide safety nets and recovery instruments for vulnerable, low-income families and the businesses that serve them. These are extraordinary times and demand similarly extraordinary solutions. As has been pointed out by many observers, we can’t hunker down in our own markets and hope that the crisis will pass over us. The virus recognizes no boundaries. We must act together, as a community, to make sure the poorest and most vulnerable among us are not left behind.
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