COVID-19 (coronavirus) is hitting the world’s poor the hardest. With more than half of the world’s population under lockdown from the pandemic, many of the world’s poor - most of whom work in the informal economy - have lost their incomes. Many have no safe place in which to quarantine, most have minimal savings for stocking up on food and supplies, and some do not even have access to basic services such as the water needed to wash their hands. “The lack of running water, access to nutritious food and dilapidated housing conditions in poor communities makes advice such as handwashing, maintaining good nutrition, and self-quarantine matters of privilege,” one Manila doctor says. And the predictions are grim: Oxfam warns that more than half a billion more people could be pushed into poverty due to COVID-19’s economic impact, the World Food Program says that the pandemic is threatening the food security of the world’s poorest communities, and the United Nations forecasts that the pandemic will “affect the world’s poorest for years”.
. The poor will likely lose labor income, whether through illness or lack of demand for their services as enterprise comes to a standstill. The level of those relying on public aid will swell considerably, assuming such aid even exists. Loan repayments will fall into arrears and microfinance lenders may struggle to remain solvent. Remittances, often a lifeline for the poor, will likely diminish as remitters lose income themselves and are unable to send money home. IFAD reports in an emailed policy brief an estimated 40-85 percent reduction in transactions among cash-based operators in European markets under lockdown. And IFAD adds that “Even digitally based companies are facing severe challenges to volumes because remitters are reluctant to send by using savings until their own future prospects concerning employment become clearer.” Cash access points for recipients also are limited due to business closure or lack of adequate liquidity. As food supply chains become disrupted, food prices will spike, particularly for those in non-agrarian areas.
Governments from Peru to the Philippines are responding to the financial trauma of the poor primarily by increasing social safety net payments. Nearly 60 countries are reported to be scaling up social protection schemes through one-time payments, increasing current programs or introducing new ones. Some countries, such as Pakistan and Colombia, are launching government-to-person (G2P) programs covering large segments of their populations. For G2P distribution, governments with systems in place mostly are relying on the digital payment infrastructures that have long been a focus of the financial inclusion community. And private sector efforts, often with the “encouragement” of governments, also are focusing on facilitating payments: Kenya’s Safaricom, for example, reduced transaction fees for person-to-person transfers and increased daily transaction limits, while many Filipino banks are adjusting repayment timelines and waiving digital transaction fees.
Governments and the private sector are not the only ones mobilizing. The development sector also is in overdrive as it evaluates how to respond. Donors in particular, even as their own countries and institutions suffer through the pandemic, are exploring how to repurpose and redirect their efforts towards mitigating the adverse impacts of the global pandemic. Although inclusive financial systems are understood to be part of the solution, donors are often unclear how most effectively to tailor their interventions. To help advance the conversation, CGAP recently brought together over 100 financial inclusion donors and partners in a webinar to exchange ideas on donor needs. Some clear views emerged about how the community should approach this unprecedented crisis, as well as areas for action.
1. Learn from the past, while recognizing that this time is different. Crises of the past can provide valuable lessons on both what and what not to do, but it is important to remain sober about the fact that the magnitude of COVID-19 is different from anything we have seen before. As pointed out by a number of experts, from CGAP’s CEO Greta Bull to CFI’s Mayada El-Zoghbi, the COVID 19 pandemic is not localized like an earthquake nor regional like refugee flows – it is global. More importantly, its impact goes well beyond the immediate health concerns: the ripple effect of lockdowns and disease are threatening livelihoods across the board, from the retail to the agricultural, manufacturing and the hospitality sectors. There is no “cut and paste solution”. Nevertheless, the financial inclusion sector has learned some valuable lessons from previous crises along the way. CGAP has pulled together a collection of resources on lessons learned from previous crises to help inform the community on what has worked before and issues to consider this time around.
2. Robust digital payments infrastructures are key to getting money quickly and efficiently to those who need it. In light of the reliance by many governments on safety net payments as the first financial line of defense, digital mechanisms will play a critical role in mitigating the crisis for the poor. This is one area where the past yields helpful insight- digital payments were key during previous crises. Take for example the issuance of prepaid cards to the victims of Pakistan’s 2010 floods. Another example is the development sector’s transition from the post-disaster distribution of in-kind good to direct digital transfer of cash. Digital channels also can get funds quickly not just to victims but also to those helping to mitigate a crisis. A case study by the Better Than Cash Alliance (BTCA) has shown how paying Ebola workers in Sierra Leone digitally kept these frontline workers from striking, ultimately saving lives. Or more recently, Bankable Frontier Associates Global (BFA Global) showed how digitally paid gig workers helped power Wuhan’s response to the pandemic by distributing essential goods to people’s doorsteps to ensure that families could quarantine at home.
These examples illustrate the immense value of robust digital payments infrastructures, systems that the international donor community has spent significant sums of money helping to create over the past decade in the world’s emerging economies. These digital rails, where up and effectively running, ironically are eyed with envy by officials in the United States planning its distribution of G2P payments. “Places like Kenya that know how to reach their poor certainly have an advantage over the US when speed and efficacy are needed,” a senior policy expert at the American Bankers Association recently told CGAP.
3. Avoid distorting the market. We have seen it before with the microcredit sector during a financial crisis or after a natural disaster: As default rates increase and microfinance institutions appear to teeter on insolvency, the donor reaction is sometimes to compensate through subsidies. Subsidies may very well be the answer, but they should not distort incentives nor create longer term adverse effects. As CGAP pointed out nearly a decade ago, an interest rate subsidy to clients could potentially confuse borrowers and reduce credit discipline. This occurred in Sri Lanka after the 2004 tsunami when the government announced subsidies without any clarity on their duration and scope. Injections of cash into a community can also backfire if they are not carefully structured. When relief organizations in Sri Lanka began cash-for-work programs, they set wage rates above comparable rates in agriculture and other sectors; laborers understandably switched out of their agriculture jobs for the temporary, higher paying positions. Large farms responded by mechanizing their operations, which destroyed agricultural employment opportunities over the long term.
There is pressure to act quickly, but donors should pause and ensure their responses are well informed. It is important for donors to be market aware by engaging with local stakeholders and developing responses based not only on short-term immediate needs but also on long-term market stability. Otherwise they risk doing harm. In any given market, donors should consider interventions that work at multiple points across the financial market, or partner with others who can fill in the gap. For example, a donor working only with providers may want to partner with another focusing on regulatory barriers in order to address long-term structural obstacles. And donors always have to consider how their interventions may distort the market, leading to negative long-term implications. With careful donor interventions now, the COVID-19 pandemic may actually lead to more resilient and inclusive financial systems in the future.
4. Focus on actionable data that can guide donor investments. Everyone loves this theme: data. Without a grounding in the facts and evidence, donor interventions cannot be optimized. So it was not surprising to learn during the CGAP webinar that many donors are focused now on gathering whatever data they can. The good news is that a number of data collection initiatives are already well under way. Governmental responses are being effectively tracked at Yale University’s Coronavirus Response Tracker and on the COVID-19 page of the Institute of International Finance (IIF), among others. The impact on the lives of the poor is also being researched: BFA conducted a survey of more than 1,500 low-income individuals across several countries to gauge early directional impact of COVID-19 on the lives of the poor. The Chinese Academy of Financial Inclusion (CAFI) researched the epidemic’s impact on the financial health of the working class and the MSEs in China. A number of investors are tracking how their private sector partners are adapting their operations in the wake of COVID-19. Many are keeping that information private for now but not all. Accion, for example, shared how three of its partners have moved their operations to “low touch” and online channels in the age of social distancing. CGAP’s FinDev Gateway has compiled a list of all data-tracking efforts, effectively “tracking the trackers” and helpfully compiling them in order of relevance to financial inclusion.
While all this is interesting information, a critical next step is to ask, “So what?” As one person put it during the CGAP webinar, data telling us that the poor are suffering is not telling us anything we don’t already know. CGAP has long advocated for clearly articulating how any data or information initiative will be used to improve the lives of the poor. Donors should focus on facilitating the collection of actionable data that help them understand how best to target their funding. One clear area of need will be MFIs. Tim Ogden of the Financial Access Initiative at NYU-Wagner says the immediate challenge lies in what’s happening to financial service providers, and specifically MFIs, since they provide direct financing to the poorest communities. He suggests it is paramount to understand the viability of MFIs both in the short and longer term: how much liquidity they need and for how long, what relief strategies they are employing either through governments or their donors, are they viewing the pandemic as presenting challenges of short-term liquidity challenges or longer-term solvency, and how they are protecting the health of their staff. In addition, donors should not overlook the institutions that reach even more poor people than MFIs: member-based institutions such as cooperatives , credit unions and savings groups. What are their current needs and how could donors specifically help? Another area for data collection would be around shortcomings in the digital infrastructure essential to digital G2P payment and remittances: how many agents are functioning, how are they managing liquidity, how are the transaction patterns changing and why.
This specific information can help donors understand the gaps and make funding decisions that have real impact. But as the situation unfolds, donors will likely have to adjust: markets are dynamic, particularly in crisis environments. And donors should share information – not only to reduce duplication but also, since travel now is limited, because obtaining data from the field may be difficult.
5. Donors need to coordinate. This may seem obvious --when political imperatives create pressure to mobilize significant resources within a short period of time, there is a high risk of donors working at cross purposes or funding overlapping initiatives. A clear message, whether from the G7, the OECD, or CGAP’s own members, is that donors need to coordinate. But how? And on what topic? During the webinar, donors identified specific categories of intervention for coordination – G2P payments, remittances, agent networks and data collection, and how best to support the MFI industry. CGAP is exploring how to harness donor momentum around these topics through working groups, which would serve as information clearing houses and vehicles for promoting inter-donor partnerships.
6. Above all, donors need to be flexible. Donors undoubtedly have a significant role to play in mitigating the crisis now and in laying the groundwork for longer term recovery. It is far too early to predict how COVID 19 will affect the financial lives of the poor: its duration, reach and ultimate impact will play out differently based on country context. The financial inclusion community will have to get comfortable with fundamentally uncomfortable levels of uncertainty. That is why perhaps the most important thing donors can do is to remain flexible. It is unrealistic to think that all investments will survive a prolonged economic downturn. Consolidation of the microcredit or fintech sectors may be the end result, and the donor community should be ready to support that development, even if the implication is a loss of donor funds. Donors could follow the example of some U.S. foundations in embracing flexibility in their programs, such as converting restricted to unrestricted funding, or overlooking postponed or canceled deliverable. Flexibility could also take the form of extending timelines, repurposing projects, and adding elasticity to rigid monitoring and evaluation frameworks. But whatever form it takes, flexibility in face of immense uncertainty is the right approach.