Earlier this year, Streppel shared his view on the role of financial inclusion in addressing the impact of COVID-19. Now six months on, he reflects from the opposite perspective and the impact COVID-19 is having on changing financial inclusion.
“Financial inclusion facilitates access to all other basic needs and provides financial resources that can enable the utilisation of talents for social and economic development. COVID-19 is having a huge impact on financial inclusion globally and has significant impact on the way Microfinance Investment Vehicles (MIVs) support the industry. I see this impact in four stages:
- Immediate impact of lock downs
- Ability to understand the real impact
- Ability to service the sector
- Outlook and exploring opportunities
1. Immediate impact of lock downs
The first stage relates to the impacts caused by the immediate response to harsh lock downs. Many businesses closed or were constrained, and value chains were broken. With borrowers earning less or no income, and financial institutions unable to interact with their clients, loans could not be repaid. This lack of cash flow resulted in financial institutions facing liquidity challenges, despite remaining solid institutions.
It was very important for governments and regulators to create clarity and offer support. For lenders to financial institutions, it was clear that repayment schedules needed to be aligned with the ability to repay. The MIV sector was quick to adopt a coordinated approach via a Memorandum of Understanding and put practical measures in place that defined the rules for COVID-related rescheduling. In most cases it was highly effective, and we saw handshake agreements from East Timor to Honduras, and from Kyrgyzstan to Ghana.
2. Understanding real impact
We are currently grappling to understanding what the real impact is. Some countries are coming out of moratoria, while others are going back in. And although COVID-rescheduled portfolios are beginning to be serviced again, we are yet to feel the full extent of portfolios-at-risk. To understand this we need quality information, however there is a risk of demanding too much from the already challenged financial institutions. We addressed this by shifting from quarterly to monthly reporting and by limiting the request for content from financial institutions. We developed new dashboards to provide oversight of our entire portfolio, and created watchlists to monitor increased risks more closely. Until early October there was also a lack of clarity around definitions, and COVID-impacted portfolios were reporting in different ways. In response, the MIV sector again collaborated and published a set of key definitions for COVID-rescheduled portfolio’s in relation to covenants that are typically defined in loan agreements.
We will increasingly have forward-looking interaction with our clients and will need a qualified assumption on the conversion rate of COVID-rescheduling into real Portfolio at Risk (PAR) to understand the impact on provisioning, profit and loss, and capital buffers. This will be essential to ascertain capital and debt needs, and to strategise for a strong future.
3. Ability to service the sector
The third stage we need to think about is the ability to service the sector. Investors in Triodos IM funds remain loyal and confident, implying we will have continuity. However, with our investment team based predominantly in the Netherlands, and travel restrictions expected well into 2021, we know we need to change the way we work. This means that we will need to:
- work more extensively with trusted partners around the globe;
- do more club deals and syndications with our peers;
- do significantly more off-site preparation and online due diligence;
- continue enhanced cooperation with our peers (for example, joint due diligence);
- regularly hire local in-country support to complement our work.
4. Outlook and seeking opportunities
With International Monetary Fund estimates of a 10% GDP reduction worldwide, and a 10% increase in poverty levels, the progress of financial inclusiveness has been thrown back a decade, but there are opportunities to turn things around.
Micro, Small and Medium Enterprises (MSMEs) are widely recognised as having been heavily impacted, but they are also the most flexible and quickest to pick up. With governments constrained by increased debt burdens, MSMEs will be the engine of rebuilding economies. This requires significant support, capital and technical assistance and the financial inclusion sector will be of vital importance. We will need to invest wisely and remember that:
- cost efficiency of services has become even more visible as a critical success factor;
- technology is increasingly providing better and cheaper solutions to service clients and to reach underserviced communities;
- we need to not only invest in access to finance but ensure that we dedicate finance to sustainable and future-proof sectors like clean energy, sustainable food and agriculture and other basic needs;
- governments and other stakeholders need to have the courage to make choices with long-term sustainability in mind and not throw massive amounts of money at sectors that are not sustainable while building on debt burdens that will limit future developments.
And lastly, for MIVs, successful cooperation in COVID-19 times has increased confidence in each other, and we should build upon that. We can cooperate further and work better together for the benefit of our clients. We should find ways to combine efforts into joint due diligence, club deals, and the creation of a more collective infrastructure for reporting and monitoring. It is work in progress, but I am confident that there will be positive and lasting outcomes. Although we still have many challenges to overcome, the financial inclusion sector is vibrant. It is more relevant than ever and is generally in a strong position.”
Visit the Financial Inclusion page on our website for more information about our approach and our impact stories.