Social and economic life is slowing down and coming to a virtual standstill, with unprecedented images of empty streets, from New Delhi to Lagos and from Tashkent to Mexico City.
These lockdowns have a profound impact on the lives of hundreds of millions of vulnerable people. Many of them live on a low-income and rely on daily earnings to survive. They see their income sharply decrease or even disappear without financial buffers or other safety measures to fall back on. In this context, our work as an impact investor is more important than ever. Through our Financial Inclusion funds, we are active in over 40 developing countries and emerging economies, providing finance to over 130 financial institutions that service tens of millions of businesses, workers and households who are now being hit so hard.
We asked Frank Streppel, Head of Global Investments at our Emerging Markets department, about the role of the financial inclusion sector in addressing COVID-19 and our role as an investor.
What do you see happening in developing and emerging economies?
Earlier crises, such as the 2008 financial crisis, put stress on capital markets and on the macro economy in general. Micro and small business also suffered but were quick to recover; the impact on them being relatively small. With COVID-19 this is fundamentally different. This crisis hits the most vulnerable people the hardest in their health and economic situation. Uncertain times have additional side effects such as volatility in local currency rates, falling oil prices and rising prices for basic needs like food. In emerging markets micro and small businesses are the engine of the economy. Collectively they account for most of the employment. If they are not supported, the economic side-effects of COVID-19 will have a devastating and lasting impact on many lives far beyond the direct medical impact of the virus.
How does this impact the financial inclusion sector?
Many of the daily wage workers, micro and small entrepreneurs may hardly be able to repay their loans, as their incomes have dropped. Furthermore, collection of microfinance loans very often happens on a cash basis, at branches or at group meetings. Thus, apart from clients’ incomes, the repayment process is also disturbed. Meanwhile, it is crucial that not all financing dries up. Certain sectors, think of food production and companies involved in health care, need to continue to operate and serve the people. This is only possible if selected sectors are being supported by governments as well as by the financial sector.
What can be done to support small businesses?
The good news is that although we cannot prevent damage from happening, we do have the ability to support many and limit the long-term impact. It requires decisive and coordinated action to maintain a strong foundation for micro and small enterprises to get back on their feet and drive economic recovery once the COVID-19 crisis recedes. From research and experience we know that micro and small enterprises are very flexible and quick to respond to new circumstances. In several countries national governments and central banks have taken proactive measures to support small businesses. A good example is a three-month moratorium on repayment of loans in countries such as India, Georgia and Peru, to ease the immediate burden. This obviously impacts their lenders, who also have their financial obligations. It is therefore of vital importance that such a moratorium is supported throughout the financial value chain, including regulators, local capital markets, local banks, international development agencies and specialised finance providers such as Triodos Investment Management.
This means that financial institutions have an important role to play
Yes, very much so. In every country our partners focus first and foremost on staying in touch with their clients and on understanding their needs. For example, some may be helped with prepayment of their loan, to reduce interest cost since they cannot buy and sell stock. Others may be helped with additional funding in order to complete the harvest season. It is amazing to see how quickly some adapt to new circumstances. They contact their clients by phone and make use of digital channels like apps. Some even provide video tutorials to their clients, which do not only address financial issues but also educate their clients by urging them to maintain social distancing, stay at home, wash their hands and stay safe. That sounds easy but we must realise that many live in very cramped conditions in densely populated neighbourhoods, without access to clean water, let alone soap. More than in developed countries, financial institutions in emerging markets that service the base of the pyramid can play an active role in society due to the large number of people they reach.
What is the role that Triodos IM can play?
With our extensive knowledge and networks, we are well positioned to contribute to sustaining the business environment in emerging markets as the foundation to recover from the crisis. We are strongly committed to supporting and enhancing our partnerships around the globe wherever possible.
Right now, we are in close contact with all our existing investees for regular updates. Some are well placed in terms of their ability to manage liquidity and for those that will encounter difficulties we are open to exploring additional facilities or restructuring current ones in close cooperation with their other partners. All with the aim to help them in a position to lend again and play their vital role in recovery once the COVID-19 crisis recedes.
We have also initiated very close cooperation with our main colleagues from around the globe to exchange insights and data so we can act jointly, efficiently and swiftly to offer support. Within the Netherlands we closely cooperate with other members of the Dutch platform for inclusive finance (NpM). We have formulated and signed a COVID-19 Investor Statement in which we express our commitment to work together as funders to support financial institutions and their clients.
For over 25 years, we have been active as a financial inclusion investor. By supporting access to basic financial services many people were able to improve their living conditions, many businesses were able to grow, and many jobs were created. More than ever, our investments have the potential to truly make a difference to people in arduous circumstances. As an investor we manage today’s risks and challenges with a long-term focus in mind: sustainable development and improving livelihoods in emerging markets.
Read more about our expectations for the global economy and financial markets in our Economic Outlook.