Digital and the microfinance sector in the face of the health crisis

By Grameen Crédit Agricole Foundation

Karel Prinsloo

The establishment of an observatory dedicated to monitoring the effects of the health crisis in conjunction with 80 partner microfinance institutions (MFIs) and social business enterprises in around forty emerging countries allows us to regularly collect information to share and draw the best lessons from it.

This week we have been focusing on how microfinance institutions are using digital channels to overcome the difficulty of direct contact with borrowers, which traditionally takes place either in branches, during group meetings, or during fund disbursements (microfinance overwhelmingly uses cash when handing over borrowed sums) or monitoring funded projects.

In our survey conducted in early April, 68% of our partner microfinance institutions indicated that they had increased their use of digital channels to overcome contact difficulties, as a result of lockdown measures or bans on group meetings. This strong growth in usage observed in the traditional finance sector is therefore also observed in the microfinance sector, where the industry is adapting at a rapid pace.

Technological means and processes including digital tools are being rapidly developed by Institutions of all sizes (the smallest having client portfolio sizes less than 10 million $, the largest well in excess of 100 million $). Since the beginning of the crisis, institutions have been producing business continuity plans, the basis for new discussions and exchanges with their funders, in which they very frequently include new digital uses.

For most institutions, the first step is to raise customer awareness about the possibility of using remote payment methods. This step is implemented through SMS messages (particularly suitable for 2G network coverage) but also through social media, when the telephone network allows it.

“[We] encourage SMS clients to use mobile money platforms for repayments as it is the safest mode at the moment” – MFI in Uganda

“[We] are starting to inform clients through social media and SMS about the possibility of repayment via terminals, mobile wallets and internet banking” – MFI in Tajikistan

For the many MFIs that did not yet have it in their range of services, the first process that was quickly developed at the start of this health crisis was that of paying installments by electronic money. This practice of remote payments is encouraged by many regulators, this is particularly the case of the Bank of Central African States (BEAC) for countries under its authority or the Central Bank of West African States (BCEAO) which decided to reduce the transfer and use fees for this form of currency. This implementation of remote payment is accompanied by mass sending of information messages to clients to explain these new modalities.

“We send numerous SMS messages to our clients reminding them how to use the mobile money code to make their loan repayments and the hotline they can call for assistance or complaints.” – MFI in Uganda

These remote services allow customers to pay their installments without having to travel (and therefore use public transport) by using the network of telephone operators' payment kiosks, which are generally dense and present even in rural areas.

The introduction of these payment methods also now allows for the disbursement of loans to customers' electronic wallets, with customers visiting these same kiosks not to pay their installments but to obtain cash disbursements for their microcredits. During the lockdown period, the use of electronic money therefore allows financing activities to continue.

“The Palestinian Monetary Authority urges microfinance institutions to provide low-interest loans to finance income-generating projects through digital channels” – MFI in Palestine

Yet, surprisingly, this crisis is being experienced by some institutions as a real opportunity to accelerate the implementation of digital platforms and the launch of new services to gain operational optimization or even relational excellence. For the leaders of partner institutions, having to invest in digital tools for reasons that are now "vital" for their institutions seems to them to be a way to accelerate investment plans that they were thinking about before the crisis. It thus allows them to immediately begin the modernization of their distribution model and their process, which has not failed to surprise us very favorably even though we know the vitality and capacity for innovation of our partners.

“This had been considered before the COVID issue […]. However, discussions are now underway regarding the possibility of launching [the mobile payment solution] accessible to all clients” – MFI in Sri Lanka

“In times like these, when everything can be considered a vector for the transmission of the virus, it is prudent to reduce cash handling. [We] have therefore taken advantage of this crisis to improve [our digital platform] to detect gaps and reduce flaws in our system” – MFI in Ghana

The economies of some countries that were already highly digitalized, such as those in East Africa, appear to be more resilient to the effects of the crisis. Microfinance institutions operating in these areas have demonstrated remarkable adaptability. For example, the Kenyan economy, which is particularly open to payment, financing, and investment transactions through electronic wallets, operates remotely, minimizing the risk of spreading the virus.

“Kenya is better prepared than other countries because of the high penetration of mobile money. The concept is widely used by the population” – MFI in Kenya

Many institutions tell us that they will be more structured and more efficient in the aftermath of this crisis. These experiences, sometimes vital to continuing their activities, seem very useful to them for considering operational performance gains in the future.

“Our team has adapted our mobile application to add a feature allowing remote loan restructuring requests. […] We have introduced a new criterion in our monitoring tool – “emergency (coronavirus)”, which means that loan officers will have to monitor their clients remotely, obtain information and enter monitoring data into the software” – MFI in Kazakhstan

“Our new strategy focuses on transforming [our] current way of operating to adopt more digital solutions, reduce the need for physical interactions between employees and clients, and replace cash transactions with mobile payment capabilities” – MFI in Georgia

These positive effects of digitalization, achieved through the rapid changes made by microfinance institutions, are also reflected in the social enterprises in our portfolio of investments. The digitalization of operational processes is a very effective way to combat the constraints of lockdown for companies that deal directly with the public or with raw material suppliers. This is the case, for example, of a Senegalese company that, thanks to digital payments, has seen its milk collection and dairy product sales activities continue and generate growth that exceeds forecasts.

For another social enterprise, specializing in drinking water treatment, the health crisis has also led to the development of home water delivery following an online order.

Our partners are aware that the use of digital solutions is not a comprehensive solution to address all the issues raised by this systemic crisis. They expect their clients and operations to encounter economic recovery challenges, to which digital technology can only provide limited assistance. Despite the increasingly intensive use of digital channels, the commercial activity of microfinance institutions is slowing. They are all focusing on supporting their clients, taking care to address the increasing number of requests for payment deferrals while maintaining risk control and good operational quality.

In some areas, the supervisory authorities have issued directives or strong recommendations for MFIs to grant moratoriums to their clients that can last several months, which imposes a very significant activity on the institutions.

However, in the majority of the testimonies we have collected, the health crisis is perceived as a sequence that requires the various management committees of our partners to deeply reflect on their operational performance under constraints. The experiences lived and the solutions found to deal with the health crisis will be very useful for "the day after," our partners are convinced.

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Discover other articles on: Covid 19 Observatory.