Yves Ferreira is this year’s InFiNe.lu scholar attending the 2018 Boulder Microfinance Training in Turin.
Here are his 2 articles talking about his experience of the second and last week of training:
- How can financial services help reduce vulnerability at the Base od the Pyramid (BOP)?
- As the curtain comes down
His first week insight can be read here.
A very enlightening selective course by Craig Churchill from ILO’s Social Finance Programme helped me taking a new look at how low-income households (LIHs) manage risks and cope with their consequences.
So when we know about the multitude of risks LIHs are vulnerable to, we can only adhere to the main message of the course:
“Financial Institutions that are serious about development should spend at least as much effort offering protective financial services as they spend on productive financial services”.
Even if Microcredit has long been outpaced by Microfinance how far has the industry gone into proposing services that effectively reduce the vulnerability of LIHs and just not consider these services as complementary sources of income that improve the bottom line? How many Financial Service Providers (FSPs) are really aware of the risks their LIHs customers consider as a priority and this over their life cycle?
Risk management is not only about coping. Prevention and preparation are prerequisites and again these are areas in which FSPs also have a role to play. About this issue, we had a very animated debate within the group around study cases of MFIs/FSPs who worked on risk prevention. From the examples of a MFI providing access to latrines in rural Cambodia, a health micro insurer in India who invests heavily in community-based group health education, a micro lender in South Africa that deals with domestic violence and HIV/AIDS prevention or a microfinance entity in India providing training on work safety, there was an easy consensus around the question shall we do it ? The debate was more about the how, the study cases giving us a few examples of beneficial partnership between the MFIs/FSPs and NGOs and about can it be financially sustainable? Some indicators such as a reduction in frequency and severity of hospitalisation costs, improvement in portfolio quality, client retention increase speak for themselves but they have to be put into perspective with the induced investment costs to convince possible reluctant boards.
When it comes to coping, the level of stress generated by the risk event will logically determine the kind of response a LIH can develop in the absence of formal financial services. However, these solutions are not always satisfactory as they end up exacerbating poverty and vulnerability. Consequently, there is undoubtedly a rational for developing risk-managing financial services for the BOP.
The course offered, starting from a categorisation of risks and induced economic stresses, a very synthetic framework allowing us to answer the question:
Which product for which risks:
|Risk||Relative Cost||Degree of Uncertainty||Product|
|Life Cycle events||Low||Low||Savings/ Credit|
|Natural disasters||High||High||Savings/Insurance/ Relief|
Subsequently, and during four sessions, we went rather deep into the details of each category of products, their merits, their shortcomings always again with concrete study cases. The latter was supposed to be illustrative but owing to the diversity of backgrounds in the group (DFIs, regulators and MFIs coming from three different continents), they gave rise to passionate debates and very practical testimonies.
Regarding emergency loans (not to be confounded with disaster loans), there is of course among MFIs, but mainly their funders, the bias against non-productive consumption loans due to the legitimate concerns about over indebtedness, credit risk but also the stress they can put on delivery channels.
But cognizant of the seasonality and volatility of LIHs’ income and expenses, their psychology (we were introduced to the Mental Accounting concept, see details below) and the drawbacks of informal alternatives (amount limitation, cost, collateral requirements for pawnbroker loans, confidentiality), under certain conditions (risk-adjusted interest rate, strict debt repayment assessment, adequate delivery methods such as digital and agents), FSPs should consider offering such product to their customers. Surely, they are a valuable complement to productive micro loans in a sense that they provide customers with a safety net in case of economic shock, avoiding a further deterioration of their situation, and in many instances create a strong customer loyalty incentive.
On savings the main message was, of course, understanding the purpose and foresee flexibility when designing the products. What type of future expense(s) / risks are the savings intended to cover? Taking into consideration the customers’ cash inflows and outflows patterns, which frequency of deposit can be offered, the adequate remuneration levels, will there be restrictions on the size of deposits and/or withdrawals, incentives for maintaining and increasing balances, are there strategies to minimize operating costs to the FSP and transactions costs to clients?
For insurance, an emphasis was put on partnerships between MFIs and Insurance Companies with an interesting case study describing a failure. The latter can be explained by an insufficient customer segmentation analysis upstream which translated into the fact that certain products were not adapted to the needs of the targeted markets. The session also touched on index insurance and Meso Level Insurance for Disaster Protection, their advantages and limitations. We had then a heated debate on loan refinancing/recovering lending in case of natural disaster, what can MFIs, funders, governments do in such situations? I mentioned EIB’s experience through ACME in Haiti after the 2010 earthquake (helping the institution restructure part of its portfolio and extend new loans to affected customers) and we were provided with a study case on VisionFund ‘s program following Typhoon Haiyan in the Philippines in 2013. Lessons drawn are very similar (see below).
Last but not least, we were also given a very interesting insight into hybrid products such as saving and credit, contractual savings combined with insurance and endowment products. M-Shwari in Kenya was given as an example of the first category (see below). In terms of conclusion, there are still few examples of successful hybrid solutions but health risks seem the most promising avenue so far.
So are you also ready for the protective financial services journey?
At the end of the first week during a CGAP members lunch I was kindly asked by a Boulder representative if, due to a last minute cancellation, I could participate as a panelist in one of the French Master Classes of the second week on “Finance for microfinance”, alongside Kasper Wansleben from LMDF (InFiNe.lu member).
ADA, another InFiNe.lu member, had already been on the spotlights the week before with Isso-Takou Soulémane Djobo during the Master Class on Risk in Credit Market Cycles animated by Momina Aljazuddin from IFC.
This time InfiNe members just “monopolised” the panel of a Master Class and presented their respective areas of intervention.
For me, it was a unique opportunity to insist, in front of a public mainly composed of MFIs operating in French-speaking countries, on the complementarities between a large Development Finance Institution such as the EIB and a specialised Microfinance Investment Vehicle like LMDF both in terms of involvement towards financial inclusion and shared values.
The Q&A component was very animated with Djibril Maguette Mbengue from Grofin, the moderator, not hesitating to also give his opinion on some thorny issues such as pricing of our loans (too expensive), how we measure impact, debt versus deposits.
But this was not my first incursion of the week in the French programme. On Monday, I had decided to attend the Master Class “Surendettement, Protection des clients et recours à l’économie comportementale” with Jessica Schicks from BIO. With the word Behavioral economics, I was back on the University benches in front of my microeconomics and economic psychology professors classes and, with the issues of over-indebtedness and client protection, at the core of our values at the EIB when we consider any investment in the microfinance sector.
Jessica presented us some of the conclusions of a study she had conducted in 2011 with the Centre for European Research in Microfinance and which remain valid.
Starting from the point that over-indebtedness is the way to payment default, Jessica rightly stressed that traditional risk management tools are not enough to prevent such situations and that client protection is also part of an effective risk management system.
Indeed, over-indebtedness is the outcome of three main factors in interaction:
- External factors such as unfavorable shocks or the institutional environment (regulation, competition);
- Lenders behaviour that can encompass a focus on marketing and growth, product rigidity or unappropriated procedures and abusive loan recoveries;
- Borrowers behaviour through psychological and cognitive distortions, sociological influences and socio-demographic and socio-economic attributes.
Confronted with such situations MFIs have at their disposal various levers:
- Reinforce their MIS in order to anticipate such situations;
- Utilise credit bureaus;
- Adapt their products to give more flexibility to customers;
- Reschedule loans appropriately;
- Adopt a responsible growth model;
- Train loan officers and customers and,
- Customer centricity.
Behavioral economics can definitely help in the definition of corrective measures that are in accordance with the natural behavior of customers. The latter can encompass:
- Help the customers thinking about the consequences of their decisions in terms of ability to repay;
- Reduce payment difficulties;
- Allow customers to change their minds;
- Transparency on pricing and risks associated with products;
- Avoid exploiting weaknesses;
- Favor preventive savings and,
- Personalised reminders.
I dare to say that some of the measures above are not very popular among many players in the industry and that such an iconoclastic approach will take many years to prevail. But this is the only way forward.
In the course of other discussions, we were told MFIs have to move from a model “High touch- Low tech” to a model “High Touch-High tech » combined with client relationship management. I would like to be sure that High Touch also goes hand in hand with High impact and High responsibility.
Finally, I would like to make special reference to another very relevant Master Class on Migration and Financial Services with Marc Jacquand from the UN and Alia Ferhat from Al Majmoua in Lebanon, an existing customer of the EIB. A few figures to start. Migration concerns 250 million people or 3% of the world population but migrants account for 10% of global GDP. While insecurity and climate change are also drivers of migration, economics remains the main reason to migrate. A special zoom was taken on West Africa where intra-regional migrations are the most prevalent flows and not migration from this sub-region to other parts of the world. Reference was also made to the Index for Risk Management that provides country by country an index on vulnerability. It is in the first instance used to guide Humanitarian action but it can also be utilised by development actors wishing to manage risk and help to build resilience across the region.
I am thinking in this respect of one of EIB’s main objectives for this region through our West Africa Microfinance Facility, which is to create economic opportunities for the low-income populations (including women and youth) and thus tackling of one the root causes of migration.
Through Al Majmoua’s experience, once again was highlighted the importance of non-financial services in the financial education of migrants (including refugees) and Graduation (from the humanitarian aid phase to stabilisation and integration in the local ecosystems).
Another, very exciting opportunity for MFIs (or any other Financial Service Provider) operating in countries were migrants establish themselves is the creation of partnerships with MFIs in the countries of origin to facilitate exchanges of information if one day the migrant returns home and wishes to start an economic activity or during his presence overseas to help reduce the cost of remittances to the family or to his savings accounts. Finally, the concept of Digital Economic Identity was referred to in particular in its cross-border dimension.
Again, an additional challenge ahead for the industry …
(Author: Yves Ferreira)