The year 2020 was unprecedented in profoundly changing the lives of virtually all people around the world. Like all major crises, it is the vulnerable and poor – the people that the financial inclusion sector exists to help – who bear the greatest costs. Even so, the COVID-19 pandemic is not the only challenge facing the sector or its clients. Climate change, political instability, the growing digital divide -- all loom in the years to come.
For nearing the end of this most difficult year, and rounding the corner of the year to come, two big thinkers and good friends of e-MFP, Claudio GONZÁLEZ-VEGA and Dina PONS, had been asked to help us make sense of it all.
What will the ‘new normal’ look like after COVID – will behavioural patterns have permanently changed? As an opening statement for the Closing Plenary, Claudio González-Vega found this difficult to answer and predict. Nevertheless, according to him some facts of life are clear: poverty will increase and there will be more extreme poverty; and climate change will exacerbate that pattern. Yet, in solace, he was also convinced that the resilience of the informal sector will create opportunities to grow, and also for new MFI products.
Among the key attributes of MFIs is the understanding of their clients, and understanding better why finance matters in these fast changing circumstances; MFIs will be re-appreciated. They are, however, not the solution, but rather one of the components of the solution. MFIs need to better understand systematic shocks and threats such as pandemics and climate change. González-Vega mentioned two types of solutions: a broader range of MFI services with access to payment systems and transfers; and, secondly, a better access to liquidity and index insurances. Societies need more robust solutions for diversification. In that sense, he also said to expect that many MFIs will not survive, and that we will see fewer and stronger MFIs in time to come.
Co-speaker Pons responded from an investor’s point of view, observing a flexible response and ‘working together’ mentality in the sector, together showing a re-appreciation of the essence of microfinance. There are many challenges for MFIs in this period: a need for restructuring while also stepping up activities, and an urgency for the right systems to be put in place to acquire the liquidity that is needed to do so.
With respect to poverty, Pons confirmed that it is right to conclude that we have gone backwards. We therefore need to re-think development and economic strategies in times of crisis and lockdowns with less consumption and productivity, and hence no income. Even if this posed a big shock, we should not underestimate resilience and hope shifting to different sectors. However, this takes time, and we must build strategies to overcome problems and create better structures for financial services. MFIs will need to be enabled to take a bit more risk, and to develop non-financial services, for example also in areas of environmental sustainability and impact assessments. We need better instruments to protect the most vulnerable people against systemic shocks. This includes better loan structuring and re-structuring, client protection principles and covering Human Resources risks, and proper understanding of the realities of MFIs.
González-Vega was very much in agreement, and said that systematic change is going to be central, requiring analytical skills to work with patient investors on sustainable structures and gains. As mentioned, with fewer and stronger MFIs, and with financial and non-financial services; the pandemic crisis will expose the weaknesses in the system. Authorities need to provide the regulatory frameworks for the participants; in Latin America, financial repression is much back as a consequence of the recession.
Pons pondered on what measures or solutions are needed to cope; unfortunately we are faced with unfortunate regulations and imperfect market systems. We need to pick up the fight and find neutral actors with the right facts, to change the mindset of regulators with the right argumentation. González-Vega stated he liked her optimism, and agreed that we need to show our hearts to distinct between real and fake; we can learn from history!
So for the post-pandemic time, we need to review MFIs and recognise other concerns such as gender and protection of the environment; these themes are universal and need mainstreaming, in addition to protection of staff, support to clients, and sustainability of institutions. What is the marginal impact of the various loan sizes; how does an extra loan contribute to more household income? Pons answered that we need to take more risk, and develop more non-financial services in the institutions to finance the right developments. At the same time, such development needs to be more inclusive for women to participate, also at management positions.
According to González-Vega, there are two challenges: is credit the appropriate tool for someone who wants to start a business (so as to not to be burdened and become poorer), and secondly what kind of non-financial services? He advocated for a minimalistic and complementary approach. Environmental risk assessment will become a crucial indicator to mitigate systematic shocks; environmental sustainability is particularly important for the most vulnerable populations.
Both speakers thanked each other for the good debate with interesting topics and insights.