European Microfinance Week 2020

Lene HANSEN opened the session by stating that the global financial service industry has been encouraged to expand its services to foreign-born residents (FBRs) since 2015. She elaborated that FBRs are often excluded from the formal financial systems, as financial service providers are often reluctant to serve them. This is due to concerns about legal documentation and residence status, perceived limited bankability and, most of all, stability – the fear that FBRs will leave without repaying the loans. The main segments of the FBR market are foreign migrant workers and forcibly displaced persons (FDPs), including refugees and asylum seekers. In many markets, this group makes up a significant percentage of the population.

Hansen introduced the panel, composed of four representatives of financial service providers with experience in this segment, FDPs in particular. Hansen started by asking the panellists about their perceived risks at the start of their journey, and if (and how) such risk perceptions have changed over time.

Oscar ROMERO NAVAS, from the Colombian bank Bancamia, stated that the main risk perceptions when serving the displaced Venezuelan population in Colombia revolved around the lack of information on credit history, legality issues and flight/credit risk. Bancamia has only served this population for about a year, thus their risk perception has not drastically changed yet. Navas further explained that what has changed, however, is their understanding of this client segment. The real challenge is to build the capacity to understand the situation and the needs of FBR clients, and learn from that. Bancamia started a pilot with this purpose, and eventually incorporated the learnings into its client assessment criteria, which better allowed the institution to manage risks. Today, Bancamia works in partnership with other actors, with whom it shares credit risks.

The other panellists revealed that their risk perception had changed over time, as they got more familiar with FBRs. Alia NAZAR-FARHAT, from for the Lebanese non-profit MFI Al Majmoua, said that their increased understanding of the FBR market segment had resulted in high growth of their customer base. Hannington THENGE, from MDI UGAFODE, underlined the importance of continuous learning about segmentation to integrate the FBR segments.

The discussion turned to segmentation and mitigation of perceived and actual risks. Martina CRAILSHEIM, from the MFI VisionFund Uganda, explained that they had incorporated additional socio-economic indicators in their eligibility/appraisal criteria for new South Sudanese FDP borrowers in their group-based methodology, including indicators of group membership, performance and group strength.

Nazar-Farhat elaborated that, after having decided that it was best to include refugees into existing financial products, it was important to differentiate eligibility criteria. By considering different risks, added appraisal criteria served to mitigate the risks identified. For instance, to lower the (perceived) mobility risk for Syrian FDPs, Al Majmoua had introduced ‘stability’ indicators, including duration of stay in the country, and enrolment of children in school.

Thenge added that the different refugee communities UGAFODE serves are organised into strong networks amongst themselves. Therefore, the Micro-Deposit taking Institution had contracted refugee employees from within the community to help them communicate and overcome language barriers. Vision Fund had done the same.

Moving on to the question of FDP performance as FSP clients, the panellists shared observed differences between FDP borrowers and national clients, up to the start of and during the COVID-19 pandemic. Crailsheim explained that the repayment rates of FDPs were perfect before COVID-19, but both national and FDP arrears had increased during the pandemic. However, during the crisis, FDPs showed significantly higher repayment rates of 70-80 percent, while nationals recorded rates as low as 20-30 percent. Crailsheim further stressed the importance of having local staff from the FDP communities gather data and monitor performance.

The experience of Bancamia had also shown a high level of loyalty and strong commitment to repayments among FDPs. Romero Navas said that displaced clients tend to be more responsible with their credit facilities, because they had more limited credit opportunities within the market. He stressed, however, that FDPs are economically more fragile (poorer, less economically active and more informally employed) than nationals, with less collateral and lower capacity to repay, so the size of loans provided were lower.

Thenge explained that in Uganda he had noticed an interesting difference between the financial performance of rural versus urban FDPs. Before COVID-19, urban FDPs and nationals at similar socio-economic levels performed similarly, but during COVID-19, rural FDPs in settlements had shown higher resilience. Urban FDP shop-owners suffered more during lockdown, resulting in higher arrears and more rejected FDP loan applications for this client segment.

Nazar-Farhat stressed the importance of realising that FDPs are a heterogenous group. In Lebanon, later arrivals among Syrians were more vulnerable and showed slightly higher portfolios at risk (PAR) than nationals, whereas more protracted FDPs (Palestinians) and migrant workers (Filipinos) had lower PAR than nationals. However, she stressed that nationality is not a helpful indicator of client performance; the time the FDPs have spent in the host country and the level of economic participation are a better indicator of resilience and good FSP performance.

Hansen continued the discussion by asking the panellists what type of support their FSPs needed to further expand their FBR portfolios. Thenge and Crailsheim answered that getting support to off-set the capital costs of working in the often remote areas where FDPs live remains important. Likewise, continuous staff capacity building is important. Providing FDPs with a welcoming environment requires staff to understand and appreciate them. Technical assistance and strategic partnerships are also important to increase financial literacy among FDPs.

Romero Navas said that building alliances with other institutions is key. He added that, in order to promote further financial inclusion of FBRs, there needed to be more efforts at policy level to enable FDPs access legal documents and residency status, as this often prevents them from opening FSP accounts. Nazar-Farhat said that, in her experience, the longer FDPs spent in Lebanon, the more their financial service demand mirrored that of nationals, and in addition to credit, they also need regular financial services like savings and insurance. As MFIs in Lebanon can only offer credit, these gaps remain.

All panellists agreed that more and better data, continued research, evidence-based studies and impact assessments are key to increase financial inclusion of FDPs, and for FSPs to better assess the new opportunities and to avoid leaving anyone behind.

The session ended by requesting advice from the panellists for other FSPs considering to start serving FBRs. Crailsheim stated investing in segment assessments is important to get to know the clients you want to serve. Also, engaging with government and local actors responsible for FDPs is key; it is better to overshare and be over-transparent. Crailsheim recommended to invest time and money in hiring and training local FDPs as staff.

Nazar-Farhat emphasised the importance of segmenting FDPs. She recommended to segment them by displacement duration and economic participation into at least three categories: vulnerable (1st year), developing (1-3 years), and economically stable/active (>3 years), and to then develop different strategies for each segment: livelihood services for the vulnerable, well-designed financial products for the economically active, and building capacities for the ‘in-betweens’.

Romero Navas recommended building alliances with partners to help identify and segment target customers, and to share information on FSP processes. Working with governments and regulators to reduce legal risks, credit risks and meet reporting requirements is also crucial. Lastly, he stressed the importance of strong internal communication across the FSP to get buy-in and to break stereotypes.

Thenge closed the session by stating that FDPs are bankable and have the capacity to contribute to the growth in portfolio of any financial service provider. He recommended that FSPs work with colleagues and partners and to keep sharing experiences in order to build a ‘refugee-ready’ environment for financial inclusion.