This is the first piece published in the Sentinel Project, a case-style research initiative which began earlier this year to track how senior microfinance managers from a group of significant MFIs are facing up to the challenges posed by Covid-19. To learn more about the rationale for this project, see the launch article here.
This first set of posts covers interviews from the first three months of the Sentinel project, from roughly March to May 2021. They have been difficult months; repeated waves of Covid have wreaked havoc in many countries, and the cautious optimism of late-2020 in many places gave way to resignation and pessimism.
Context and crisis: The state of the pandemic in the Sentinel markets
While every country has been affected by the pandemic, severity of impact varies among Sentinel countries. Some have relatively few infections and have been able to maintain normal, or near-normal economic activity, with limits on large gatherings and mask requirements. Others faced a full-blown third wave, including from new variants, and endured economy-dampening new lockdowns, some regional, some national, and involving curfews and movement restrictions. Others are somewhere in between, and the risk of new waves remains. Across all countries vaccination rates are low; only one has vaccinated more than 20% of the population as of this summer. Overall, the Sentinels, their institutions, and their country populations at large are in a holding pattern, unsure when or whether new restrictions might be put in place.
What is anecdotally clear is there is a drastic under-counting of the health impact of Covid-19, both in reported cases and deaths, as well as a dearth of data in low-income countries on the prevalence of so-called “long Covid”. The first three months of interviews with the Sentinels say as much: there have been extensive “write-offs from client deaths” in Southeast Europe, “many clients [are] sick” in East Africa, and the economic impact “is worse than 2008 –2009” in North Africa. One leader described the economic crisis from Covid as “of enormous and unprecedented magnitude,” and this comes from an institution that faced one of the major sector-level crises a decade ago. “[There is] complete uncertainty...everything depends on vaccinations,” but there is “widespread scepticism and fear, driven by gossip on social media,” says a Sentinel from East Africa.
A generational crisis for clients
It’s abundantly clear that Sentinel organizations’ clients are suffering from both the closure of businesses and borders in recurrent lockdowns, and the devastation of Covid itself. This distress manifests in fear and “reluctance to come to in-person meetings during the first lockdown,” according to the Sentinel in West Africa. It’s seen in “very low business confidence” among clients who “are really struggling and are afraid to start a business right now,” according to a Sentinel in Southeast Asia, and as a CEO in Central America says, “people are more conservative, they don’t want too much debt, and institutions are more conservative as well.” The anguish of the pandemic is seen in “high anxiety and stress among clients, as so many are dependent on movement of people and goods that has impacted their cash flow,” according to the CEO in East Africa.
But the effects aren’t evenly distributed, either between or within markets. Sentinels in Central and Southeast Asia and Southeast Europe report that clients involved in agriculture in fact earned more during the pandemic because the prices of food products increased significantly. They “not only paid off their debts, but they went through those lockdowns much better compared to urban citizens, whose businesses had to be put on hold,” and “since MFIs mainly serve those rural clients, their clients suffered less compared to bank clients and they very quickly restored their businesses after the lockdowns,” according to the Central Asian Sentinel. The CEO in Southeast Europe observed that “agriculture was completely resistant, also in most of the cases the consumer housing portfolio was resistant to Covid.” Conversely, Sentinels in North Africa and in another Southeast Asian country reported that agriculture was particularly hard hit, causing issues with food availability and quality among their customers.
Keeping channels open: communicating with clients
The ways the Sentinels’ organizations have responded to the pandemic in terms of communicating with clients varies as much as the contexts in which they operate. There have been impressive initiatives to ensure clients don’t feel abandoned; the Sentinels in West and East Africa and one from Southeast Asia all ensured that staff or management systematically phoned all clients during the first lockdowns. In East Africa, clients considered “opinion-leaders within communities” were financially supported to travel and meet with other remote clients, with PPE provided by the organization.
A Southeast Asian Sentinel says that managers were tasked with contacting all clients to reassure them that there would not be penalties for those who could not make repayments, and to encourage repayment among those who could. This included “linking clients to government social amelioration programmes where possible; many of our clients lack the confidence or understanding of how to navigate and access these programmes, so this is where we feel we can add value to them.” In East Africa, the “immediate priority was ensuring we could reach clients remotely...groups were moved into virtual WhatsApp groups in April 2020, with downstream moratoria in place, and additional moratoria for those in education and transport sectors.” In Central America, loan officers had been operating on WhatsApp and sharing two types of content with clients: operational updates on when loans have to be renewed, etc., and “soft” messages of non-financial support (for example, how to help kids with online learning) which they believe generate client loyalty.
Contact with clients naturally became less frequent as lockdowns continued. In Southeast Europe, a Sentinel said that the pandemic expedited processes already in place to increase efficiency and reduce costs of communicating remotely with clients. And other initiatives have been catalyzed too: in Southeast Asia, a Sentinel explained how the organization has tried to “rapidly diversify on multiple fronts in the past year, to generate sustainable revenue streams beyond microbusiness lending… for example our microinsurance programme has increased considerably during the lockdown periods, with cross-selling opportunities for branch or loan officers.”
At this Southeast Asian Sentinel, and in several others , Covid has accelerated digitalization of processes. The Central Asian Sentinel “changed to the remote work model,” and therefore “communication with clients continued through the phone; we changed the way we work with clients; we transformed all this client service online into mobile applications, mobile baskets.” There were obstacles, of course: “before, clients didn’t trust online, they preferred to repay in person, they did not believe the infrastructure was well-developed to provide secure services. The lockdown helped or forced clients to take the risk and move their transactions online.”
Increased communication has also extended to surveying clients’ needs. The Sentinel from West Africa says there were no formal moratoria in place “and in any case, we could not do case-by-case moratoria with our group clients.” He says they tried to be flexible in terms of collections, and many clients suspended business and ate into their capital. “We did a quick client survey to find out the size of loan they would require….[Before Covid] every month the senior management would randomly call several clients and ask them a standard set of questions, like how’s your business? Does our staff treat you properly? How is the interest rate for you? In the pandemic we multiplied this to thousands a month.” These calls gave the Sentinel both a reading on how clients were doing and a chance to provide information to them.
Managing staff and sustainability
One of the biggest challenges over the past year has been the almost impossible balancing act required on staffing. On the one hand the legal duty of care to not put staff in harm’s way and the moral duty to ensure their livelihoods where possible, and on the other, the obligation to clients and stakeholders to continue the organization’s operations as much as possible.
At many of the Sentinel’s organizations, staff largely worked from home for much of the previous year. At some, like a Sentinel in Southeast Asia, this will become permanent (20% of staff will be permanently working from home at the end of 2021), a consequence of pushing clients to digital products and platforms, a drive for more cross-selling by loan officers (being trained in “telemarketing”) and several mergers among branches—six and counting. “By the end of next year,” noted the Sentinel," many physical branches will close.”
Loan officers’ compensation at the same Southeast Asian Sentinel is heavily weighted towards salary (rather than commission), and many officers went on leave for long periods during 2020—with pay if they had accumulated vacation; unpaid if not. Unsurprisingly, during the first four months of the pandemic, “morale was very low, especially [among] loan officers worried for their future and their families… We saw a lot of resignations, due to concerns about getting the virus through work.” After three months there was a partial re-opening but staff “remained concerned about coming back...12% resigned in the first few months. We have not hired anyone since.”
Downsizing of staff is widespread. In East Africa, the Sentinel let all temporary staff go and was forced to halt its internship program (which had supported loan officers in the field). Some contracts coming to an end—mainly branch support staff— were not renewed. There were specific restructuring targets: reducing staff by over 100, mostly via voluntary redundancies, and cutting pay for all remaining staff, by an average of 25% for staff and 30% for management. At the same time, management also lowered targets for loan officers’ incentives, so they had a realistic chance of meeting them.
Predictably, staff morale suffered, especially during the rounds of redundancies. If there is a common theme to low staff morale among the Sentinels, it’s job anxiety.
In East Africa, though, it seemed that the worst has passed, at least on cuts to staff and salaries. Salaries were returned to pre-pandemic levels after eight months at the lower rates. Management began a series of in-person town hall meetings with staff, a branch-based, open, and informal initiative, to “engage with staff on how the MFI can turn around performance, to demystify the future of the market and the company—and helping staff to really understand the painful processes we’ve had to go through and why. And hopefully helping them understand that we believe the worst is behind us. But improved productivity is going to be key.”
Not all Sentinels have faced such a difficult outlook. At a South Asian Sentinel, there were “no layoffs... pressure on the branch managers has increased but it’s those branches who were initially slow in recovering [that] are finding it hard to adjust post-Covid recovery period.” They also identified exceptional branches to see if they were closing early or late, or opening on Saturdays (which is indicative of slow recovery or disbursement), and devised appropriate strategies for each of those branches. “We were clear in our objective that the staff should not suffer due to the crisis, so have reduced the incentive portion of the pay and increased the fixed proportion.” Elsewhere in South Asia, another Sentinel told us that while other institutions reduced staff salaries, they instead paid full salaries earlier in the month than normal; the decision was a “crucial thing, [it] motivated staff.”
Moreover, the staffing morale issues were more serious in urban than rural areas, a common theme among different Sentinels, including the Sentinel in North Africa: “In rural areas [Covid is] less pressing on people's minds.” And morale is virtually inseparable from anxiety; in SE Europe, staff morale improved as “people got used to the situation and the [virus] situation improved...and more and more people are getting vaccines.”
Necessity as the mother of product invention
Several of the Sentinels have proactively sought to adapt both their products and their distribution channels to the new context of the pandemic, and respond to the fast-changing needs of their clients, as well as to the institutions’ new risk position.
One common response has been to focus on emergency credit to households. A Sentinel in Eastern Europe noted that “demand for credit is higher during Covid,” and that demand is driven less by business needs and more by households seeking to meet liquidity needs for basic expenses. Responding to similar demand, a Southeast Asian Sentinel rolled out a social emergency loan, providing up to $250 to families that had lost more than 50% of their income and could not meet their existing interest payments. Up to 50% of these emergency loans could be used to pay interest on existing loans. Meanwhile, the product a South Asian Sentinel used was even more flexible, providing up to $125 emergency credit without inquiring how it would be used at all (similar products were mentioned by some other Sentinels).
For business clients, several Sentinels focused on providing funding to help recapitalize and jump-start businesses to take advantage of resumption in economic activity. This was the approach for a South Asian Sentinel, which disbursed loans to 20,000 business clients to help them build up stock and pay utility bills. There were significantly stricter eligibility criteria for these loans, but they allowed the Sentinel to reduce reliance on repayment moratoria, which kept standard portfolio metrics stable while providing a useful service to clients—liquidity during a time of need.
A particularly notable product innovation came from a Sentinel in Southeast Asia. Facing major challenges in its traditional lending business, the organization rolled out an insurance premium loan that allows clients to afford health insurance by converting a substantial upfront premium into a series of small payments spread over three or six months. This, combined with a new emphasis on increasing deposits, helped motivate staff and provide products to clients that had little desire or ability to afford traditional microfinance loans. An interesting feature of the insurance premium loan is that coverage is guaranteed even for clients who fall behind on their loan payments.
One often overlooked challenge to product innovation and responsiveness is the need to invest in (or manually work around) loan management and finance systems that were never intended to handle widespread moratoria, emergency loans, or dynamic restructuring. For example, an Eastern Europe Sentinel had to develop and integrate software into its existing MIS to manage its “Covid portfolio”—that is, rescheduled loans that did not require provisioning. This new system had some additional advantages: it enabled real-time monitoring “every day, every minute, and every second” of these loans. While such detailed management may not be necessary outside a crisis, the capability to track specific parts of the portfolio more closely may prove well worth the investment in the future.
Fundamental transformations
Changes to product offerings have been accompanied by even greater changes in operations and distribution channels. The pandemic seems to be making real the “digitize-or-die” slogan that’s been common on the conference circuit for several years now.
How deep the transformation is varies. As noted earlier, the pandemic was a huge push toward digital payments, the kind of jolt that no amount of education or encouragement could match, especially for customers who continued to prefer cash over digital payments.
But for some of the Sentinels, the transition is even more fundamental than new products or more customers making digital payments. Here’s a Latin American Sentinel:
“We had to generate digital and mobile banking WhatsApp groups. This was helped by the years of tech investments that we had been making. We now know that digital contact with clients works and is accepted by clients. This paradigm that the personal touch is fundamental is now questionable. For new loans, we continue to have a physical presence, but now it’s only one time in the loan cycle. We went from 16 meetings in a loan cycle to just one, during the initial disbursement. The group continues to maintain contact. Some is personal - but some is digital. Each group decides.
We are visualizing a digital transformation of the institution. We want 100% digital outreach. [We] will not fire the loan officer, but use them to reach more clients. And this will be vastly more productive, from 200 clients to 500 in their portfolio.”
This first entry has introduced some of the enormous breadth of challenges the Sentinels are facing—from communicating with clients, to managing human resources, to leveraging technology to continue operations. The next instalment will focus more on what Sentinels have said about the financial challenges their institutions have faced—liquidity, solvency, dealing with investors, and understanding and implementing fast-changing government policy.
