How MFIs are scaling the brick wall that is COVID

By Jaime Aristotle B. Alip, PhD

The Philippines was recently identified as one of the least attractive destinations for foreign direct investment (FDI) in the Asia-Pacific.  Citing the country’s poor infrastructure and business environments, Oxford Economics ranked the country 13th out of 14 Asia-Pacific economies in its FDI attractiveness scorecard, ahead only of Taiwan. With this and the downgrades from other think-tanks, the pandemic scars on our economy are clear. But what has not been made clear is how critical the situation has become for our most vulnerable sectors: the poorest population, the micro, small and medium enterprises (MSMEs), and the financial systems that support them.  The most crucial among these is microfinance, which serves sectors and communities that are largely ignored by the traditional financial system.

MFIs at the Frontlines

Microfinance institutions (MFIs) – the collective term for rural banks, thrift banks, non-government organizations and cooperatives engaged in microfinance – provide a broad range of financial services, including small-business loans, savings accounts, microinsurance and other non-financial support to boost entrepreneurship among lower-income communities. Traditionally built on a business model that is anchored on face-to-face interaction and community building, MFIs had been forced to adapt as the pandemic limits people’s mobility and impede business opportunities for MSMEs. COVID has become an additional brick wall, curtailing poor people’s access to much-needed financial services.

To contain the pandemic, the government has declared different levels of community quarantine since early 2020, restricting mobility and business activities.  This had adverse impacts on family incomes, jobs, education of children, food security, and businesses. They also posed difficulties for MFIs, hampering not just their operational efficiency but their social impact.  MFIs had to adjust their internal operations and make difficult decision, like reducing their lending activities at a time when liquidity was most needed by their clients. While many have become resilient and can withstand the crisis, some MFIs are unable to extend financial support to their clients, thus, falling short of their primary mission to support the lower-end entrepreneurial sector.

Transformation as a Precondition

Because of the pandemic, MFIs have had to find new ways to reach clients.  This is so because social distancing is required. Clients also value convenience and need-responsive services. With safety a primordial concern, exploring alternative delivery channels became a necessity for MFIs.

MFIs also learned to beef up their data management capabilities.  MFIs had always struggled with digitization – the conversion of customer data and other information into digital formats – but the pandemic taught them that data is crucial.  After all, many of the changes they have had to make are anchored on data: from credit risk management, product design, operational adjustments, client needs assessment.  MFIs even had to move one step further, towards digitalization – the transformation of their business processes to fully embrace the use of digital technology.

To survive the pandemic, product diversification is key.  Because the landscape and the markets have changed, MFIs had to broaden their product and service offerings.  For instance, the demand for health services has increased, as well as people’s awareness of insurance.  This compelled MFIs to offer microinsurance products and to include COVID testing and medical consultation in their range of complementary services.

Information technology is the game-changer for the microfinance industry. While IT has always been a weakness for MFIs, digital transformation has brought new players to the financial inclusion ecosystem.  The entry of fintechs and telcos changed the industry, exponentially improving people’s access to financial services. Commercial banks are also joining the fray, putting up thrift banks or partnering with rural banks to serve the lower-income population.

The CARD MRI Experience

True to its mission, the Center for Agriculture and Rural Development Mutually-Reinforcing Institutions (CARD MRI) continued serving its 7.8 million members despite the challenges posed by COVID. Supporting government initiatives, CARD re-opened its bank branches with skeleton workforce, even in GCQ and MECQ areas, anticipating their clients’ need for savings withdrawals, deposits, and remittance services. Field staff connected with clients using remote channels such as cellphones social media.

Despite the financial implications, CARD supported members, providing a grace period in the payment of loans, declaring a moratorium in the payment of dues, and imposed no interest on interests, no penalties, and other fees pursuant to the Bayanihan law. To increase its capacity to assist members in bouncing back from the pandemic, it signed a loan agreement with the International Financing Corporation to expand its COVID credit facilities to support MSMEs.

With travel restrictions and the prohibition against group formation, CARD had to adjust its operations to ensure the safety of staff and clients. All branches offered services to clients from nearby areas affected by government lockdowns.  It expanded digital services to cover savings, loans and microinsurance transactions.  It strengthened its online mobile application, called konek2CARD, which allows clients to easily monitor their accounts, pay bills, and transfer funds. It used both clients and staff as konek2CARD agents, expanded the CARD Sulit Padala remittance facility, and partnered with pawnshops, sari-sari stores, and other alternative payment channels.

To bring financial services closer to their clients, CARD has established konek2CARD digital communities in barangays where internet connectivity is limited. It set up WIFI access to allow residents to freely access the konek2CARD mobile application. konek2CARD agents assisted clients in making transactions such as loans and bills payments, cash in and cash out using the mobile app.

While CARD has been providing free medical, dental and optical check-ups to clients since 2015, the health crisis gave it the impetus to merge technology and health services. It launched the CARD e-Doctor on Facebook and catered to 26,955 clients in 2020 alone.  Even CARD’s business support services to clients became geared towards online selling, linking their MSMEs to Facebook, Instagram, and soon, with flagship stores in Lazada and Shopee.

While the pandemic significantly affected CARD’s field operations, adverse impact was minimized because it has facilities and digital initiatives in place to take over the loans and savings transactions which were very critical at the onset of the pandemic.  All the twenty-three institutions that compose CARD MRI have been pursuing automation of their core business processes for years. It proved to be a blessing, and the pandemic only reinforced its decision to invest in technology to push forward its mission of financial inclusion.

Change Management

While we are making inroads into managing the pandemic, COVID is here to stay and we all have a long way to go. Digitalization is more than just investing in technology.  It is a top-to-bottom investment in change management, grounded on MFIs’ understanding of their clients’ needs. It is not a cure-all. But by taking a long, hard look at emerging business models and rethinking how MFIs operate, digitalization represents an opportunity for the sector to retain a competitive position and to thrive by providing responsible services to their low-income customers.

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Dr. Jaime Aristotle B. Alip is a poverty eradication advocate, with more than 35 years of experience in microfinance and social development. He is the founder of the Center for Agriculture and Rural Development Mutually-Reinforcing Institutions (CARD MRI), a group of 23 organizations that provide social development services to 7.8 million economically-disadvantaged Filipinos and insure more than 25.8 million nationwide. CARD’s innovative financial and enterprise development services targeting the poor has won many accolades, including the Ramon Magsaysay Award for Public Service in 2008, and for Dr. Alip, the prestigious Ramon V. del Rosario Award for Nation Building in 2019.  Dr. Alip is an alumnus of the Harvard Business School, the Southeast Asia Interdisciplinary Development Institute and the University of the Philippines.