Part 1: Keeping the Patient Alive: Adapting Crisis Rubrics for a COVID World
In 2010, the Centre for Financial Inclusion (CFI) published a paper by Daniel Rozas called Weathering the Storm, reviewing 10 MFIs that faced existential crisis, some having survived and others not. The paper was written in the aftermath of the 2007-08 global financial crisis and its subsequent ripples across many microfinance markets.
Today the sector is facing a crisis both broader and deeper than anything that’s come before. It is not alarmist to say that the threat - to clients, their business, financial service providers and the whole ecosystem that supports them - is existential.
In recent weeks, there has been a cacophony of responses as different stakeholders try to get a grip on what's happening and what comes next. We’re mindful not to add to the noise without adding value. The value, we think, is in extracting just the applicable lessons from previous crises, matching them to the complex array of challenges being faced today, and doing so within the framework of an illustrated guide that takes that CFI paper as its starting point. So to this end, the European Microfinance Platform (e-MFP), CFI and the Social Performance Task Force (SPTF) are launching a collaborative blog series that will try to help practitioners, investors and other stakeholders weather this storm.
There is already a wealth of resources on the lessons from previous crises - from Ebola and earthquakes to typhoons and no pago movements - and some early work on how they can be applied to the COVID challenge. Many of these can be found on CGAP’s dedicated page. But investors and practitioners have too much going on these days to be able to absorb it all; there are so many lessons and responses that it’s easy to get lost. What this series will try to do is to guide institutions - FSPs, investors, even regulators - through a sequence of responses that are interlinked, mutually reinforcing, and that are each necessary - but alone not sufficient.
As one of the first papers to examine MFIs dealing with crisis, Weathering the Storm adapted the Hierarchy of Needs - a concept first introduced in psychology by Maslow in 1943 - to show that, in a crisis, there is a hierarchy of challenges. Put another way, there are important things, and there are urgent things, and the important cannot be addressed before the urgent is handled first. You cannot, for example, maintain staff confidence if you don’t have cash to pay them -- so you should address liquidity first and foremost. Likewise, creditors’ confidence will collapse if there’s no plan for retaining staff. But at the same time, there are critical feedback effects between different responses - preserving liquidity by sacrificing client confidence (for example, by not issuing new loans), is likely to ultimately result in lower liquidity anyway, as clients lose the incentive to repay their loans. Viewed this way, the hierarchy may be better thought of as a loop or a coil: there are sequential steps that must be taken, but the steps are mutually reinforcing. In isolation, keeping staff paid achieves little more than keeping staff paid.
In some ways, financial institutions must think like ER doctors - an apposite analogy these days. When a critical patient comes in, the first priority is to stabilise vital signs - pulse, blood pressure, breathing. Once the person is stable, you look for the underlying ailments that brought them in and treat them. Even so, these secondary and tertiary treatments can’t be ignored - failing to do so will simply bring about the very emergency you just addressed. Finally, the body comprises several complex systems and interdependent organs. A failure of one will eventually bring about the failure of others.
This need to first address the urgent gives rise to the second part of crisis management in finance: that the normal rules do not apply. Capital adequacy and even solvency become esoteric and addressing those can be downright harmful during crises. PAR and portfolio quality tell you little about what you need to know - which loans are only temporarily delinquent versus which might be permanently impaired? Which clients - and client segments - can be relied on to repay as soon as they can, and which cannot? Even regulatory and legal norms can (and sometimes must) be cast aside if an institution is operating in an environment where time and self-preservation is of the essence. In other words, don’t hesitate to break the glass in case of emergency. It’s what it’s there for.
Different environments also call for different responses. The impact of the pandemic in rural areas is likely to differ greatly from urban ones. Trade might slow or even stop as markets are closed, but farmers still need to plant crops, and food needs to make its way to buyers. And the challenges faced by deposit-taking institutions are quite different from credit-only providers. Continuing to pay basic salaries to loan officers who predominantly earn income from their commission may not be enough for them to get through this. And clients with smartphones may be able to interact with institutions in ways that those without cannot - a distinction that could prove especially important in a social distancing environment.
This blog series will begin from this hierarchy of needs, and broadly match the relevant lessons to them, while expanding on these concepts via contributions from the three partner organisations that have set it up, and other expert stakeholders across the sector. In this sense this series will focus on different aspects of crisis management, from the challenges of preserving liquidity to maintaining the confidence (and reciprocal trust between) staff and clients - and matching these challenges to pertinent lessons from previous crises, all with the goal of surviving the pandemic and being ready to engage fully as soon as the circumstances allow.
Finally, this series of blog essays is not intended to be didactic. On the contrary, we believe solutions to this crisis will not just require collaboration but communication and constructive engagement. We hope that these short papers will encourage debate among readers and we welcome feedback in this open forum.