Financial inclusion is a cornerstone of sustainable development. The basic premise being that zero or poor access to financial services makes life a lot more complicated for people trying to grow a business, take care of a family and access the services they need in day-to-day life. By improving the quality of financial services and connections for underserved populations, we can help reduce poverty, improve economic resilience, encourage innovation and close equity gaps. As a start, financial inclusion creates access to a transaction account, allowing money storage and to send and receive payments. But it also covers a whole range of client-facing services, like savings, insurance, lending, as well as broader issues such as financial literacy, digital identity and financial technology.
There are various industries that are pushing the needle forward on financial inclusion. In the Lebanese context, the microfinance sector has been a powerful driver; providing financial services to micro and small businesses, and low-income populations unable to access traditional banking services. Key to the success of the industry has been the networks of agents and committed loan officers who build strong relationships with end-beneficiaries. This often comes along with a suite of non-financial services that microfinance institutions (MFIs) provide, such as technical training on household income management or agronomic support for smallholder farmers. Before the onset of Lebanon’s multiple crises towards the end of 2019, the Lebanese microfinance sector had consistently proven itself capable of performing on par with or better than global benchmarks, demonstrating strong opportunities for growth while maintaining its commitments to its end clients and international partners. According to the Lebanese Micro-Finance Association, the sector reached a portfolio of $220 million in 2018 while serving 153,000 clients.
However, the economic crisis has crippled the industry; and today it operates at a fraction of its capacity. This is first and foremost because the unfolding crisis, compounded by the COVID-19 pandemic, has put microfinance clients – a large number of whom are women – under severe financial stress. A study on the direct impact of Lebanon’s economic and COVID-19 crises on microfinance clients by CGAP, a think tank housed at the World Bank, indicated that turnovers of 90 percent of microfinance clients has decreased and that 40 percent of businesses have closed. Moreover, 40 percent of microfinance clients are unable to meet their basic needs, with 60 percent cutting back on essential foods in 2020. Since these figures relate to two years ago, we can make a safe bet that these percentages would be far greater now.
A Shrinking picture?
As a result of the downturn, the asset quality of MFIs has deteriorated and the number of non-performing loans has significantly increased. In addition, MFIs are facing severe liquidity shortages and large mismatches of their assets and liabilities in foreign exchange, particularly as the economy becomes dependent on dollars. Many MFIs are not deposit taking and depend solely on resources and borrowing in US dollars from foreign lenders. This is posing serious risks to the sustainability of the microfinance sector and its operations, with some MFIs already facing insolvency.
However, in that same CGAP survey, 93 percent of microfinance borrowers said that they would resume borrowing once economic conditions allowed. This is remarkable in these unstable times. The MFIs still in operation are leveraging their relationships with development organizations to explore new channels to bolster economic resilience, despite the challenging conditions of a financial meltdown.
Stakeholders from the international donor and lender community such as the World Bank, European Bank for Research and Development, USAID, and others are doing their best to support the sector in the face of political and regulatory intransigence. The technical assistance and grant funding they continue to provide is vital to buoying the sector. However, it does not solve the existential issue of liquidity. MFIs must find a way to unlock new funding and capital for the sector, which at present is being financially excluded.
This will require reform and new regulations, but microfinance stakeholders can also actively help their partners in-country by exploring alternative sources of funding, beyond traditional debt financing. For example, financial technologies, bond initiatives and crowdfunding across the private and public sector could provide liquidity solutions that could even grow into new development finance models for countries in crisis. Such innovative thinking and crowding of expertise is necessary to ensure that the sector is able to regain its position and once again provide tangible, realistic economic opportunities to large swathes of the population.
