Guest Articles

May 4

Elisabeth Rhyne

Banking on Human Capital: What Financial Institutions Need to Do – Now – to Enable a COVID-19 Recovery

Every crisis carries its own signature, unfolding with distinctive timing, impact and, ultimately, recovery. Floods have a short, sharp impact, and recovery begins as soon as the waters recede. Other crises, like the 2009 global financial meltdown, linger for years. 

For the novel coronavirus, many epidemiologists predict a series of waves for the next year or so, with lockdowns beating back the virus only to have it flare up again when those measures are eased. As policymakers with limited information struggle to find the right balance between the health of people and the health of the economy (while also working to keep themselves in power), we can expect a juddering mix of policy-induced economic slowdowns that could go on for months – if not longer. 

Within that scenario, we in the financial inclusion sector need to take stock of the impact of the crisis on vulnerable people who use financial services, so we can optimize our approaches to a start/stop/start/stop pattern. What have people lost and what remains to build on? A thorough understanding of this question, by customer segment, will provide financial institutions – and the policymakers and investors that steer them – with the insights needed to guide service provision during reopening(s) and shutdown(s). 


Lessons from a Flood

In 2000 I was living in Mozambique when an Indian Ocean cyclone pummeled the country with rain, wind and an enormous storm surge. The flooding and destruction were massive: crops ruined, homes flattened and coastal geographies reconfigured through landslides. 

“They’ve lost everything!” cried the media, and indeed, the market stalls and inventory of many small businesses were in tatters. But in a broader assessment of total flood damage, the physical assets lost turned out to be a relatively small, and in some cases not especially important, part of total capital. The bigger assets of many small business owners remained intact: their business know-how and their connections in the marketplace with customers and suppliers. They retained their human and social capital. Drawing on those assets, small businesses began trading again quickly, sometimes within days. New loans to such businesses could have been put to work productively, to replenish stocks and repair premises – and hence, could have been quickly repaid. In contrast, farmers who lost an entire season’s crop, together with damaged fields, would need agricultural input loans with repayments delayed until harvest. Few lenders would be prepared to extend such loans without external backing. 

This example can be useful in weighing our responses to the economic impact of COVID-19. In understanding the arc of a crisis for various types of people, all forms of assets need to be considered: physical, financial, human and social capital. For poor people, human and social assets may well be the most important – and are certainly the most resilient – of their assets. 


The Unique Characteristics of the COVID-19 Crisis

Turning to the arc of this pandemic, we start with very bad news. The economic signature of this crisis is a prolonged interruption of income, whether it comes from employment, business or remittances. For many people, income may not return to pre-crisis levels for months. 

Income stoppages lead to even worse news: the rapid depletion of reserves and savings. Surveys suggest that there’s a short time frame during which lower-income people can meet their basic needs if income is interrupted – in some cases as low as a week. With a two or three-month interruption, the vast majority of low-income people will use up most or all of their financial reserves and non-financial coping strategies, especially in a context in which their favored strategies – relying on family and friends and working more – may fail because of the systemic and global nature of the slowdown. The role of financial institutions in this case is to support consumption by making it simple for people to withdraw their savings, facilitating the movement of money from person to person, and relaxing loan repayment requirements. (Customers will seek loans for immediate consumption, which is normally a red flag – but that’s a topic for a separate discussion.) And after the reopening, people with no reserves will look uncreditworthy by pre-crisis standards – even if they’re otherwise-reliable borrowers. Lenders will need policies that accommodate these lower asset levels.

On the somewhat more positive front, unlike many other natural disasters, the crisis will not damage the premises and tools that people need to carry out their work. Farmland will still be as fertile as ever. Inventory may, in some cases, also be preserved. This means that – on the supply side, at least – business can restart immediately after the lockdown. However, as the duration of the crisis extends, some people will lose physical assets – selling them to buy food, or losing their housing or premises due to non-payment of rent. If financial institutions can find a way to help people avoid this type of loss, it will make a significant difference as reopening begins. 

As with previous crises, people have another key asset that’s available to build upon: their business and social relationships, many of which will remain in place and become central to the recovery. However, while people will still have relationships with their past suppliers, customers and employers, many of those relationships may be slow to rekindle, given that supply chains will be disrupted and the buying power of customers will rebound slowly. These relationships will be most disrupted for the vast numbers of people who have streamed out of urban areas. Social relationships, too, will be a source of support, as family and neighbors, even though stressed, will find ways to help each other out.

Finally, the best news is that people retain their know-how. Lenders can and must bank on this human capital. 


Guiding Principles for Financial Institutions in the COVID-19 Recovery

If the guiding principle for financial institutions during the height of the slowdown is to support consumption, the guiding principle for recovery will be to enable people to restart their incomes. In a stop-start recovery, these two aims will actually be closely intertwined. When recovery begins, small businesses will ask financial institutions for loans to purchase inventory and re-establish working capital, and small farmers will ask for loans for seed and fertilizer. Yet, as mentioned above, with little current income and no financial reserves, these clients will look far less creditworthy than normal. Financial institutions will need a deep understanding of their customers’ individual situations, and will need to develop new lending standards based on that understanding. 

At the same time, financial institutions will have drawn down their own reserves, making them even more reluctant to bet on the intangible personal assets of their customers. This is a perfect time for governments and investors to provide loan guarantees to get things moving again. Loan guarantees are often overused, but when there is a gap between the ability or willingness of financial institutions to take bets and the likely success of those bets, guarantees can be very helpful. 

Another lesson I learned from the floods in Mozambique was about timing. It took some international organizations months – and in one case, over a year – to get cash assistance to flood victims. By that time, the floods were history. But unlike back in 2000, we now have digital tools that allow money to move fast. The real delays come from slow decision-making inside supporting organizations. That’s why the financial inclusion community needs to begin immediately to plan their support for recovery.


Elisabeth Rhyne is a visiting fellow at the Financial Access Initiative, where she will be focusing on the effects of the global pandemic on microfinance clients, and how financial service providers are responding, with an eye toward planning for recovery. She is the former managing director of the Center for Financial Inclusion and a co-founder of the Smart Campaign.


Photo courtesy of Engin_Akyurt.




Coronavirus, Finance
COVID-19, financial inclusion, microfinance, savings