Recommendations
Liquidity Constraints
How do we deal with liquidity constraints?
➀ Multiply framework agreements to diversify your partners and your delivery mechanisms and coordinate implementation schedules with other actors in your areas of operation
To mitigate the operational risks associated with relying on a single service provider in contexts of liquidity constraints, you should establish framework agreements with a greater number financial service providers. Each agreement should also be broad enough to cover as many delivery mechanisms as possible, even if currently only one or a few are effectively being used. This will allow for the use of different financial services and delivery mechanisms based on geographical locations or types of payments. The idea is also to increase competition between different providers to decrease costs. Drafting additional agreements with new partners requires time and effort, but it is a crucial step in mitigating the risk of relying solely on a single mechanism that could potentially fail.
In contexts of liquidity constraints, the functioning financial channels tend to be more limited. In a given operational area, all humanitarian actors will tend to rely on the same few FSPs and mechanisms. There is often little coordination or information shared about payment schedules between agencies. When the amount of liquidities available is limited, this can result in overcrowding FSPs when several agencies are intent on delivering on the same dates. In addition to better coordinating implementation, aid actors could also coordinate their tendering processes with FSPs in order to have more bargaining power over contract fees.
#operations #procurement #programs
➁ Increase communications with your FSPs and provide them with advance notice of your disbursement schedules
Maintaining good relationships with financial service providers is crucial in contexts of liquidity constraints, as they may end up favouring the demands of some of their clients over others. In contexts of liquidity constraints, FSPs also require as much predictability as possible in their own work, especially since they will be under a lot of demands from all of their other clients as well. They will also require more time to process some specific types of orders depending on the nature of the liquidity constraints (for example, more particularly cash-out orders, electronic transactions, international transfers, etc). Generally speaking, you can make the life of your financial partners easier, and your own operations smoother, by providing them with as much advance notice of disbursement as possible so that they have time to find the necessary liquidities and so that they can organise their own workplan accordingly.
As with all your other local partners, it is important to recognise and understand how FSPs are themselves affected and to enquire about how they cope with the current situation. This will also give you valuable information about their capacity to handle all or part of your operations and the resilience of their systems. Take the time to ask them about the nature of the liquidity constraints they are facing and how you can adapt your SOPs and interactions with them to make things easier. This can be about changing the size of transactions, the frequency of orders, etc.
#operations #procurement #finance
➂ Monitor the availability of specific denominations & consider mixing currencies
Consider in particular the quality and availability of smaller denominations in a given currency. It is possible that the smaller denominations will be hoarded by specific industries and types of commerce. If money in circulation is not being replaced by newly printed one, it is also likely that the bills and coins in circulation will start deteriorating from being used and re-used, to the point that some traders or shops may not accept them anymore. This is likely to happen first and faster with the smaller denominations. It is estimated that it takes 6 to 10 months for a bill to become unusable. This would be a challenge mostly for programmatic payments, as large amounts of good quality small denominations may become more difficult to come by. If mixing currency in distributions to participants is not an option, you will want define your transfer values as a multiple of the most easily available denominations.
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➃ Consider options for supply-side support
Whatever affects the capacity of FSPs to find fresh currency denominations may also affect trade route & availability of products depending on imports. In local market systems, the same liquidity constraints that affect the feasibility of humanitarian operations will also result in low capacity for exchange and limited transaction levels that also critically impair the recovery of the affected population. There are key opportunities for NRC in this response to increase the impact of its activities by leveraging market-based programming and in particular market support interventions to key local actors on the supply-side.
To identify such opportunities, you should conduct a more specific analysis for critical systems related to humanitarian needs, such as water, food, and housing systems. This analysis can identify tensions that could be alleviated through temporary support, ultimately improving cash flow. Similarly, you could investigate the systems most affected by liquidity constraints or, in general, the most important contributors to the Sudanese economy in terms of overall impact or employment of participant populations.
Your usual local suppliers, service providers, and implementing partners are also typically affected by the lack of liquidity. You could systematically ask your partners and suppliers about how they have been affected by the crisis and what would help them recover faster. For example, instead of always contracting with the highest capacity and least affected actors as suppliers, consider intentionally supporting affected local actors by using them as partners in your operations. It can be for example about providing them with small grants so that they can make the necessary investments to adjust their systems and increase their reach, scale or resilience. This would be particularly relevant in terms of alleviating the constraints on local and more informal financial systems that participants in your program also rely on. In particular, in contexts with liquidity constraints, you already know that financial actors, both formal and informal will be impacted. Once you understand more specifically the constraints at play, you could consider building into you program designs elements of market support to the financial sector. This could contribute to supporting your operations, while at the same time fostering broader critical changes in the system that are relevant to NRC’s programmatic agenda. For example, support to the financial sector could be a great way to leverage the opportunity to develop financial products and services that are more accessible and more adapted to the poor, and thus contribute to financial inclusion.
#programs
➄ Be mindful about how you label transactions when making international transfers
An important source of constraints on international transactions in the humanitarian sector is related to the fact that the countries in which we operate can fall under counter-terrorism legislations or anti-money laundering measures. In such cases, the way in which a transaction is coded within the international financial system can make a big difference in terms of processing. Sometimes, your international transfers can be blocked simply because an intermediary bank that does not know NRC particularly, nor its humanitarian mandate simply refuses to conduct a transaction to a specific country or location. You have usually relatively little direct communication nor even visibility, and hence little leverage, with the correspondent banks through which your transfers orders transit internationally. Yet, a simple good practice such as checking the way a project is named in a transaction can end up being the difference between a transfer that goes through and one that does not.
NRC has also found that being able to provide extra information about the transaction and its purpose in the correct format through the SWIFT system to all financial intermediaries in the chain can make a significant difference. You can discuss this with your global finance team for more details. In particular, it can be helpful to reference relevant humanitarian exemptions in the transaction, so that financial institutions knows the transfer is covered by them. In the most complex cases, additional outreach to individual financial institutions to ensure that they are aware of the exemption and how the transfer is covered under the specific conditions could also be needed.
NRC has been able in some contexts to unblock payment channels at the global level by carefully mapping and tracking delays, blockages, and questions from FSPs. The routings of international transactions and the correspondent banks through which they transit are often the most problematic point. NRC global finance department already tracks all blocked transfers from Head Office to Country Offices and tries to unpack the reasons for the blockages. They can then also use this information to engage with international correspondent banks directly where possible, or via donors and other organisations. It is thus a good idea to start systematically keeping track of what works and what doesn’t work in terms of international transactions by NRC, as well as to systematically gather similar information from other actors and organizations, either through coordination structures or through more informal communication channels.
#operations #finance
✚ Make sure you have also considered and adequately put in place the actions in the box below, which are meant to prepare you for contexts with liquidity constraints in the first place!
How do we prepare for liquidity constraints?
If you are worried that your context could devolve into high inflation in the future, consider putting in place some of the following actions as preparedness measures.
➊ Break down transaction flows into different segments
When moving humanitarian money in the context of liquidity constraints, whether in local or hard currency, it becomes important to distinguish three types of transfers: receiving money from donors, transferring money into your country from abroad, and moving and accessing money inside your country of operation. In normal circumstances, all three would typically be done simultaneously and through the same payment mechanisms and FSPs. However, in more challenging situations, it may be necessary to 'mix and match' and use a variety of combinations of both FSPs and delivery mechanisms, depending on the final recipient of the transfer and their location.
In order to do so, start by clearly distinguishing between the different elements of your delivery mechanisms: the transfer system, the delivery medium, and the encashment process. This will allow you to be agile and have more flexibility in the ways you combine different segments of your delivery process.
To better prepare your program design and choose appropriate segments of your delivery mechanisms in contexts of liquidity constraints, it is important to also delve in particular into the following details: (1) the end user journey and the encashment process from the perspective of the program participant; (2) the specific points at which money is deposited into and withdrawn out of the formal financial system. This will enable you to anticipate the Know Your Customer (KYC) requirements at the beginning of the transaction and when cashing out. You can then align specific delivery mechanisms with participant profiles, based on the ID documents they can provide for example. Additionally, you can determine the information that you need to include in the registration process to enable the transaction in the first place.
Consider having a programmatic guideline that outlines not only you currently preferred mechanism per area and per target group profiles, but also your possible backup plans such that you can pivot from one mechanism to another more swiftly if necessary. Note also that while this recommendation is particularly relevant for programmatic components, it still applies as well more broadly to all operational payments, including payroll."
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➋ Scope the feasibility of closed-loop delivery mechanisms and digital transfer options
With most types of liquidity constraints, the difficulties are related to money entering or exiting a given financial system. Consider whether it would operationally feasible to shift some or all of your transactions to closed-loop transfer, payment or value systems. You can use for example informal value transfer systems (IVTS), closed-loop exchange systems with vendors such as vouchers, or digital money (noting that each system may be suited to some types of expenditures but not others, like rent). This shift assumes that other stakeholders, such as traders, suppliers or partners, take on the exchange rate risk. It also supposed that contractual payments can be made to them in digital currency. When contracting traders, you can build in additional mechanisms appropriate to your programs, such as mitigating price fluctuations and inflation using value vouchers rather than commodity vouchers.
Consider that digital systems can also allow to adjust the transfer value (thus also mitigating difficulties related to inflation or volatile exchange rates). This provides increased flexibility compared to systems which require set denominations to be pre-printed or prepared in advance. Finally, if you are opting for voucher-based systems, consider hybrid models, whereby traders provide a cash-back option – provided that they have access to the adequate liquidities.
#operations #finance