Impact of Disaster in Microfinance: Approach towards Sustainable Financial Practices

With the evolution of microfinance over time, a better understanding of its strengths, limitations in poverty reduction, and its potential in strengthening the risk management capacity of the poor has emerged. Studies have indicated that access to microfinance services including majorly credit, savings, housing loans, etc. tend to increase vulnerable households’ prospects of escaping poverty and at minimum provide a safety net from falling further down the poverty line.

Even though this impact has played a vital role in reducing the vulnerability of such households, there exists its own set of risks that can adversely affect the long-term operational and financial sustainability. Some of the most serious risks pertaining to the external environment in which the microfinance institutions operate include natural disasters, economic crises, and unrest.

According to the Global Climate Index report in 2019, India ranked 14th in the most vulnerable country in the world due to extreme weather conditions and over the past several decades, the frequency and impact of disasters have grown exponentially. The recent devastation in the wake of the YaaS and Amphan cyclones is a testimony to the statement.

The sheer increase in recorded incidents of floods, storms, heatwaves, drought, and other similar events impacts a large proportion of the world population. Beyond the immediate physical devastation of disasters, there are long-term social and economic consequences especially for these vulnerable households who often are the most severely affected.

Impact of disasters on MFI

The impact of a natural disaster is rarely uniform across households in a community or a region and it depends on the nature of the disaster. Microfinance Institutions across the globe, largely cater to poor and near-poor populations. This group suffers from the twin problem of higher disaster risk exposure and a lower risk-bearing capacity than any other population group. Not only are they excluded from the formal financial system, but they are also highly vulnerable to external shocks, thus putting them at greater risk. At the same time, they cannot usually avoid the impact of such disasters, given their limited choice when deciding where to live and by delivering services to clients under these conditions, MFIs link the impact of disasters to their portfolio.

Several MFIs operate in communities and regions which are predictably hit by disasters year after year, while others operate in more stable yet disaster-prone areas. When this unmitigated risk translates into a disaster, not only the clients, their microenterprises, income streams, and ability to repay loans are affected, but also the MFI’s portfolio, their service delivery capacity, and the sustainability of their impacts.

Learnings from Past

Given the potential impact of disasters, MFIs as an institute have an added responsibility as well as an opportunity to develop a framework in addressing the disaster management crisis within their curriculum to ensure the institutional sustainability as well as the resiliency of their clients.

Bangladesh is one such nation where the MFIs have faced a series of natural disasters and have been able to sustain their presence. Through these experiences, MFIs in Bangladesh have seen how such disasters can affect existing financial products and are experimenting with different products to help both their clients and their institution to cope with the impact of a disaster.

One interesting case study is of Bharat Financial Inclusion Limited (formerly SKS) and Manab Mukti Sangstha (MMS) in Bangladesh. In communities highly exposed to flooding, SKS and MMS developed a “community-loan” product to construct flood-shelters that, during normal times, also serve as sources of income programs. The MFI used a portion of clients’ accumulated savings too -

1. Buy a section of land near the community,

2. Employ clients to raise the land above the level of floodwaters, and

3. Build several income-generating activities on the land (fishponds, agriculture) in addition to shelters, a tube well, and a sanitary latrine.

During floods, this land serves as a safety zone where the community can take their families, livestock, and other household assets. The tube well and the agricultural products are grown on the raised land provide food and water during these times. During normal times, all the MFI clients in the community repay a portion of the loan as an extra levy on their regular loans, and the clients who operate the fishponds and other ongoing income-generating activities repay a larger portion of the loan.

Although the impact of these interventions needs further investigation, it is evident that such an exercise will not only help to incapacitate the local folks but also provide a safety net both for the clients as well as the MFI institutes.

Suggestions

The increase and frequent occurrence of natural disasters indicate that MFIs cannot avoid disasters, let alone ignore them. Their achievements can be reduced by a single catastrophic event or undermined by repeated disasters, as their borrowers become increasingly impoverished and vulnerable, and their operational and financial sustainability is compromised. It is therefore important, from this perspective, for the MFIs to assess ways to increase their effectiveness and become more sustainable institutions by addressing the risk directly.

This can be achieved through an overall stakeholder engagement to develop a disaster management strategy and create partnerships between different institutions that are willing to pool their resources and skills to design resilient models for effective disaster management. This needs to be supported by apt policy advocacy, research, and evaluation of successful global models that can be replicated in their geographical context.

At the same time, to cater to the needs of clients amidst the disasters, MFIs need to undertake short- and long-term disaster-oriented services. Short-term services include emergency loans and remittance services, loans rescheduling and loans to restore capital assets lost in the disaster, and lastly, loans to rebuild housing and other infrastructure and start new economic activities. Long-term services relevant for disaster-prone areas include insurance products to protect the vulnerable population against future disasters and savings services to provide for a safety net.

MFIs need to prepare for the impact of natural disasters on their clients and themselves. They will be better placed to respond effectively when a disaster strikes if they have worked through the issues, designed policies and products, and negotiated collaboration with stakeholders, before disaster strikes rather than finding a solution in the midst of it.

Bibliography

1. Nagarajan, G. (2000). Bangladeshi Experience in Adapting Financial services to Cope with Floods: Implications for the Microfinance Industry. ResearchGate.

2. Pantoja, E. (2002). Microfinance and Disaster Risk Management- Experiences and lessons learned. Provention Consortium.

3. SEEP, IFMR Lead, Citi Foundation. (2016). Study on the role of microfinance sector in disaster risk reduction in India. SEEP, IFMR Lead, Citi Foundation.

4. World Vision, FDC. (2003). Microfinance and Disaster Management.

5. Wright, G. A. (1999). "Vulnerability, Risks, Assets and Empowerment – The Impact of Microfinance in Poverty Alleviation.” Kampala, Uganda: Micro-Safe Africa and Uganda Women’s Finance Trust.

About the Authors

Tanvi Misra (Manager-Marketing and Communications at Sub-K IMPACT Solutions)

I am a Rural Management Graduate from XIM Bhubaneswar, working as a Marketing professional in a Fintech company. I aim at entering policy-making and playing a vital role in how the implementation of these policies happen at the ground level.

Prerna Singh (Manager-Risk Management at Sub-K IMPACT Solutions)

I am a Development Management Graduate from IIFM Bhopal, working as a Risk Management professional in a Fintech company. I aim at understanding the ground-level issues and possible solutions for them by taking cues from historical evidence and integrating it with the latest methodology.