(This article which appeared in the ISLAND news paper on 03/09/05 was sent in by Ananda)
by Dr. S. P. Premaratne, Micro-finance specialist University of Colombo
The negative effects of disasters are well-known. Recently, Sri Lanka experienced the worst natural disaster - Tsunami. In addition to the social and psychological trauma, many basic tenets of society crumbled under the pressure. Communities may be torn apart, government structures dissembled, and basic infrastructure vital to economic life and cross-regional transport rendered useless. Now we are in post-disaster era; post-disaster rehabilitation and reconstruction works have begun. One of the most useful and helpful tools for such situation is micro-finance delivery service. Various, formal and informal, MFOs have rushed to the Tsunami affected areas. What would be their role? This paper makes recommendations for donors, policy makers, and MFOs.
Effective delivery of micro-financial services is challenging under any circumstance. Institutions that desire deep outreach and financial sustainability however, encounter even more obstacles in post- disaster societies. Many groups desire a Jump-start to economic survival, although, their specific requirements vary widely.
Micro-finance institutions can effect positive change at the individual, the community, and the national levels. On a larger scale, institutions can demonstrate the positive effects of micro-finance to an attentive national audience. Successful examples in the early reconstruction phase can influence policymakers and legislators to support legislation enabling micro-financial service provision and can prevent restrictive regulations.
The economic impact of natural disasters on poor households
The impact of a natural disaster is rarely uniform across all households in a community or region, and the specific impacts depend on the nature of the disaster. Nevertheless, natural disasters typically impact the finances of poor households in a number of ways. First, the disaster might affect the households ability to earn income. It might be difficult income-earners to reach their customers or for customers to reach them. Before Tsunami, tourist and fishery industries were the major income sources for the areas. The two sectors have almost completely destroyed by Tsunami. Second, poor households might face increased expenditure. Prices of essential commodities such as food or fuel might have increased dramatically due to high demand and/or short supply. Household health expenditure increased dramatically. Third, the disaster might have caused damage to, or destruction of, income-generating assets such as crops, livestock, tools-of-trade or other equipment. Loss of productive assets can have a long-term impact on the ability of the household to generate income. Finally, the disaster might have caused damage to, or destruction of, household assets.
The impact of natural disasters on MFOs
Given that the clients of MDOs are basically the poor households, it is common for MFOs to be impacted financially as well. First, there will be an immediate decline in inflow of cash. Second, there will be an increase in outflow of cash. Clients are likely to withdraw savings and they may request additional loans. There may be a significant loss of capital if large numbers of clients are forced into loan default. Furthermore, while group-lending methodologies can ensure high repayment rates under normal conditions they can also serve to magnify capital losses in times of widespread economic stress.
The result of all of the above is that MFOs may face a serious liquidity crisis in the wake of a natural disaster, but MFOs have a role to play under a disaster situation.
Without a proper study, it is very difficult to say that the demand for micro-finance in Sri Lanka far exceeds the supply but recently a number of donors and NGOs rushed to the affected areas. For this reason, all MFOs (NGOs and formal financial institutions) are making a positive contribution by satisfying a need. As long as MFOs respond to active demand, they are encouraging investments in enterprises that might not be made otherwise and helping residents to recover from the post-disaster economy. It is a positive effect that is worth their time and talent.
Despite the proliferation of MFOs in Sri Lanka and the widespread support for micro-finance, there is still a great amount of unmet need. On average, nationwide there is less than one bank branch for every 100,000 people, less than 50 percent of micro- entrepreneurs have access to credit, and less than ten percent of the population have a bank account.
The efforts of micro-finance agencies have been aided by strong government support through a decentralization plan and structural adjustment reforms. The government policy is to create an enabling environment for micro-enterprise by improving education, credit, and transport services. The support of the government and a strong governmental commitment to reconstruction. are critical factors in successful post-disaster micro-finance endeavors.
The role of MFOs in disaster relief, rehabilitation, and reconstruction
Most MFOs cannot ignore the possibility of being impacted by natural disasters. Regarding the role of MFOs in emergency relief, one debate revolves around whether MFOs should engage in general (non-financial) disaster relief activities, or whether they should concentrate on providing financial services that support clients to manage their household finances through the difficult post-disaster period. MFOs should think about two aspects. On one hand, the MFO wants to protect its identity as a member of the community that puts the need; of its clients first, as any successful business will do. On the other hand, the MFO wants to protect it’s identity as a-long-term, professional financial intermediary as distinct from aid organisations. Now relief operation stage has gone.
With national disaster management unit, MFO personnel may be involved in detailed disaster assessment activities. Nevertheless, the MFOs primary focus is on assessment of its existing clients. As the focus of disaster response moves from emergency relief to rehabilitation, the MFO needs to re- orient both its personnel and its clients, and to disengage from emergency response activities.
The success of an MFO’s services following a disaster depends on a number of factors. Most important are the timeliness of the intervention, the length of time the MFO offers various services, the types of financial products the MFO provides, the MFO’s ability to coordinate its services with those of other relief organizations, and loan terms and conditions.
Established MFOs can provide relief activities immediately after disasters, but the period during which they offer such assistance should be brief and followed by unsubsidized loans in the rehabilitation and reconstruction phases. Any MFO activities during these phases require coordination with other organizations to ensure the quick and accurate flow of information and services from all players. Successful MFO activities during the rehabilitation and reconstruction phases also depend on timely intervention. During these phases, emergency loans, allowances for withdrawal of client savings, and rescheduling of debt may be more important than providing clients with new loans for housing or asset replacement. New loans can most successfully be made about six months after the disaster to clients who have proved they can manage the disaster through other means.
New MFOs should be created after the relief and early rehabilitation stages are over, so that they can better screen applicants and make higher-quality loans. Providing services in postdisaster settings entails both high direct and indirect costs: New MFOs encounter more difficulty than established organizations when serving the same disaster-affected population, as it takes longer for new MFOs to reach financial sustainability than it does existing MFOs. The initial costs of servicing loans in post- disaster areas are very high for new MFOs but can be reduced somewhat by involving the community in making new loans.
Effective delivery of micro-financial services is challenging under any circumstance. Institutions that desire deep outreach and financial sustainability however, encounter even more obstacles in post- disaster societies. Many groups desire a Jump-start to economic survival, although, their specific requirements vary widely.
Micro-finance institutions can effect positive change at the individual, the community, and the national levels. On a larger scale, institutions can demonstrate the positive effects of micro-finance to an attentive national audience. Successful examples in the early reconstruction phase can influence policymakers and legislators to support legislation enabling micro-financial service provision and can prevent restrictive regulations.
The economic impact of natural disasters on poor households
The impact of a natural disaster is rarely uniform across all households in a community or region, and the specific impacts depend on the nature of the disaster. Nevertheless, natural disasters typically impact the finances of poor households in a number of ways. First, the disaster might affect the households ability to earn income. It might be difficult income-earners to reach their customers or for customers to reach them. Before Tsunami, tourist and fishery industries were the major income sources for the areas. The two sectors have almost completely destroyed by Tsunami. Second, poor households might face increased expenditure. Prices of essential commodities such as food or fuel might have increased dramatically due to high demand and/or short supply. Household health expenditure increased dramatically. Third, the disaster might have caused damage to, or destruction of, income-generating assets such as crops, livestock, tools-of-trade or other equipment. Loss of productive assets can have a long-term impact on the ability of the household to generate income. Finally, the disaster might have caused damage to, or destruction of, household assets.
The impact of natural disasters on MFOs
Given that the clients of MDOs are basically the poor households, it is common for MFOs to be impacted financially as well. First, there will be an immediate decline in inflow of cash. Second, there will be an increase in outflow of cash. Clients are likely to withdraw savings and they may request additional loans. There may be a significant loss of capital if large numbers of clients are forced into loan default. Furthermore, while group-lending methodologies can ensure high repayment rates under normal conditions they can also serve to magnify capital losses in times of widespread economic stress.
The result of all of the above is that MFOs may face a serious liquidity crisis in the wake of a natural disaster, but MFOs have a role to play under a disaster situation.
Without a proper study, it is very difficult to say that the demand for micro-finance in Sri Lanka far exceeds the supply but recently a number of donors and NGOs rushed to the affected areas. For this reason, all MFOs (NGOs and formal financial institutions) are making a positive contribution by satisfying a need. As long as MFOs respond to active demand, they are encouraging investments in enterprises that might not be made otherwise and helping residents to recover from the post-disaster economy. It is a positive effect that is worth their time and talent.
Despite the proliferation of MFOs in Sri Lanka and the widespread support for micro-finance, there is still a great amount of unmet need. On average, nationwide there is less than one bank branch for every 100,000 people, less than 50 percent of micro- entrepreneurs have access to credit, and less than ten percent of the population have a bank account.
The efforts of micro-finance agencies have been aided by strong government support through a decentralization plan and structural adjustment reforms. The government policy is to create an enabling environment for micro-enterprise by improving education, credit, and transport services. The support of the government and a strong governmental commitment to reconstruction. are critical factors in successful post-disaster micro-finance endeavors.
The role of MFOs in disaster relief, rehabilitation, and reconstruction
Most MFOs cannot ignore the possibility of being impacted by natural disasters. Regarding the role of MFOs in emergency relief, one debate revolves around whether MFOs should engage in general (non-financial) disaster relief activities, or whether they should concentrate on providing financial services that support clients to manage their household finances through the difficult post-disaster period. MFOs should think about two aspects. On one hand, the MFO wants to protect its identity as a member of the community that puts the need; of its clients first, as any successful business will do. On the other hand, the MFO wants to protect it’s identity as a-long-term, professional financial intermediary as distinct from aid organisations. Now relief operation stage has gone.
With national disaster management unit, MFO personnel may be involved in detailed disaster assessment activities. Nevertheless, the MFOs primary focus is on assessment of its existing clients. As the focus of disaster response moves from emergency relief to rehabilitation, the MFO needs to re- orient both its personnel and its clients, and to disengage from emergency response activities.
The success of an MFO’s services following a disaster depends on a number of factors. Most important are the timeliness of the intervention, the length of time the MFO offers various services, the types of financial products the MFO provides, the MFO’s ability to coordinate its services with those of other relief organizations, and loan terms and conditions.
Established MFOs can provide relief activities immediately after disasters, but the period during which they offer such assistance should be brief and followed by unsubsidized loans in the rehabilitation and reconstruction phases. Any MFO activities during these phases require coordination with other organizations to ensure the quick and accurate flow of information and services from all players. Successful MFO activities during the rehabilitation and reconstruction phases also depend on timely intervention. During these phases, emergency loans, allowances for withdrawal of client savings, and rescheduling of debt may be more important than providing clients with new loans for housing or asset replacement. New loans can most successfully be made about six months after the disaster to clients who have proved they can manage the disaster through other means.
New MFOs should be created after the relief and early rehabilitation stages are over, so that they can better screen applicants and make higher-quality loans. Providing services in postdisaster settings entails both high direct and indirect costs: New MFOs encounter more difficulty than established organizations when serving the same disaster-affected population, as it takes longer for new MFOs to reach financial sustainability than it does existing MFOs. The initial costs of servicing loans in post- disaster areas are very high for new MFOs but can be reduced somewhat by involving the community in making new loans.
Differences
Some of the key characteristics differentiating post-disaster micro-finance sites from a standard location are highlighted below.
- Pervasive poverty and loss of assets
- Greater dependence on informal sector
- Mobile population
- High levels of dissavings
- Damaged or non-existent banking system
- Inflation
- Short-term operational focus vs. sustainability
- High level of uncertainty and incentive to avoid irreversible investments
Pre-conditions for entry: Despite the difficulties involved in entering a post-disaster area, institutions committed to establishing services are able to commence with remarkably few pre-conditions. Even for the most well-managed institutions, the complexities involved in post-disaster environments may have detrimental effects on operations and sustainability. For this reason, most institutions eye post - disaster and post-conflict sites with hesitation and many prefer to wait until certain pre-conditions are met before beginning micro-financial services.
Certain essential pre-conditions (not apply for relief services) have been identified as necessary before micro-finance services commence. The displaced population should plan to permanently settle, be allowed to settle, and have the ability (skills and access to markets) to form successful businesses. Regardless of the targeted clients, financial institutions look for a partially monazite economy, the ability to develop and implement risk management strategies, a cohesive community, some market activity, credible insurance and guarantee markets, and a government social safety net.
Micro-finance organizations often establish services in post-disaster areas more rapidly than they do in standard sites. It is acceptable to begin a program after a rapid market assessment, foregoing the traditional comprehensive feasibility studies and pilot projects. ‘However, micro-finance organizations should analyze which pre-conditions have been met, and which are likely to improve. Although it is possible to deliver services in minimalist environments, the enabling conditions must appear eventually if the institution desires sustainability.
Possible Strategy
Writing-off loans is not a good strategy for any MFO. In some cases, however, loan write-offs can occur, such as when a client is killed or unable to be located. Writing-off loans has a number of negative impacts. First, it benefits different people to different degrees and this can cause disharmony among clients. Second, experience has shown that writing off loans is likely to cause repayment apathy on future loans. Third, writing off many loans can cause serious decapitalisation of the loan fund. Loan cancellation should not be considered. In addition, MFOs have different options. Some of them discuss here.
The following table identifies some of the strategies undertaken by various micro-finance institutions operating in post-conflict and post-disaster areas. The actions taken depend upon organizational capability, the goals of service provision, and the specific characteristics of the operating environment.
table 1
Some of the key characteristics differentiating post-disaster micro-finance sites from a standard location are highlighted below.
- Pervasive poverty and loss of assets
- Greater dependence on informal sector
- Mobile population
- High levels of dissavings
- Damaged or non-existent banking system
- Inflation
- Short-term operational focus vs. sustainability
- High level of uncertainty and incentive to avoid irreversible investments
Pre-conditions for entry: Despite the difficulties involved in entering a post-disaster area, institutions committed to establishing services are able to commence with remarkably few pre-conditions. Even for the most well-managed institutions, the complexities involved in post-disaster environments may have detrimental effects on operations and sustainability. For this reason, most institutions eye post - disaster and post-conflict sites with hesitation and many prefer to wait until certain pre-conditions are met before beginning micro-financial services.
Certain essential pre-conditions (not apply for relief services) have been identified as necessary before micro-finance services commence. The displaced population should plan to permanently settle, be allowed to settle, and have the ability (skills and access to markets) to form successful businesses. Regardless of the targeted clients, financial institutions look for a partially monazite economy, the ability to develop and implement risk management strategies, a cohesive community, some market activity, credible insurance and guarantee markets, and a government social safety net.
Micro-finance organizations often establish services in post-disaster areas more rapidly than they do in standard sites. It is acceptable to begin a program after a rapid market assessment, foregoing the traditional comprehensive feasibility studies and pilot projects. ‘However, micro-finance organizations should analyze which pre-conditions have been met, and which are likely to improve. Although it is possible to deliver services in minimalist environments, the enabling conditions must appear eventually if the institution desires sustainability.
Possible Strategy
Writing-off loans is not a good strategy for any MFO. In some cases, however, loan write-offs can occur, such as when a client is killed or unable to be located. Writing-off loans has a number of negative impacts. First, it benefits different people to different degrees and this can cause disharmony among clients. Second, experience has shown that writing off loans is likely to cause repayment apathy on future loans. Third, writing off many loans can cause serious decapitalisation of the loan fund. Loan cancellation should not be considered. In addition, MFOs have different options. Some of them discuss here.
The following table identifies some of the strategies undertaken by various micro-finance institutions operating in post-conflict and post-disaster areas. The actions taken depend upon organizational capability, the goals of service provision, and the specific characteristics of the operating environment.
table 1
Strategies for Post-Disaster Micro-finance service delivery
In order to determine which strategy or strategies will further a micro-finance organizations goals, it must determine priorities and a time frame. NGOs commonly participate in one of five service fields: refugee/survival service, development grant initiatives, development lending for income generating activities, brokerage services (low-income and lending institutions), and financial intermediation.
Emergency loans may be offered for the purpose of restoring productive assets and essential household assets. The decision to offer an emergency loan should be based on a detailed assessment of the clients asset loss. It should be case specific.
Rescheduling repayments: As a general rule,, MFOs should expect continuing full repayment. However, in some instances, it will be appropriate to offer options for temporarily reducing repayments. Repayments might be made interest only, they might be suspended completely, or they might even be returned to the client on a regular basis as a support of household income.
MFO personnel should consider loans for rescheduling-on a case-by-case basis.
Reduced interest for disaster-affected clients: MFOs might consider a temporary reduction of interest rates. However, without also reducing the requirement to repay capital, this option is usually of little significance.
Revised lending methodologies: While group-lending methodologies can result in high repayment rates under normal conditions they can also serve to magnify losses in times of widespread economic stress.
Insurance measures: It is usually best if the MFO acts as a link between clients/groups and reputable insurance companies who can provide general insurance.
Loan loss reserves, write-off policies, loan recovery policies: Provided restructured loans are treated appropriately, there need not be any alteration to the accounting policy on arrears ageing and delinquent loan write-off. All effort should be taken to ensure that delinquent loans are recovered, either through the client, the loan group, an insurance mechanism, or combination of these.
In order to determine which strategy or strategies will further a micro-finance organizations goals, it must determine priorities and a time frame. NGOs commonly participate in one of five service fields: refugee/survival service, development grant initiatives, development lending for income generating activities, brokerage services (low-income and lending institutions), and financial intermediation.
Emergency loans may be offered for the purpose of restoring productive assets and essential household assets. The decision to offer an emergency loan should be based on a detailed assessment of the clients asset loss. It should be case specific.
Rescheduling repayments: As a general rule,, MFOs should expect continuing full repayment. However, in some instances, it will be appropriate to offer options for temporarily reducing repayments. Repayments might be made interest only, they might be suspended completely, or they might even be returned to the client on a regular basis as a support of household income.
MFO personnel should consider loans for rescheduling-on a case-by-case basis.
Reduced interest for disaster-affected clients: MFOs might consider a temporary reduction of interest rates. However, without also reducing the requirement to repay capital, this option is usually of little significance.
Revised lending methodologies: While group-lending methodologies can result in high repayment rates under normal conditions they can also serve to magnify losses in times of widespread economic stress.
Insurance measures: It is usually best if the MFO acts as a link between clients/groups and reputable insurance companies who can provide general insurance.
Loan loss reserves, write-off policies, loan recovery policies: Provided restructured loans are treated appropriately, there need not be any alteration to the accounting policy on arrears ageing and delinquent loan write-off. All effort should be taken to ensure that delinquent loans are recovered, either through the client, the loan group, an insurance mechanism, or combination of these.
Program Design
Successful program design for post-disaster settings requires careful risk management that minimize loan defaults and other financial losses. Diversification to minimize risks also demands careful examination of group lending practices. Group lending with Joint liability may suffer from covariance effects and domino defaults, whereby one defaulter can pull the entire group into default. In addition, group-based programs with equal loan sizes and joint liability are unattractive to clients during the rehabilitation and reconstruction phases.
Successful program design also demands that governance structures be stable. Established MFOs have developed disaster-management funds to help clients cope with emergencies. Despite their role in protecting clients in times of disaster, MFOs cannot serve as social safety nets for the entire vulnerable population in their service areas. MFOs may provide temporary relief services on a non-exclusionary basis, but rehabilitation and reconstruction services are available only to previous clients of established organizations and selected clients of new organizations.
Successful program design for post-disaster settings requires careful risk management that minimize loan defaults and other financial losses. Diversification to minimize risks also demands careful examination of group lending practices. Group lending with Joint liability may suffer from covariance effects and domino defaults, whereby one defaulter can pull the entire group into default. In addition, group-based programs with equal loan sizes and joint liability are unattractive to clients during the rehabilitation and reconstruction phases.
Successful program design also demands that governance structures be stable. Established MFOs have developed disaster-management funds to help clients cope with emergencies. Despite their role in protecting clients in times of disaster, MFOs cannot serve as social safety nets for the entire vulnerable population in their service areas. MFOs may provide temporary relief services on a non-exclusionary basis, but rehabilitation and reconstruction services are available only to previous clients of established organizations and selected clients of new organizations.
