Microfinance can be a powerful force in disaster recovery
The cost of disasters far outweighs the resources available for recovery. Microfinance could be one way to fill the funding gap.
After a major disaster, generally, there is a surge of post-disaster relief and rehabilitation assistance from international donors, and other external public and private agencies. But you may wonder: Is that post-disaster assistance enough for the affected people’s rehabilitation? How effective is the assistance? Does it really reach the people who need it most?
Post-disaster assistance is especially important for developing countries with limited budgetary resources. External assistance prevents governments from diverting their budgetary resources for the relief and rehabilitation and enables them to maintain their investments for economic and social development. However, post-disaster external assistance has limitations. Generally, such assistance is far smaller than the actual damage from the disaster.
The region’s annual loss from disasters is estimated at $675 billion, while the region’s net official development assistance in all sectors in 2017 was approximately $21 billion, according to the United Nations Economic and Social Commission for Asia and the Pacific’s Asia-Pacific Disaster Report 2019. Also, external assistance normally fades away a few years after the disaster. However, the actual recovery takes much longer, especially for the poor.
Involving local microfinance institutions can be an effective tool to assist disaster-affected people’s recovery, especially for those in the low social and economic tier. Microfinance institutions are either formal financial institutions such as banks and cooperatives or nongovernment organizations, whose common objective is to provide financial services to the poor. Microfinance institutions, in addition to their regular financial services, are increasingly playing a role in helping the poor during disasters. The institutions are committed to serving and providing in-depth knowledge to local communities.
An example of microfinance institutions’ involvement in post-disaster assistance can be found in Nepal after the earthquake on April 15, 2015. The earthquake, which caused nearly $7 billion in economic losses and damage, as well as 9,000 deaths, also impacted poor people’s livelihoods by damaging crops, livestock or other means of generating incomes. After the earthquake, the Asian Development Bank provided grants to help the affected households to recover their livelihoods. The assistance provided livelihood restoration microcredit to the affected people through the Small Farmers Development Bank, an apex microfinance bank of small farmers’ agricultural cooperatives. By October 2017, livelihood restoration microcredit was provided to 15,700 affected households who are mostly poor and marginal farmers.
In 2018, an assessment of the livelihood restoration microcredit’s impact surveyed 700 affected households which received the microcredit – the beneficiaries; and 175 affected households which did not receive the microcredit – the nonbeneficiaries. The survey results indicate that the beneficiaries’ incomes exceeded the pre-earthquake level while the non-beneficiaries’ income level had yet to recover to the pre-earthquake level. The beneficiaries had higher household incomes, and person-days of employment as compared to the nonbeneficiaries.
The experience in Nepal indicates that post-disaster access to finance by microfinance institutions is useful for disaster-affected households’ early recovery. Recently, many microfinance institutions offered such post-disaster emergency microcredit as part of their microfinance business. In addition, some of these institutions also started providing special savings products, insurance services and other disaster risk financing to enable their clients to mitigate financial risks from disasters.
In disaster response, donors are encouraged to involve microfinance institutions to deliver relief and rehabilitation assistance. However, for these institutions to provide post-disaster assistance, they need to have an established client network as well as skills and resources. Donors cannot only engage microfinance institutions at the time of disasters, but should also develop their capacity for disaster response during normal times. For the poor, recovering from disasters takes time and is difficult. In providing post-disaster assistance, it is important to provide medium to long-term continuous and community-based support to rebuild affected people’s livelihoods. Microfinance is an increasingly important part of the mix of assistance that is needed.