Microfinance provides post-disaster relief and support quickly, reduces the cost of recovery financing, reduces aid dependency, and builds long-term resilience.
This week, Small Farmers Development Bank, a microfinance cooperative bank in Nepal, started extending small-scale loans to earthquake-affected people in Dhading, Nuwakot and Rasuwa districts, providing families with much-needed relief and, at last, a chance to get on with their lives after the devastating earthquake in April 2015.
The loans of up to NR50,000 (about $460) to help families restore their houses, farmland, livestock, or micro enterprises are part of ADB’s $15 million Disaster Risk Reduction and Livelihood Restoration Project funded by the Government of Japan. The three-part project aims to provide concessional microcredit to at least 12,500 households affected by the tremors, and targets particularly poor and vulnerable households that have no alternative sources of financial assistance. It will also rebuild or retrofit model schools and provide training on disaster risk management.
The Nepal government’s Post Disaster Needs Assessment, published shortly after the earthquakes, said that the disaster disproportionately affected the poor, who have few emergency funds to fall back, especially those in rural locations where houses were less robust and poverty tends to be higher.
It also estimated that as a result of the catastrophe an additional 2.5%-3.5% of the population will be pushed into poverty during the 2015-2016 fiscal year, which translated into at least 700,000 additional poor. Roughly 50%-70% of the these will be from the rural central hill and mountain region, where vulnerability prior to the earthquake was already high.
The central Dhading District was one of the seven districts most severely affected by the earthquake, and even before the disaster, was one of the poorest districts in Nepal with a Human Development Index (HDI) ranking of 0.461 versus the country average of 0.491. The HDI, created by the United Nations, measures key dimensions of human development such as standard of living, life expectancy, health, and education. Nuwakot and Rasuwa were also severely affected.
Over the year after the disaster, which killed nearly 9,000 people, affected over 8 million, and destroyed 500,000 houses, many people are still struggling to get the necessary support to rebuild their lives. Hundreds of thousands of Nepalis are still living in shelters made from tarpaulins and corrugated iron sheets, which provide little protection from the harsh monsoon rains in Nepal.
This is partly due to the delay in establishing the National Reconstruction Authority, the government agency tasked with managing reconstruction projects, which only started operations earlier this year.
But another part of the problem is the longstanding problem of getting credit. Out of Nepal's total population of 27 million, 13 million have no access to formal financial services. Even before the earthquake, microfinance institutions were heavily concentrated in the most accessible cities and towns, and only reached about 23% of the 14 million Nepalis who could access finance. Microfinance institutions with networks in rural areas also had difficulties because their resources were too limited to meet with the sudden surge in demand from affected people.
ADB’s Disaster Risk Reduction and Livelihood Restoration Project will help counter that in cooperation with the Small Farmers’ Development Bank, which will channel microcredit through its network of small farmers’ cooperatives and through them to borrowers. The bank has 85 cooperatives in affected districts, and will show that well-organized microfinance institutions have a key role to play in providing relief and post-disaster support quickly. Microfinance can also reduce the cost of disaster recovery financing, while reducing aid dependency and building long-term resilience to disasters.
In Dhading, Rasuwa and Nuwakot, farmers and their families can now, finally, start rebuilding their lives.