Disasters and Conflict: FAQs

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There are a few basic steps which all institutions should implement in order to be prepared for disaster, and first among these is the development of an Emergency Preparedness Plan. The importance of pre-planning cannot be overestimated. Simply thinking through what you would do during a crisis, and reviewing it on an annual basis, is absolutely critical. This planning becomes of utmost importance during the first three days after a disaster, when most mistakes are made.

As part of a preparedness plan, systems should be in place to protect an institution’s assets. All physical assets should be insured. Back-ups of necessary data, systems and power sources should be arranged through data back-up and recovery systems, holding records in secure off-site locations, and maintaining off-site backup operations of the management information system (MIS). In addition, cash holdings should be protected by keeping the majority of cash in bank accounts. Only minimum cash should be held in branch offices, stored in disaster-proof receptacles. These protective steps will help ensure that an institution can come out of a disaster intact.

But in order to go beyond mere survival and continue to thrive post-disaster, financial institution must also protect their financial assets. To mitigate risk of loan portfolio losses from a disaster, diversification of the loan portfolio is highly recommended – in terms of geography, client segments, and types of loans. In addition, offering and promoting risk-mitigating financial products such as microinsurance and savings can help both clients and financial institutions weather the storm.

One challenge institutions often face immediately after a disaster is severely reduced cash flow, as loan repayments stop coming in and clients withdraw savings to cover living expenses. To mitigate this cash flow and liquidity risk, institutions must be sure to maintain sufficient reserves in banks. In addition, pre-established lines of credit with banks, or arrangement of other sources of emergency borrowing with banks or other institutions, such as emergency liquidity facilities, are important for quick access to funds.

Additional preparedness steps will depend on the operating environment, and must be determined through risk analysis. For example, if your area is prone to frequent disasters such as seasonal flooding, a contingency fund for emergency loans is also a good idea.

Sources:
Microfinance and Disaster Management: Training Manual (FDC & Citigroup Foundation, 2006)

Microinsurance has the potential to be a useful risk mitigation tool, providing solutions that help both clients and institutions cope with the devastating economic effects of disasters.

In practice, however, there are few successful experiences and it has proved extremely challenging to structure and implement affordable and high value microinsurance products specifically for disasters. Several factors must be put in place for it to work, including a large and diversified risk pool, low transaction costs and premiums, transparent and easily verifiable triggers, and systems for speedy and efficient payouts. In addition, specialized staff and accounting procedures are necessary. These pre-conditions are hard for many institutions to meet. In addition, it can be very difficult to create demand for such a product in areas where disasters occur infrequently.

Sufficiently large and diversified outreach is perhaps the biggest challenge of all. It is imperative to do so since the design of affordable insurance products depends on not having to pay out claims to all policyholders at once, yet disasters tend to affect entire populations where MFIs work. To address this issue, it is necessary to create national or indeed global risk pools that spread risk across geographies and types of hazards. Reinsurance is thus critical as it enables small insurers to share the risk with a broader pool of insurers, thereby reducing their own risk exposure and gaining access to funding and actuarial experience.

Given these key challenges, it is best to exercise caution when considering the use of microinsurance as a major disaster relief tool. Should MFIs decide to pursue microinsurance, public-private partnerships or alliances with insurance companies and reinsurers are recommended as it is very difficult for most MFIs to provide insurance alone. An appropriate role for an MFI can be to act as an agent of an insurance company. MFIs take responsibility for aggregating the clients and marketing the product while reputable insurance companies design the products, set the premiums, and monitor insurance claims.

There is still much work to be done in this area, but public-private partnerships or alliances with regional and global insurance companies could lead the way.

Sources:

The most important way financial institutions can help clients to be prepared for disaster is through responsible lending prior to the disaster. Organizations with lax policies and procedures and poor underwriting standards tend to get hit the worst by disasters or sudden conflicts, and are typically the ones who put clients most at risk and suffer the greatest defaults.

Besides responsible lending, financial institutions can also help clients prepare for disasters through savings. If licensed to take deposits, MFIs can promote savings in their institution through various mechanisms including obligatory deposits as a part of a loan approval process, and compulsory savings for groups. These savings should then be made available immediately post-disaster, even if they were held in closed time-bound accounts, to help clients recover without having to take on additional loans.

For institutions which are not licensed to take deposits, they can still actively promote savings in other institutions by connecting clients with savings institutions or training self-help groups on how to intermediate savings and make sure they are held in a safe, reputable institution.

In combination with savings, remittances can also be an important post-disaster resource for clients in many areas. For institutions with clients who receive regular remittances, it is important to connect these money transfers with savings which can help clients to cope in case of disaster. In addition, for institutions which process remittances themselves, it is important to have back-up plans to enable continued receiving of remittances post-disaster for those clients who depend on them. After a disaster, the institution must prioritize getting remittance systems back up as soon as possible. 

In areas which are particularly disaster-prone, housing improvement loans can help clients to make their homes more disaster-proof and protect their assets. Microinsurance can be another resource to help clients withstand and recover from disaster, but it also has some key limitations. 

Though every disaster and financial institution is different, there are some basic steps that all will need to undertake immediately after a disaster:

Phase 1: Stocktaking

  • Verify the scope of the disaster
  • Ensure safety of staff, taking care of their needs
  • Take stock of key assets (data, physical facilities, processes)
  • Establish a Crisis Task Force
  • Review disaster response plan, reviewing and adapting disaster policies
  • Inform employees about policies and procedures
  • Impact assessment – systematic examination of clients, institution, and environment
  • Assess immediate cash flow situation and ensure sufficient supplies of cash to meet client and institutional needs in the near future
  • Institute liquidity management, obtaining liquidity support if needed
  • Portfolio management – review health of loan portfolio, setting aside sufficient reserves to cover anticipated loan losses
  • Consider how the institution can support relief efforts

Phase 2: Monitoring and analysis

  • Monitor and follow up with clients
  • Design product modifications (such as rescheduling, refinancing, changes in lending methodology from group-based to individual liability)
  • Roll out new products (such as emergency loans, leasing and grants)

Phase 3: Focus on medium-term

  • Review of product offerings for recovery – developing new products and markets as part of overall reconstruction effort
  • Assess new market/client environment and redo strategic/operational plan to take into account the new environment
  • Assess longer term portfolio needs and identify needed financing sources

Emergency loans are often offered to clients in order to cover basic needs immediately post-disaster, and sometimes to help with replacing assets lost in the disaster.

Financial institutions must consider carefully, on a case-by-case basis, when it is appropriate to offer an emergency loan and when other interventions may be more appropriate. The questions to ask include: Is the client’s livelihood still functioning? Does the client have an existing source of income? Is the asset being replaced an income-earning asset?

If the answer to any of these questions is positive, then an emergency loan could be appropriate because the client has an income source from which to repay the loan. However, if the answers are negative, an emergency loan may not be appropriate and could end up further indebting the client. In such cases, grants or other assistance are often better options.

After a disaster, financial institutions must assess how it has impacted their clients in terms of their assets and income-generating activities, ability to repay any outstanding loans, and recovery needs. Assessments should begin as soon as possible, and should be ongoing, since initial assessments can sometimes be inaccurate and the environment can change quite rapidly. In addition, it may be very difficult to locate clients right away, so gathering data may be a gradual process. The institution can also choose to do a quick assessment right away, and a deeper one later.

To start, institutions can cross-reference news and government reports to locate the areas most affected, and then follow up with visual surveys on visits and tours of the affected areas to gauge the extent of the damage. Client surveys should then be conducted wherever possible to get the more detailed information needed to make key decisions. MFIs should also attend donor/NGO coordination meetings when held, as this is a key time for exchanging information. MFIs can check if other NGOs have conducted assessments in their area, so as not to duplicate information. However, microfinance practitioners affected by the flooding in Pakistan highly recommended that MFIs perform their own client assessments instead of relying on third parties or the government, since their data may not provide an accurate picture.

Information collected in client surveys should determine:

  • How many clients suffered damages?
  • How severe were the damages they suffered (life, health, homes, business)?
  • What immediate concerns do they have, and what kind of immediate assistance do they need?
  • Do they have sources of income that will help them weather the crisis?
  • Will they need to access cash – withdrawing savings, other loans, etc.?
  • What is their attitude toward and ability to continue making their loan payments?

It is also important to assess clients’ coping strategies so that they can make sure short-term repayment needs don’t create longer term problems.

While the purpose of the client survey is to gain the most accurate information, interviewers must be sure to display sensitivity towards the losses clients have suffered and the difficulties they are currently facing. They should emphasize that they are there for the client and wants to help them recover. In addition, interviewers must be careful not to raise expectations of gifts or debt forgiveness that may not be forthcoming.

The one blanket rule here is that there should be no blanket rules. All loans need to be evaluated on a case-by-case basis. Financial institutions should be willing to make adjustments to clients’ loans when necessary both to help clients recover and make sure the institution remains in business.

After a disaster, clients are often unable to repay loans according to a pre-disaster schedule, and the most common response is to restructure or reschedule loans. Restructuring should take place immediately after a disaster and should be limited to geographic areas heavily affected. They should meet with clients to evaluate their post-disaster repayment capacity. Decisions to reschedule or restructure loan repayments should be based on a detailed assessment of the clients’ temporary loss of income.

Refinancing, which usually involves replacing a previous loan with a larger one, can be the best option for clients who have lost their productive assets in the disaster and need a larger loan to replace these assets. Again, a detailed assessment of clients’ losses is crucial to determine whether to refinance, and if so, the amount and conditions of the loan.

Writing off loans should always be a last resort, as write-offs can cause serious problems, both in terms of reduced capital and worsened credit repayment culture. After a disaster, institutions may consider changing their normal policy to allow more time before loans are written off. Of course, institutions must be prepared to write off loans which appear to be truly uncollectible, such as due to the death or disappearance of clients.

Many MFIs grapple with this question because they are sometimes the institutions with the greatest capacity to reach affected populations with relief activities, and donors can put a lot of pressure on them to help out. In addition, MFIs often want to help with relief because it is their communities which are affected. However, they must be careful about getting involved in activities which are outside their areas of expertise.

In general, MFIs can and should get involved in relief and should do so immediately post-disaster. Areas in which they can provide valuable assistance include conducting assessments, identifying affected populations, and helping relief organizations with distributions during the early stages of the relief efforts. Since MFIs are known and trusted by their clients, they can also offer a valuable service in explaining the different relief options available and helping clients access the help they need. MFIs can also operate as a source of information on victims.

MFIs should not remain involved in non-financial relief efforts over the long-term and should make sure to provide only that relief which is in the MFIs’ capacity in terms of financial and human resources. It is not recommended that MFIs become overly involved with relief efforts outside their area of expertise, such as operating camps.

The risk with getting caught up in relief efforts is that the population may come to associate an MFI with hand-outs, a development which could undermine its reputation as a financial institution whose loans need to be paid back. While MFIs with a long-standing presence in an area do not usually face this problem, this can be a serious risk for newer start-ups. For this reason, smaller, newer MFIs are often better off partnering with others in relief efforts.

Ultimately, MFIs need to participate in relief efforts to show the community they care. Decisions about how and when to provide relief involve finding the best balance between showing commitment to the community on the one hand, and maintaining a strong, business-like reputation as a lending institution on the other hand.

Donors and government clearly have important roles to play after a crisis, from supporting immediate relief efforts to long-term reconstruction and development. When it comes to microfinance, one key area of focus should be helping coordinate the overall post-crisis environment, which can involve a confusing array of organizations, large and small, local and international, public and private. Donors and government can assist by making sure sufficient relief efforts are reaching clients and balancing how much goes to what type of intervention.

Another possible role for government and donors in post-disaster microfinance is liquidity support. A common question put to funders is whether to re-capitalize financial institutions if they have lost liquidity. Governments may consider providing access to liquidity from the Central Bank.

However, liquidity support should be approached with caution, as needs are not always apparent immediately after the disaster. In the case of the 2010 flooding in Pakistan, MFIs overestimated their liquidity needs significantly. Ultimately, the solution depends on the microfinance market in a particular country or region. Where the sector is very strong, there is no real risk involved in a donor helping to re-capitalize. However, where microfinance markets are weak, it can reinforce poor practices and incentivize dependence.

When possible, the best option is to set up risk mitigation funds or emergency liquidity facilities (ELF) ahead of time. Financial institutions must meet certain requirements to participate in these types of funds, and then would have access to liquidity in case of emergency. In 2004, an ELF was set up for Latin America and the Caribbean, providing a best practice example for this type of initiative.

Capacity-building is another area where donors can contribute to MFIs’ post-disaster recovery. Instead of simply writing checks for post-crisis liquidity, donors can provide assistance to help MFIs build their internal capacity to manage and plan for disasters. Technical assistance to help MFIs in developing savings and remittance products can help both clients and MFIs to withstand disasters.

Government and donors can also play an important role in disaster risk mitigation. Donor-assisted risk-transfer programs provide benefits both to developing countries by improving their disaster response capabilities, and to donors by reducing the long-term need for assistance. For example, donors may support sustainable insurance programs for clients who cannot be served by the commercial insurance market.

Though there are several crucial roles which donors and government can play post-disaster, there are also some important notes of caution to consider while approaching this work. Funders must be careful not to force or pressure financial institutions to do work outside of their core business, when they may not be the best choice for such activities. Pressure is a big issue when it comes to post-disaster microfinance.

A post-crisis environment is often politically charged and can be misused to garner political allegiance or votes. Governments should be careful not to mix political favoritism with economic activities, a combination that can have harmful long-term effects.

Donors should also avoid supporting subsidies that have the potential to distort the market and create confusion among clients. Programs must be designed carefully to make sure that they enhance long-term access to credit, not undermine it. 

Microfinance after a natural disaster and microfinance after conflict have much in common in terms of the types of products needed to help clients re-build their livelihoods and homes. However, there are some key differences between the two settings which affect how MFIs must approach this work.

The fundamental impact of these two types of crises is very different. After a natural disaster, the main impact is generally extended physical damage, requiring intensive reconstruction of physical assets, and potential displacement of people. While conflicts also cause physical damage and displacement, the impact tends to go much deeper and more long-term. Conflicts tear apart the social fabric of a region, sowing distrust among different groups and creating the need for extensive reconstruction of society itself, as well as its physical assets. In contrast, natural disasters can sometimes even help bring people together – leading to two very different working environments.

The added security concerns and social trauma brought about by conflict make implementing microfinance in a post-conflict setting much more difficult than in a post-natural disaster setting. After a natural disaster, organizations tend to rush in immediately to assist the victims, starting re-building and recovery efforts as soon as possible. After a conflict, the timing is not so clear, as MFIs need to analyze the environment carefully to determine if certain minimum or “essential” conditions are in place to offer microfinance. These conditions are often considered to be: (1) sufficient economic activity that can use credit services, (2) a relatively stable client population, and (3) a certain degree of political stability. Though the first two points may also apply after a natural disaster, the last condition of political stability is a key issue with post-conflict settings and always needs to be evaluated carefully.

Post-conflict microfinance often also faces significant challenges in human resources. Especially after long, drawn-out conflicts, human capital can be very low, making the staffing and development of institutions very difficult. In general, recovery can take much longer after a conflict, as society begins the slow process of reconciliation and rebuilding, and can suffer setbacks if the political situation is volatile.

Sources:
Microfinance in the Wake of Conflict: Challenges and Opportunities (USAID, 1998)
Microfinance During and After Armed Conflict: Lessons from Angola, Cambodia, Mozambique and Rwanda (Concern Worldwide, 2002)

Microfinance is simply one of many tools needed in disaster recovery, as it alone does not deal with all the livelihood and economic recovery issues which must be addressed. While financial services are certainly important, they are only a small part of what is needed to help disaster victims recover. Medical services, food distribution, temporary shelter, infrastructure re-building, and other immediate relief efforts are all crucial post-disaster services which microfinance institutions are not well-placed to provide.

When dealing with a post-conflict environment, the limitations of microfinance can be even greater. Microfinance is not a tool for peace-building or reconciliation, and it can be dangerous to place broader, more idealistic expectations upon it. When security conditions are still unstable, it may not be an appropriate intervention at all.

Microfinance is a financial tool which can help with economic recovery at the household and business level, and is most successful when implemented with realistic expectations of its impact.

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