MFI Liquidity Problems After a Natural Disaster
This brief seeks to document initial evidence, and point to some initial ideas now under discussion on how to head off or resolve potential liquidity crises. After a natural disaster, access to adequate liquidity is one of the most difficult issues microfinance organizations (MFOs) face. As MFOs begin to quantify their liquidity needs, a picture emerges that points to the magnitude of the problem.
In the wake of a sudden natural disaster, MFO clients may change their borrowing and saving behaviors in four ways:
- Failing to make loan repayments;
- Ceasing to make deposits into compulsory savings programs;
- Requesting advances against their savings;
- Demanding emergency and reconstruction loans.
The first two practices reduce the liquidity flowing into the MFO, while the last two increase the demand for liquidity outflows.
The study concludes that even if MFOs develop emergency funds, post-disaster liquidity problems still will arise for two reasons. First, many MFOs will remain unable or unwilling to maintain disaster funds. Second, even the best-prepared MFOs cannot cope with massive natural disasters of the scale seen in 1998.
One possibility is for a national or international central agency to support MFOs in times of crisis. A national or international agency may be useful as a "lender of last resort" in chronic crisis-affected areas as well. But in such areas, individual MFOs have a motive to develop internal emergency funds to deal with natural disasters that are bound to strike.
