Using Compulsory Savings for Natural Disaster Response
The paper suggests that very few microfinance organizations (MFOs) are licensed to mobilize savings. But many MFOs require clients to make regular deposits to build loan collateral and inculcate financial discipline.
The resulting fund, typically called "compulsory savings," can be an important source of emergency support to MFO clients following an unexpected natural disaster. In areas facing chronic disasters, it is a common practice for some percentage of the compulsory deposits to be earmarked for unexpected emergencies, including natural disasters or personal crises. This amount would be available to clients as a cash advance, should the need arise.
Using compulsory deposits rather than new loans to assist clients through emergencies can both maintain MFO repayment rates and help clients to avoid falling into a post-disaster debt- dependency syndrome.
The paper concludes that natural disasters significantly disrupt compulsory savings and it appears likely that, in general, the stricter the terms and conditions for accessing compulsory savings, the more likely clients are to think carefully about withdrawing savings, to use them prudently and to replenish them promptly.
One can assume that the higher the interest rate, the more determined the client will be to replenish her savings. But there are other issues to consider. For example, as the terms and conditions become stricter, the number of clients accessing their own savings may decline, as they choose to go elsewhere to meet their emergency needs.
While this may lessen the MFO?s liquidity crisis, it may also put clients under greater long-term financial pressures as they turn to informal lenders for money with fewer strings attached. And MFOs should certainly consider internal ethical questions as well as operational questions: is it appropriate to charge clients interest on advances against their own savings, particularly if the MFO does not pay interest to clients on those savings deposits?
[Adapted from author's abstract]
