Bangladeshi Experience in Adapting Financial Services to Cope with Floods: Implications for the Microfinance Industry

The paper summarizes findings from an investigation into the Bangladesh floods of March 2000. Savings products have the potential to play a significant role in helping clients manage the impact of disasters, but compulsory savings products provide only limited benefit for two reasons:

• Difficulties in accumulating meaningful balances due to the small size of regular contributions and no incentive to contribute more than the required amount. Clients have to contribute for several years before they have accumulated a balance large enough to offset flood-related losses - average losses in 1988 were around 1000 times more than a weekly payment;
• Difficulties in meeting substantial demand for withdrawals where Grameen Bank, for example, reported that 95 percent of affected clients' compulsory savings had been withdrawn. Having lent out funds collected as savings, some organizations struggled to find sufficient liquidity to meet the demand for withdrawals in affected areas and this also has longer term consequences. By creating open access savings products other organizations were able to increase client accumulated balances rapidly slowing the advantages of voluntary withdrawal access and unbundling savings from loans. Greater frequency and convenience of collections can also help clients to accumulate larger balances faster which increases their protection and to avoid liquidity crises.

Credit products can play an important role in reducing the negative effects of disasters:

• Pre-disaster or preventative products where several MFIs have experimented with adjusting their loan repayment schedules to reduce required repayments during the flood season and encourage more protected houses or the purchase of small boats - assets that help reduce losses when the floodwaters rise;
• Emergency relief where immediately after a disaster, MFIs may be able to reschedule existing loans to reduce the burden on affected households and provide new, quick disbursal emergency loans to replace income sources temporarily lost because of the disaster MFIs can use new loans to help clients repair and replace damaged or destroyed assets. Loans are smaller than average in size and for shorter terms than normal and reported repayment rates were similar or better than normal MFI rates;
• Reconstruction loans clients may not have the capacity to take on more debt and this is problematic for reconstruction loans used to finance assets, such as latrines or houses. MFIs that had difficulty sourcing funds for relief loans also struggled to find funds for reconstruction loans;
• Outstanding issues include factors that influence clients to decide whether to use financial coping mechanisms in disasters, the extent preventative loans reduce households' losses and future potential for preventative loans in the face of disaster.

None of the MFIs in Bangladesh provides insurance against disaster-related losses. Product delivery lessons include:

• Customizing solutions according to clients' situation;
• Making local staff customize in an efficient and timely manner;
• Giving clients options such as choosing between different withdrawing from savings or taking an emergency relief loan;
• Protecting client records and information from destruction or damage.

The paper concludes that there is no one product or set of products that all MFIs can use to fully cope with disasters. However, the Bangladeshi experiences highlight that client preferences, the degree of disaster exposure, and the size of an MFI will all likely influence which products or product adaptations are most appropriate in a given situation.