PAPER WRAP-UP: Post-Crisis Microfinance: Literature Review by Ivica Petrikova

Written by Ivica Petrikova of the School of International Service, American University, this report analyzes how conflicts and disasters affect the poor population and Microfinance Institutions (MFIs) and the role MFIs should play in such situations. It references other relevant studies by researchers and examines the best-practices proposed by them for MFI initiatives in crisis-affected areas. The 10 page document was published in November 2008 and the full text of the report is available here.

What follows is a summary of the report:

Natural disasters and other conflicts cause great disruption to the lives of the poor. They damage assets and decrease economic activity which in turn reduces the capability of the poor to earn income and sustain themselves. In this regard, there are three identified ways by which poor families typically cope with crisis:

1. ‘Low stress’ strategies where families reduce consumption and stop saving.

2. ‘Medium-stress’ strategies where families consume their savings, sell non-essential household assets and take out loans.

3. ‘High stress’ strategies where families sell off their productive assets and default on their loans.

High-stress strategies have the most impact on the long-term economic sustainability of the poor, often pushing them even deeper into poverty. Hence the minimum goal of MFIs in crisis and post-crisis situations should be to help suffering population avoid the need to resort to such ‘high-stress’ tactics.

With the onset of a crisis, MFIs typically experience a decline in their stock of cash. Decrease in economic activity leads households to spend more than they can save, often leading them to withdraw savings or request emergency loans from the MFIs. In addition, MFIs also face an increase in the number of loan defaulters due to the affected poor either fleeing the crisis-impacted areas or becoming too impoverished to repay the loans. Thus, this de-capitalization in times of crisis diminishes an MFI’s ability to provide financial services to the poor, whose need for financing, unfortunately, is much higher in times of crisis.

The role of MFIs in crisis can be divided into short and long term actions. Earlier studies by other researchers all concur on the fact that MFIs should not launch operations in an area for the first time immediately following a crisis. Consequently, short term actions are applicable only to MFIs already working in the area before the onset of the crisis and who have an understanding of the region. Short term actions call for MFIs to provide, in addition to microfinance services, immediate relief and humanitarian services to the people both during the conflict/ disaster and its immediate aftermath. Some studies do call for the separation of relief activities of MFIs from their microfinance activities. However, this might be achievable only for the larger MFIs. Smaller MFIs might not be able to operate as separate relief and microfinance entities. The report calls for more research into this aspect to precisely understand which of the two methods would be more effective.

With regard to financial activities by MFIs immediately following a crisis, the report calls for several short-term adjustments in existing practices to decrease pressure on the anxious clients and thereby reduce their likelihood of defaulting. Adjustments include loan rescheduling, loan refinancing, allowing withdrawal of forced savings, temporary suspension of interest-collection and greater flexibility for loan repayment.

From a long-term involvement perspective, MFIs should tailor their products and approaches to the context of the impacted areas in question. Pilot projects should be carried out to identify the most effective approach for the area in question. In this way MFIs should assess whether to focus on individual or group based loans and also whether to collect a certain percentage of loans to build up a crisis-insurance fund or to encourage clients to save. Before new MFIs can enter post-crisis areas or before existing MFIs can resume non-term financial activity, the following three conditions must be fulfilled:

1. A minimal level of political stability and infrastructure in the region

2. The presence of adequate economic activity to enable micro-entrepreneurs to generate enough income to repay their loans.

3. Population stability or people whose presence in the area can be credibly expected to be long-term.

MFIs operating in crisis affected areas should plan for the future and embed the possibility of another crisis into their long term plan. Diversification, both geographic and income-generating is a highly recommended strategy for MFIs to reduce the risk of de-capitalization due to crisis. Such diversification reduces the chance that a crisis would affect an MFI’s entire client base. MFIs could also add a mandatory fee onto the loan interest rate to build an emergency fund to be used in case of a crisis-induced liquidity crunch. Further, MFIs, if they possess sufficient funds, should invest in technology which enables their staff and clients to continue financial operations even in cases where the crisis becomes too insecure for people to venture outside their homes.

The report, which references studies by other researchers to arrive at best practices for MFIs, concludes that most studies in this regard are based more on observation and hence need not necessarily be the best solution for MFIs operating in crisis-affected areas. The report calls for more analytical evaluations of the post-crisis activities of MFIs in order to generate a more reliable collection of best practices.

By Bharathi Ram, Research Assistant

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