What can individual financing institutions (MFIs) do in a disaster scenario?

As the communities most affected by the recent devastating tsunami courageously begin to rebuild their lives, microfinance institutions (MFIs) can play a powerful part in the path to recovery.

Key Principles for MFIs

Maintain a commitment to sustainable operations. Where possible, MFIs should work with dedicated agencies and donors that specialize in emergency relief rather than providing relief directly. In the absence of dedicated relief agencies, established MFIs often have to provide relief assistance immediately after disasters. But this period of post-disaster assistance must be well-defined, and should be followed by a return to unsubsidized loans in the rehabilitation and reconstruction phases.

MFIs should consider where they can contribute best in disaster response and avoid embarking on activities beyond their capacity and mission. Smaller MFIs may not have the liquidity, resources or flexibility in their information systems to handle relief efforts and provide medium-term loans required to rebuild assets such as houses that don't generate regular cash income. In these instances, partnerships with commercial banks and possibly other MFIs may be considered. MFI participation in relief efforts should usually be limited to locating clients, linking clients and other community members to on-going relief operations or by transporting these people to locations where they can receive services. However, MFI field staff can play a vital role in transmitting public health messages, such as the importance of consuming only clean water. Coordination with relief organizations is essential.

Customize solutions according to clients' needs. Some clients may be severely affected by the tsunami, others less so, and a few fortunate ones not at all. MFIs should be able to provide each household with the appropriate menu of services depending on its circumstances. For those hit hardest, emergency relief would be a better first intervention than financial services. To make customization work, staff must have the training to assess the situation and the authority to make on-the-spot decisions. For the MFI, this approach offers a more efficient use of limited funding than a blanket policy for all clients, and ensures that staff maintains contact with clients throughout the recovery period. Specific criteria should be defined for loan officers to make decisions about rescheduling and providing grants.

MFI Guidelines

• Rescheduling Loans. Rescheduling loans on a case-by-case basis can help MFIs avoid losses and defaults on their loan portfolio, and ensures that any cash flow earned by those hardest-hit stays in the household. This can also build trust and loyalty to the MFI during a time of crisis. MFIs usually choose between having clients continue to pay interest while the principal payments are postponed, or stop the accumulation of interest until after principal repayment has resumed. In some exceptionally bad cases, the MFI may consider writing off loans to the client but should be cautious about sending the wrong signals to the community.

• Reconstruction Loans. Reconstruction loans are most effectively given once the emergency stage is over and MFI staff can assess the damage to property, and the credit standing, of clients.
• Going into New Areas. MFIs considering entering unserved areas to provide emergency financial assistance should plan their long-term presence in these areas carefully.
• Managing Micro-insurance Claims. Insurance claims should be processed as soon as possible to afford clients access to emergency cash. Care should be taken to screen out false claims and to ensure the sustainability of the micro-insurance program. Emergency loans can be provided against approved insurance claims if there are delays in disbursement.
• Avoid setting disbursement targets. Donors should avoid setting a target number of 'clients served' for microfinance institutions, as this may encourage some to take on clients who are unable to repay debt. This hurts both the clients and the institutions, weakening the impact of microfinance in the long term.

Source: CGAP

Contact: CGAP at cgap@worldbank.org or by fax, at 1-202-522-3744