Microfinance and natural disasters

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The natural disasters that occurred at the beginning of the year reminded us that in spite of the global economic crisis and numerous debates on the sustainability of our financial infrastructures, we will always be at nature’s mercy. We do not yet have the technological mastery to face challenges such as the deadly earthquakes in Haiti and Chile and the storm that shook Western Europe. We must therefore wonder how apt we are to react when these disasters occur. Are our types of interventions adequate and do they really help lay the foundations of a country or a region that needs to be rebuilt?

Natural disasters require immediate joint action from the authorities and the international community. Buildings collapse, communication is cut off and infrastructures cannot be used: it is therefore essential to salvage and rebuild. Humanitarian aid then gets underway and mobilizes governments and populations to come and help the victims of the disaster with the help of copious amounts of shocking images broadcast by the media. Even if this aid is vital, it is “short term” and does not lead to durable reconstruction. To make up for this, we need complimentary tools that can get the local people involved in their own recovery. Microfinance is one of these tools.

Microfinance is a dynamic tool that can adapt to the setting to best suit the needs of microentrepreneurs. Since microcredit was created and women in Bangladesh were granted the first loans by Muhammad Yunus 30 years ago, it has considerably developed and now includes many products. Microinsurance is a convincing example because as well as the traditional short-term loan of a small sum, it also secures the income of poor families and gives them insurance coverage against disasters and death. There is also a microfinance network (more or less structured depending on the country) of local organizations that know the region and communities well. By relying on these assets, microfinance clients can take part in the post-disaster reconstruction efforts and offer durable assistance.

Microfinance clients who want to get involved in durable assistance therefore have two options. Microfinance institutions (MFIs) can take preventive measures such as emergency funds, or structure their network to anticipate the risk of propagation of the crisis to other MFIs. They also have different means at their disposal to unburden the disaster victims; reorganise payments, revise the terms of contracts, and even, in extreme cases, grant emergency loans. MFIs must act fast without endangering their financial viability, and as they are established locally, they can follow the recovery of populations more closely.

Bangladesh was helped by microfinance after the terrible 1998 floods. It is a perfect example of a successful combination of emergency humanitarian aid and microfinance’s sustained action. Microentrepreneurs’ access to services was key to redressing the economy; savings saved them from ruin and microcredit made it possible to gradually kick start activity.

Nevertheless, microfinance is not a miracle solution as it also has its own limits. For example, when crises occur, the lack of liquid assets completely blocks MFIs and this problem can only be solved by emergency aid from international donors. Moreover, one must remain vigilant and work alongside local MFIs to limit the risks of certain institutions taking advantage of vulnerable victims. This series of natural disasters does however open the debate on the creation of new assistance tools, and on a wider level, raises questions about the development of Southern countries. Microfinance is therefore a very promising line of enquiry that deserves all the hopes that have been reposed in it.

Microfinance et Catastrophes Naturelles

by Jacques Attali, President of PlaNet Finance

Text courtesy of the author

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