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Disaster management practices of microfinance institutions

In 2017, SEDPI conducted a series of training on “Innovations and Trends on Financial Inclusion” held in Baguio, Cebu and Davao. It aims to provide capacity building training to microfinance institutions in improving delivery of pro-poor financial services towards financial inclusion of microenterprises.

Industrial Guarantee Loan Fund (IGLF) supported the conduct of the training. IGLF is a government-owned credit program (through the National Economic and Development Authority) administered by the Development Bank of the Philippines (DBP) under the supervision of a Governing Board composed of NEDA, BSP, DTI, DOF, and UP-ISSI. It used to be the longest running lending facility in the country assisting MSMEs with their credit needs.

The workshop on disaster management focused on six (6) areas. These areas were used in order to gather input from the participants on the impact of disasters to MFIs and their clients, and how these could be managed so that the negative effects of disasters will be mitigated.

Profile of respondents

A total of 157 participants from 56 microfinance institutions all over the country. Most are top management (32%) or middle managers (62%) of their respective microfinance institutions and holds a college degree (74%). More than half are male (58%) and married (71%). Most of the participants finished college (74%).

 

Effects of Disaster to the MFI

When disasters strike in areas where MFIs operate, they experience difficulty in collecting loan repayments, savings deposits, and other payables, thereby increasing delinquency and default. In some cases, MFIs put a temporary moratorium on loan repayment of affected clients. There is a decrease in cash inflow with less payment collected and savings mobilized. MFIs also experience decrease in profit with the decrease in collection. To recover from losses, MFIs restructure or refinance some accounts.

Sufficient funds are required from MFIs as they service insurance claims and savings withdrawals. MFIs may face liquidity problems if funds are not enough. With less savings deposits and more withdrawals, there is a decrease in savings balance.

Following disasters, many MFIs put loan releases, especially to new borrowers, on hold. This result to decrease in athe mount of loan portfolio. Participants pointed out that this may hamper client expansion. Membership may also decrease as clients choose to drop out of the program or migrate to other location.

There are instances when MFIs’ assets, including their records and data, are damaged. MFIs, sometimes, need to close temporarily during and immediately after the typhoon. Staff becomes less productive or efficient as they are occupied with their families’ recovery.

MFIs’ expenses increase as a result of the occurrence of disasters. They need to allocate more loan loss provision expense with the increase in delinquency and default. MFIs also have to pay for the damages incurred. Clients expect MFIs to extend assistance to them. So MFIs is obliged to extend relief operations to affected clients.

The cost of disasters to MFIs may put the institution in a bad financial position. With a decrease in revenues and an increase in expenses, there is a possibility of net loss. When this happens, MFIs’ reputation may be at risk.

Activities or Policies of MFI to Mitigate the Effect of the Risk

Participating MFIs listed activities or policies they employ to mitigate the effect of risk of disasters. Some of the activities are suggestions.

MFIs should formulate their business continuity plan or disaster risk reduction and management policies in preparation for the occurrence of disasters. Stipulated in this document are policies on prevention, mitigation, preparedness, response, recovery and rehabilitation for disasters. Some set up a management committee on risk reduction and preparedness.

Another preventive measure that the MFIs can implement is the conduct of area mapping integrating disaster management. MFIs can conduct area mapping to identify disasters their areas are exposed to, their frequency, and gravity.

They provide appropriate insurance coverage and other benefits, including relief operations. Insured are the members’ life, loans, and crops, and MFIs’ office and equipment and cash. When disasters occur MFIs can process claims from insurance companies.

MFIs can explore Agricultural Guarantee Fund Pool, a Department of Agriculture-led program with Land Bank of the Philippines, to protect a portion of their loan portfolio that is extended for agricultural purposes.

MFIs create a disaster fund to service institutions’ and their clients needs. They can maintain credit line from financial institutions. They could drawdown from loan if disaster fund is insufficient. Some participants suggested implementing environmental awareness program and tree planting activities to prevent occurrence of disasters.

MFIs conduct disaster risk management training for their staff and their clients in preparation for the disaster. This may be in partnership with the local government unit.

During and after disasters, MFIs may grant moratorium on loan payments. After the disaster, MF staff conduct assessment of areas affected by the calamity. MFIs may opt to conduct relief operations and/or debriefing in some of these areas.

Clients can withdraw from their savings accounts to address their post-disaster needs. Some MFIs offer additional loan for the recovery of their clients. To address delinquency brought about by disasters, MFIs grant loan amnesty, restructuring, and refinancing. They typically extend the loan term to help with the ease of payments.

How can other organizations help MFIs?

Various organizations and activities may support MFIs in disaster management. In preparation for disasters, MFIs and their clients should be covered by insurance. MFI staff should also undergo trainings on disaster risk reduction and management by LGU.

Disaster-related researches from the academe is also helpful with risk mitigation. LGU can provide advance information in the form of early warning and updates to MFIs. MFIs act as the liaison between members of the community, government, and other institutions for disaster management. Organizations may partner with the MFIs to reach their stakeholders.

MFIs need calamity fund, grants, or subsidized loans from the government, banks, or other agencies. Organizations may coordinate with MFIs during rehabilitation. Repair of damaged roads will help microfinance account officers reach areas of operation.

As persons who will interact with the victims and are victims of disasters themselves, MFI staff can benefit from rescue operations and debriefing programs provided by other organizations. To know the extent of damage the disaster has caused, MFIs need information from surveys on the affected areas.

Effects of Disaster to the Clients

MFI clients usually experience financial losses when disasters strike. Their ability to generate income is affected. Production and income from sales decreases. Some lose sources of income. They also incur losses in their investments.

Those in the agricultural sector may suffer damage to their crops. The farmers have either low or no yield. If with yield, the quality is low. Disasters can also bring about damages or losses of clients’ properties and assets.

Financial constraints will be experienced by members. They could have difficulty in providing the needs of the family, like food, education, and medicine.

Financial losses cause the inability of clients to pay their loans. Due to delinquency clients would have to pay additional interest and/or penalty. In times of need, clients may withdraw their savings and/or acquire additional loans. Others would opt to offset their loans and withdraw their membership from the MFI.

Some MFI clients may sustain injuries or physical disabilities. In severe cases, there may even be loss of life. After experiencing financial losses, clients may be poorer than they were before the disaster.  Some might opt to migrate in order to find sources of income. Victims are affected not only physiologically and financially but also psychologically and emotionally.

Changes in product design to mitigate the effect of the risk

To mitigate the effect of the disasters, a business continuity plan should be put in place. MFI can also allocate funds to be used in case of disasters.

Training participants suggested providing modified and new loan products. One modification is to include insurance in loan products. For agri-loans, proceeds may be released on a per stage basis.

Two loan products can be made available to clients. First is calamity or disaster loan, which will be availed following a calamity or disaster. Interest rates and/or services for this loan is lower than ra egular loan. This will also have a shorter term. Second product is housing loan to improve houses of clients before or after the disaster.

Policies on loan restructuring and amnesty specifically for clients affected by disaster can be further clarified. MFIs can modify their savings products to make funds withdrawable. Some participants suggested designing new savings product that can only be withdrawn following a disaster.

Microfinance clients will also benefit from life and non-life insurance. Non-life insurance that can be made available include health, accident, properties, and crop insurance.

MFIs can also deliver non-financial services related to disasters. MFIs can conduct capacity building on disaster preparedness for their clients and staff. After disasters, affected members may receive livelihood assistance and trainings.

How can other organizations help MFI clients LGU, aid agencies, academe, church etc?

Aside from microfinance institutions, other organizations can help out MFI clients during disaster preparedness, response, and recovery and rehabilitation.

To prepare clients for a disaster, they are encouraged to participate in the programs of MFIs, LGUs, and other organizations. MFIs may link clients with local organizations for the conduct of disaster risk management trainings in order to build awareness.

Clients will benefit from government subsidy on crop insurance. Organizations can also provide clients with emergency equipments and first aid kits. Construction of water impounding facilities will help clients mitigate the risks of drought.

With any disaster, warning devices should be put in place. Government and non-government organizations can furnish advisory of predicted disasters. Provision of technology to address disasters like cloud seeding, irrigation, water pump, shallow tube wells, and rain collector for drought.

During the disaster, clients need access to evacuation or relocation centers, transportation facilities, medical assistance, relief goods, feeding program, rescue operations, and stress debriefing. Government, NGOs, church organizations may provide the assistance during calamities. Individuals link with organizations to render their volunteer work.

In some cases, military support is need for rescue and relief operations. Government should conduct survey on affected areas to assess extent of damage.

MF clients require funds to recover and rehabilitate from disasters. MFIs and insurance companies should be able to promptly pay claims to beneficiaries. Loans may be extended to clients. Clients also need livelihood assistance in the form of inputs (seeds, planting materials, equipment), and training.

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