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Microfinance for Risk Reduction and Resilience of Communities: Experiences and Way Forward from Philippines and Indonesia

1. Microfinance and Risk Reduction

Disasters leave insurmountable amount of damages in the local economy, infrastructures, agriculture, and livelihood among many others. As a result, it drowns the vulnerable into even deeper poverty.

The Philippines is known as one of the most hazard-prone countries in the world. In a 2008 World Bank study, the country was identified as a natural disaster hot-spot with approximately 50.3% of its total area and 81% of its population vulnerable to natural disasters. The United Nations University Institute of Environment and Human Security’s (UNU- EHS) 2016 World Risk Report, the Philippines is ranked the third most disaster risk country worldwide. In the same report, Indonesia was ranked as 36th.[1]

Microfinance is the provision of financial services to low-income people. It refers to a movement that envisions a world where low-income households have permanent access to high-quality and affordable financial services to finance income-producing activities, build assets, stabilize consumption, and protect against risks.[2]

Risk reduction is one of the goals of microfinance to prevent the poor from becoming poorer.

2. Suriving Disasters and Supporting Recovery Framework

The World Bank Guide to Surviving Disasters and Supporting Recovery a Guidebook for Microfinance Institutions was used as framework for the research. This involves assessment of risks; institutional preparedness; client preparedness; emergency response and recovery.

Since microfinance provides services to microenterprises who belong to vulnerable groups, they could be in a good position to provide assistance to them in times of disaster. In fact, it is in the best interest of a microfinance institution to be prepared before, during and after a disaster. The survival of its clients and the revival of their livelihoods would spell its sustainability in the long term.

3. Assessment of Risks

In the Philippines, microfinance clients and key management staff identified typhoon as the most frequent and most destructive among disasters identified. This was followed by flood and drought. Earthquakes happen frequently but these have low impact. La Niña and pests rarely happen but they have high impact. Landslide, strong waves and tornado rarely happen and these have low impact on the community. This is consistent with the findings of the United Nations Office for Disaster Risk Reduction (UNISDR) which rank storms, floods, earthquakes and drought as the most frequent disasters experienced in the Philippines.[3]

Indonesia experiences almost the same disasters as the Philippines. The Center for Hazards and Risk Research at Columbia University cites the following as risk hazards in Indonesia – cyclones, dourghts, earthquakes, floods, landslides, volcanic eruptions.[4]

Figure 1. Risk Assessment Magnitude Framework

The figure shows the relationship between impact of the disaster and frequency of the disaster. It shows how the poor perceive disasters in terms of impact and frequency. The x-axis represents frequency of occurrence and the y-axis represents the impact rating of the disaster.

In the past 10 years, Filipinos who were affected by Typhoon Haiyan and  Bopha, classify typhoon, flood and drought under high impact and at the same time having high frequency. The same group classified La Niña and pests under high impact but have low frequency. Earthquake was the only one classified under high frequency but with low impact. Landslide, strong waves and tornado were classified to occur infrequently and has low impact.

4. Disaster Preparedness

    4.1 Client Preparedness[5]

Almost 9 out of every 10 households of microfinance clients in the Philippines reported loss of livelihood as a negative impact of the disaster in their lives. Damages are sustained in the stores where they do business, warehouses and their houses where most microenterprises conduct their business. Machines used in their enterprises were also destroyed.

There is also massive negative effect on agriculture. Farmers reported that their crops were destroyed and washed out; livestock died and farm or fishing equipment were damaged or lost. As a result, most were not able to repay their loans after the disaster.

Poultry and livestock raisers shared that their animals either drowned or got sick because of the disaster. Fishermen also reported low fish catch after a disaster. After a disaster, a significant number of microfinance clients have no alternative source of livelihood.

Numerous deaths and injuries were also reported after a disaster which causes great financial burden and pressure to poor households.

At the community level, the following are the effects of disasters: no water and electricity; damage to infrastucture, disease outbreaks and lack of access to government services. These makes the poor even deeper into poverty.

The top priority coping mechanism of the poor in times of disaster are the following: (a) access to loans; (b) finding additional work; (c) assistance from family members; and (d) donations or relief operations.

    4.2 MFI Preparedness

The Philippine experience risk assessment presented in Figure 1 can be used to come up with strategies for disaster risk reduction and management. For high impact and high frequency, the general strategy that could be adopted is to avoid or insure against the risk. Typhoon, flood and drought are risks classified under high impact and high frequency risks.

Insurance against weather disturbances and climate change could be offered to microfinance clients. Microfinance institutions can properly time lending activities during typhoon season. But even this is becoming less predictable due to climate change.

There is a general lack of MFI preparedness to face disasters. These have inadequate policies and procedures to mitigate diaster risks. The following are the areas where MFIs lack good policies and procedures for disaster management: lack of document backup; insufficient funding for emergencies; no search and rescue, relief; no crop insurance; inability to identify risk or hazard areas; and restructuring, refinancing and moratorium of loans—among others[6].

As a result MFIs experience low portfolio quality management. The MFIs also experience difficulty in reaching clients and eben its staff since the latter are most likely victims of the disaster as well. Their office buildings and equipment also get damaged. Liquidity management becomes a problem since commercial banks are not online. Delays in management information add to the liquidty challenge of an MFI.

5. Disaster Response[7]

It is interesting to note that a significant number of microfinance clients chose to use their savings to repay their loans to the MFIs. At first glance, this looks like a very anti-poor practice.

The ideal use of the savings would have been to use it to purchase basic needs that would help the clients survive and cope with the negative effects of the disaster. The clients explained that if they exhaust their savings with the MFI, this will only last a few days because the amount is too small.

Most microfinance clients have savings but these are too small and not enough. If they are able to keep their loans current with the MFI, they would be able to access a larger amount that would help them restart and re-establish their livelihood.

With their small savings, they are able to keep their repayments from the MFI and are able to borrow additional loans.

Due to the proximity of MFIs to microfinance clients, they are in a good position for distribution of aid or relief. In the Philippine experience, MFIs act as the first responders to their clients. Relief goods distributed includes food, clothing, medicine and temporary shelter.

Some of them provide even faster service than the government. MFIs preposition relief goods before a calamity or disaster strikes, especially typhoon.

6. Disaster Recovery[8]

The obvious financial service for disaster mitigation among MFIs is insurance. Insurance provides protection for external risks such as natural hazards and calamities.

MFIs that offer insurance products are able to process claims of clients. Since MFIs in the Philippines are prohibited to operate their own insurance products, these are usually linked to commercial insurance companies.

It typically takes some time for commercial insurance companies to pay claims to microfinance clients. The most common practice is for MFIs to pay the claims forward and then have these reimbursed with the insurance company.

This practice drastically reduces the waiting time of MFI clients for claims payment. MFIs that do not have liquidity might experience tight cash flows in this instance.

MFIs also restructure and refinance loans of clients who are hit hard with disasters. This provides clients temporary reprieve from paying amortization.

Most MFIs do not entertain new loan applications right after a disaster. MFIs typically do not entertain new clients to enter their system due to the risk involved. They prioritize those that they have established relationship.

Moratorium on loan payments are also imposed to allow breathing space for the clients to cope with the disaster. These typically last for about one to three months.

7. Role of Microfinance in Disasters

The discussion on the role of microfinance in disasters is largely based on a framework of Mercy Corps.[9]

    7.1 Before the Disaster

Microfinance institutions should be able to provide safe and compelling place to save to its clients before disasters. This will encourage more savings from clients that will help them accumulate cash that could be used in times of emergencies.

Microinsurance should also be offered as a standard product offering given equal importance with loans and savings. Insurance will provide the necessary layer of protection to vulnerable groups.

Through their loan products, microfinance institutions help spur local economic activities that could increase investment climate and confidence. High confidence in the local economy provides more opportunities for the to earn more income that will make them more resilient.

Another crucial role of MFIs is also to provide financial education to their clients. Specifically, on the importance of savings and insurance in mitigating effect of disasters.

It could also provide information and encourage alternatives when disaster is predicted.

    7.2 During the Disaster

During disasters, MFIs could help channel aid. This entails establishing partnership and collaboration with government and aid agencies even before a disaster strikes.

Office building of MFIs are often one of the sturdier structures in the community. It could keep points of service open during disasters and offer its space as possible evacuation point.

As a financial intermediary, MFIs should be able to provide continued financial services during disasters. Of utmost importance is the resumption in servicing remittance and savings products.

    7.3 After the Disaster

To aid the community rehabilitate and recover, MFIs should be able to resume lending to their clients, recapitalize and adjust terms and conditions to help restart activities.

Pro-poor financial products and policies should be able to arrest and prevent adverse choices among the poor such as distress selling of assets.

MFIs should also provide insurance payouts to its clients.

Similar to the before the diaster strategy, MFIs should comtinue providing financial education to its client base so that they make informed financial decisions.

8. Supporting Microfinance Institutions in Disaster Management

The two examples that follow describe the role of government and aid agencies in supporting microfinance institutions so that they could be part of the broader disaster and climate change adapatation strategy

    8.1 Indonesia Liquidity Facility After Disaster[10]

The Indonesial Liquidity Facility After Disaster (ILFAD) was established after the 2004 tsunami that hit Banda Aceh. MFIs experienced liquidity crunch due to this massive natural disaster.

ILFAD is an emergency liquidity facility where MFIs are able to access cash in times of liquidity challenges brought about by disasters. There are 164 MFIs pre-approved participatinng MFIs in ILFAD.

Pre-approval means that they have ready access to the facility should a disaster strike in the MFI’s area of operation. ILFAd also provides technical assistance with product development and emergency management to the MFIs.

Mercy Corps led the establishment of of ILFAD. It is hoped that the facility will attract public sector support to provide more funds.

    8.2 Microfinance NGO Act

The Microfinance NGO Act in the Philippines provides tax incentives to non government organizations operating microfinance. In lieu of all national government-mandated taxes, it is taxed 2% of its gross revenues only.

This allows a lot of savings to MFI NGOs that could be earmarked for disaster management.

The act specifically requires microfinance institutions to provide financial literacy to clients. As mentioned earlier, MFIs should be responsible in providing financial education interventions to their clients so that they imbibe savings and appreciate the benefits of insurance protection. The preferentual tax treatment provided to MFIs enables them to have funds to support this activity.

The act also provides that MFIs could get into disatser risk reduction and management as a form of other services that could be delivered to clients.

Accredited MFI NGOs can also get access to government programs.

9. Recommendations

Disaster risk management and mitigation is not the primary role of MFIs. Due to the nature of its target market and its proximity to them, MFIs could provide an important role and significantly contribute to disatser risk management.

In this light, there is a need for government-led and government-sponsored technical assistance on disaster risk reduction and management.

MFIs can coordinate efforts with local government units and other aid organizations in terms of information dissemination and announcements before, after and during a disaster. It could also be a good conduit for relief operations.

Livelihood support for clients both on the technical and financial side should be extended. This could be coupled by the making loans available preferably with soft interest rates during the recovery stage.

The role of government is t provide subsidized source of funds for MFIs during the recovery and rehabilitation stage so that the funding costs are not passed on the the poor who have already suffered enough because of the disaster.

Activities that spur local economy during recovery such as cash for work and cash transfers is also a tool to restart markets to function. MFIs could be good conduits for this activity.

There is also a need to strengthen value chain on agriculture where the poor can participate and benefit the most. This will increase theur income and will make them less vulnerable to external shocks.

It is also recommended that governments establish an emegency liquidity fund such as ILFAD of Indonesia for microfinance institutions to enable cash to flow in the local economy. The fund should bear subsidized costs and recoverable at long periods.

Broad technical assistance appropriate for microfinance operations should also be implemented covering—restructuring and refinancing policies in times of disaster; microinsurance support; and loan writeoffs.

 

[1] Welle and Birkmann, “The World Risk Index 2016,” Bündnis Entwicklung Hilft (Alliance Development Works), and United Nations University – Institute for Environment and Human Security (UNU-EHS), 2016.

[2] “Microfinance Gateway – CGAP.” www.microfinancegateway.org/what-is-microfinance.

[3] Rapisura, et. Al., “The Effect of Haiyan and Bopha to Microfinance Institutions and their Clients,” SEDPI Publications, September 2014.

[4] “Indonesia Natural Disaster Profile, The Earth Institute at Columbia University, https://www.ldeo.columbia.edu/chrr/research/profiles/pdfs/indonesia_profile1.pdf

[5] Rapisura, et. Al., “The Effect of Haiyan and Bopha to Microfinance Institutions and their Clients,” SEDPI Publications, September 2014.

[6] Rapisura, et. Al., “The Effect of Haiyan and Bopha to Microfinance Institutions and their Clients,” SEDPI Publications, September 2014.

[7] Ibid

[8] Rapisura, et. Al., “The Effect of Haiyan and Bopha to Microfinance Institutions and their Clients,” SEDPI Publications, September 2014.

[9] Kurz, “Financial Inclusion Before, During and After Natural Disasters, Mercy Corps, 2015

[10] Kurz, “Financial Inclusion Before, During and After Natural Disasters, Mercy Corps, 2015

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