Recovery loans can be instrumental in helping clients rebuild. Learn more at #SEEP2016
“How can you lend to them? Won’t it just make them worse off?” In the weeks following 2013’s Typhoon Haiyan, these were questions that many concerned humanitarian responders voiced to me. Indeed, apprehension about affected people being burdened with too much debt was common and combined with concern about our local microfinance institution (MFI), Community Economic Ventures (CEV). CEV had immediately suspended repayments and interest among affected borrowers—which was highly appreciated, but costly—and saw a huge amount of loans at risk of not being repaid.
How could we lend to the affected communities when both our clients and our MFI were already in financial trouble?
After a Disaster; to Lend or not to Lend?
In the weeks following the storm, amongst vast destruction, CEV staff met with clients to better understand their needs. Three striking themes emerged:
Affected people were appreciative of emergency aid, but acutely aware that it was temporary;
They wanted to take responsibility for their own recovery, and as quickly as possible;
There was a dearth of resources available for rebuilding livelihoods.
In fact, despite an unusually large response from the international community, only 60% of what UN OCHA estimated was needed, ever became available. Meanwhile, clients saw new business opportunities emerging and explained how they would use loans from their MFI to support recovery. We realized that if we took the safe route—suspend new lending, collect repayments and restart lending only as the situation stabilized—we would actually take money out of the communities at precisely the time that they needed it the most.
The question had changed: How could we not lend?
The Impact of Recovery Loans
In response, we created special recovery loans with larger and more flexible loan terms that loan officers could tailor to the needs of each borrower. Clients responded with quality demand that expanded our lending by 120%. Using the loans, clients rapidly rebuilt businesses, homes, and their local economies. In fact, clients overwhelmingly reported the loans were instrumental to their recovery—in many cases indicating that they had fully recovered or better within 18 months.
Indeed, the experience of CEV and other MFIs after Typhoon Haiyan demonstrated that microfinance can significantly contribute to the recovery of affected households and communities following a disaster!
Post-Disaster Lending: Why are MFIs Slow to Respond?
More recently, VisionFund launched recovery lending in Africa, Myanmar and Ecuador. Again, we have seen disaster-afflicted people seeking credit to rebuild, but MFIs struggling to lend. In fact, a range of studies by economists have confirmed this problem: lending to the micro, small and medium enterprise (MSME) markets typically declines post-disaster, despite an increase in quality demand.
Two key issues drive this market failure: fear of lending into a risky environment, and inadequate finances. In fact, one of the key strengths of the microfinance industry—the close link between clients and the MFI—becomes a problem when a disaster strikes. As many clients are affected and struggle to make their repayments, the credit providers themselves struggle and, consequently, cannot raise the capital they need to continue their lending.
A sustainable solution for post-disaster recovery lending
To provide post-disaster recovery loans effectively and quickly, MFIs must be able to adapt products rapidly, reinforce operations, and raise fresh capital. VisionFund, together with partners from the academic, insurance, humanitarian and microfinance communities, is building a Financial Disaster Risk Management (FDRM) solution that combines portfolio-level insurance with contingent liquidity. Furthermore, FDRM will provide in-depth understanding of exposure to risks, supporting preparation and mitigation against these hazards. Paired with quality lending, this FDRM solution will equip microfinance institutions to continue serving their clients through disasters, at modest fees of about 1% of the portfolio.
Our experience and the experience of many other MFIs has shown that microfinance can support client recovery through prudent, timely lending. Unfortunately, post-disaster lending is not the norm today as many MFIs face financial pressure and a dynamic environment that impede both their willingness and ability to continue lending. Modern financial and risk management tools, though, can equip MFIs to both be prepared for and respond to disasters.
The microfinance industry has been a pioneer in bridging private capital and social purpose, unlocking billions of dollars for the fight against poverty and becoming an integral part of poor communities along the way. A similar innovative approach to addressing disaster risk can bring yet more resources for client resilience and ensure that MFIs are ready to serve even in the most challenging times.
- Article contributed by Michael Kellogg. Michael is a part of the Insurance team at VisionFund International, which is building an innovative approach to supporting client resilience through market systems. With ongoing support from Professor Jerry Skees, DFID, Rockefeller Foundation, Asian Development Bank and FMO, VisionFund has reached over 20,000 clients in five countries following disasters during the past two years, and will soon cover more than 500,000 clients with its insurance-backed “Disaster Resilient Microfinance” approach.
The Microfinance Gateway is proud to be an outreach partner for the 2016 SEEP Network Annual Conference, with the theme of Expanding Market Frontiers.
This blog was originally posted on The SEEP Network’s website as part of their ongoing Annual Conference - Peer Learning Session series.
Read the full set of Highlight Articles from our SEEP partnership: