Microfinance in the Wake of Natural Disasters: Challenges and Opportunities

Many microfinance organizations (MFOs) now working in disaster-prone countries have been caught up in natural disasters as they have occurred and have become active players in post-disaster situations.

This paper documents the experiences and experiments of MFOs that have found themselves on the front line in natural disaster situations. The author synthesizes the lessons learned from such situations and makes recommendations for donors, policy makers, and MFOs.

If an MFO is to succeed and protect its clients in the wake of a natural disaster, the following conditions must be met:

• Governments or donors must be able to undertake relief activities;
• The local economy must be at least partially monetized;
• The MFO should be able to access information for client preparedness and portfolio protection from early- warning systems that help predict the onset of disasters;
• The MFO must have the capacity to develop and implement risk- management strategies;
• A cohesive and trusting community must exist so that peer pressure can be used effectively;
• The country should have adequate size and geographic/environmental diversity so that crop insurance and disaster insurance can diversify risk effectively.

The paper identifies four key strategy areas:

• Services;
• Operating costs;
• Program design;
• Disaster preparedness and portfolio protection.

The paper concludes that a comprehensive disaster-preparedness program, implemented during normal times, may be one of the most effective tools to help MFOs deal with disasters in a systematic and sustainable way. As noted, another effective tool for portfolio and client protection is diversification of member enterprises and the MFO portfolio. 

[Author's abstract]