Can Microfinance Meet the Poor's Financial Needs in Times of Natural Disaster?

USAID's Microenterprise Best Practices (MBP) Project has focused on the ability of MFIs to serve poor communities affected by crisis, and to reduce poor communities' vulnerability to crisis. By undertaking a broad examination of microfinance as an industry and looking at specific experiences in the natural disaster context, the paper draws several broad lessons:

• Microfinance cannot be a financial safety net to an entire affected community, but can play an increasingly constructive role in disaster preparedness and response as it expands its range of products and services;
• Establishment of long-term relationships between individuals and MFIs allow poor households access to existing MFI products that can help reduce some of the hardships caused by natural disasters;
• Preparedness of the MFI's staff and systems is the key to providing timely response to clients;
• Timing of MFI services matters to clients: emergency loans must be available quickly after a disaster strikes, while reconstruction support is useful once the household has fully passed the emergency stage;
• Regular MFI products can be modified to be useful in post-disaster settings, and regular MFI systems can be disaster-protected.

Along with these broad lessons, there are also clear bottlenecks that limit the role MFIs can currently play in natural disaster response and mitigation:

• Most MFIs do not have the liquidity position to respond quickly or fully in a disaster context;
• Most MFIs are not currently prepared to either weather or respond to a natural disaster situation;
• Most MFIs have not considered client needs from an emergency perspective; rather products and services are primarily geared to day-to-day business or household concerns;
• Demand for special services may be small, yet may require significant institutional investment;
• Regulatory restrictions and limits to institutional capacity will keep most MFIs from mobilizing voluntary savings for the foreseeable future.

The paper concludes that with careful planning most of these bottlenecks can be removed or reduced by:

• Engaging the microfinance community in a dialogue about natural disasters and other types of environmental instability;
• Ensuring disaster professionals encourage MFIs be prepared to respond to disasters and actively engage with clients and communities in mitigation planning;
• Encouraging donors to provide financial incentives to take this step;
• Encouraging MFIs to broaden the types of financial services they can provide in order to play a constructive role in this context.