Disaster Loan Funds for Microfinance Institutions: A Look at Emerging Experience

This paper explores the recent experiences of a number of MFIs with disaster loan funds (DLFs). DLFs are financial reserves that are held against the occurrence of a disaster such as flood, hurricane, or earthquake, and are used to make loans to affected households to help them cope with the effects of disasters.

The paper examines the DLFs developed by:

• Bangladeshi Rural Advancement Committee (BRAC), BURO Tangail, CARE, and Palli Karma-Sahayak Foundation (PKSF) in Bangladesh after the 1998 floods;
• The Inter-American Development Bank (IADB) in Central America after Hurricane Mitch;
• Fundusz Mikro in Poland after the 1997 floods.

It finds that:

• Main purpose of DLFs is to meet the immediate demand for cash by households affected by disasters;
• DLFs examined were structured in three different ways: MFI managed (single institution), separate DLF management (multiple institutions), or MFI managed (multiple institutions);
• Each DLF structure has its strengths and weaknesses, so choosing an appropriate structure should depends upon the following factors: control, existing capabilities, speed of disbursal, and accessibility of participating MFIs;
• Key components of DLFs are initial injection of funds, damage assessment, making loans, additional capitalization, monitoring.

The article concludes that the DLF concept meets a real need of MFIs and their clients. However, it states that the following questions still need to be considered:

• Do all MFIs need DLF protection?
• Will DLFs create disincentives for MFIs to take preventative measures against disaster-related losses?
• Should DLFs be designed as a perpetual disaster-protection mechanism, or should they have finite life cycles?
• How appropriate are DLFs for different types of disasters and areas with less disaster exposure than Bangladesh?