Relief Through Finance: How Microfinance Builds Resilience to Disasters And Crises
Nepal, May, 08 2015 -
While there is an important role for those organisations, there is also a vital role for the financial services industry in helping people rebuild their lives. Microfinance can be genuinely transformative in this respect.
Late last month, a magnitude 7.9 earthquake devastated swathes of Nepal. Thousands are dead already, likely hundreds of thousands displaced. While shocking, the tragedy is hardly surprising – nor was the damage unforeseeable. Poor infrastructure and poverty prevent adequate preparations in countries like Nepal, and there will be immense human suffering in the months and years to come. Let’s hope the global community – as it has on multiple occasions before – steps up in helping people get back on their feet.
This last sentiment is a common one. But it presupposes that it’s the relief and aid community that must take the lead after crises. While there is an important role for those organisations, there is also a vital role for the financial services industry in helping people rebuild their lives. Microfinance can be genuinely transformative in this respect.
The microfinance industry has had its own share of crises in the past few years – some very real; some overblown through misunderstanding about its role, its capacity, and its limitations. But from crisis has come opportunity, as social performance management, appropriate regulation and demand-driven products bring the sector closer to its founding ideals.
As natural disasters become ever more prevalent and serious – a result of population growth, and possibly of climate change as well – so too has civil strife dominated the lives of many in emerging economies in recent decades.
For poor people in countries suffering from these crises, life is an endless tale of vulnerability. Microfinance can play a vital role in helping these people increase their resilience to crisis, minimizing their vulnerability to poverty, insecurity and instability. Restoring livelihoods and providing resilience to vulnerable populations are among the core benefits that financial intermediation can offer, by providing access to savings, insurance, emergency loans, remittances and income smoothing, among other services. Microfinance providers are well-suited to play this role, building on existing relationships of trust with clients that foreign NGOs cannot.
This is an emerging viewpoint, illustrated by the focus of this year’s 6th European Microfinance Award, which recognises institutions that provide financial services in post-disaster, post-conflict areas and fragile states, thus helping to increase the resilience of the affected population. Post-crisis microfinance is the next frontier in an industry that’s re-defining itself, and looking to provide sustainable positive impact through financial inclusion.
The irony and the opportunity is that microfinance has the greatest potential for impact in places which also happen to be most susceptible to crisis – whether natural disaster or civil conflict. Poverty and exclusion thrive in the gaps. In the 33 Fragile and Conflict-Affected Situations (FCS) as defined by the World Bank Group, poverty rates are at 51 percent – a number that represents half a billion people.
In these countries, disaster and conflict can lead to a negative feedback loop of poverty traps over the short and long term. Incomes become less stable, and economic productivity decreases. Market opportunities worsen, and infrastructure failings prevent the movement of goods. Housing and working conditions deteriorate, and social cohesion can be destroyed.
In response, the provision of fair, sustainable, scalable financial services to poor populations, appropriate to the context and flexible to changing circumstances, can create employment, drive economic growth, ensure a range of critical services, and bring people together during times of shared difficulties. Microfinance can also build social cohesion, while putting people and communities back on their feet.
It will take years for the communities affected by the earthquake in Nepal to recover. Relief and aid will always have their place, and the rest of the world will need to send money and logistical support to help. But long-term recovery will require more than food packages and temporary housing. It will need livelihoods to be re-built, businesses to be grown, and the long-term reconstruction of assets and skills. The applicants for the European Microfinance Award, and the eventual finalists and winner (to be announced in Luxembourg during European Microfinance Week in November) will demonstrate excellence in providing services in the hardest environments imaginable. With luck, their ideas and experience can be leveraged to help millions of others recovering from future crises around the world.