The Nature of Safety Nets that Work

Aug 2016
Global, August, 24 2016 - Microfinance institutions around the world are familiar with the impact of disasters, both natural and man-made, on their clients and, by extension, their lending operations. From time to time, humanity faces one serious challenge or the other.

Sometimes, these challenges take extremely high dimensions, requiring action on a global scale. In other cases, they may be controlled within the confines of national borders. Such challenges include floods, fire outbreaks, famine and even recession. Nigeria is currently facing both floods and recession. The present Nigerian government has been taking steps to deal with both as did the previous ones. However, there is need to ensure there is a departure from the failed efforts of the past.

The poor and the vulnerable – women and children, the sick and the elderly – are exactly what they are: vulnerable. Their capacity to protect themselves against any disaster is limited. They are even more vulnerable in times of major crisis such as floods, and that is when they need the safety nets provided – all those policies and support strategies that help to cushion them from the impact of disasters. Sometimes we read safety nets wrongly to include Ad-hoc arrangements made in the face of a challenge. They are more than those.

Without public support, the vulnerable may perish when major disasters happen. So safety nets are not a favour to the vulnerable but an obligation on our collective part. This is why the recent proposal of a social safety net the Vice President should attract some attention. According to him, this would involve the opening of a register of the poor and vulnerable to avoid the past errors of inclusion and omission. The details of this proposal are not yet in the public domain. However, we must indicate the importance of an expanded view of safety nets to avoid the error which actually is in our concept of safety nets.

Microfinance is a safety net. In view of the fact that the poor, especially the economically active ones, depend on microfinance for the survival of their subsistent businesses, natural disasters that hit them often hit microfinance institutions equally. The flood disaster of 1998 in Bangladesh was “celebrated” not only for the length of time it lasted but for the damage it caused to microfinancing. The flood affected about 5 million families and over 1000 microfinance providers, especially those led by the Grameen Bank. The flood disaster was so bad that it seemed like the whole microfinance industry was under water. It was so “celebrated” that the New York Times made a banner headline of it, with the title: “Grameen Dream Washed Away”. It was like the whole effort of the founders of microfinance had vanished with the floods.

The importance of public and private efforts to provide mitigants to the poor in times of trouble may be seen more clearly when we remember what happened in India, also in the late 90s, following a major attack of pests on their cotton plants. The microfinance industry and indeed, the whole world, was shocked to hear that about 200 poor farmers of the South Indian states of Andhra Pradesh, Karnataka and Maharashtra, committed suicide because they could not face the moneylenders to whom they had become indebted following the massive crop failure. The farmers had resorted to borrowing from, and were actually granted loans by, money lenders for the production of cotton. The pest attack sealed their hopes of repaying the loans. Out of shame, they took their own lives.

Different kinds of disasters both natural and man-made, visit humanity at different times making it imperative for government to always take steps to provide succour to the victims. The current recession in Nigeria is one such disaster, which may not appear like one but is a major disaster by all definitions. The simple test of significance, as it were, of the enormity of our present debacle is a trip to the villages outlying our major cities. The first thing one sees is the army of able bodied young men hanging around and doing absolutely nothing of pecuniary relevance.

It is now common for one to come to a gathering of people only to discover that most of the people have no regular source of livelihood. One is probably the only person with any kind of gainful occupation. Such a situation is very dangerous for the survival of any country. It does not matter whether it is in Owerri, Yola, Kano or Idanre. The army of well-educated and the not so well-educated youths that have nowhere to go is not a problem for the poor. It is for the rich. Obviously as our leaders compete with each other on fixing their children and family members in public institutions through uncompetitive means and preventing access to the poor, they may soon find out that they have brought home ant-infested firewood. It will be their business to find the best way to get rid of the ants, when they begin to crawl out.

Real safety nets should include economic justice and equity engraved in our economic system. A register of the poor that helps organize handout to them is good. Transfer payments are part of the fiscal management strategies that nations employ. However, safety nets should go beyond things like SURE-P that seek to pass cash and goodies to the poor. We know they do not. Somebody needs to tell us who the beneficiaries of SURE-P are. Those policies fail, especially in a system without institutions like ours. Safety nets should include provision of power, water, security and a just society. The poor stand a better chance of helping themselves in the face of disaster if they have basic infrastructure.

Microfinance institutions face considerable risks under the present macroeconomic environment. The only way to glean what could possibly be happening in the industry is to look at the money centre banks. The banks have been battling with their risk assets, especially foreign currency denominated loans, which are now mostly at risk. Under the full weight of the prudential guidelines, many of them are likely to balk. Perhaps a stress test would help the Central Bank prepare for any eventuality the current bad economic conditions would inevitably throw up. Is there any hope or place for anyone who has a foreign currency loan from a bank in Nigeria today? Sooner or later, the demand for bailout may be inevitable and once again, the poor and vulnerable will bear the brunt.

If the money centre banks have need to worry about the present state of the economy, then microfinance institution must have a big story to tell now. Their clients are the weakest in society, even in the best of times. We should wonder the condition under which those clients now operate. It is therefore needful for microfinance banks in Nigeria to stop and take stock of their operations. Taken separately high inflation and recession are both enemies of the people. Taken together they are akin to a death sentence. This death sentence was passed in Nigeria when the Central Bank literally directed the banks not to lend money at any rate below 15 percent. That is the implication of an MPR of 15 percent. Raising interest rates in a recession and talking about safety nets is like eating your cake and searching for it in the refrigerator. It is within the realms of voodoo economics.

Source : Businessday

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