In emerging economies, the impacts of natural disasters often set individuals, families, and communities back for years. Even with microfinance institutions supporting innovation and financial inclusion, this support cannot protect families from financial disaster after catastrophic natural disaster. The small savings and insurance that many people carry are for livestock or crop loss, rather than for a larger loss of home and business. In many communities, the lack of infrastructure after a natural disaster further slows recovery efforts.
Several regional index-based insurance schemes are developing models for supporting MFIs after natural disasters. Many are using climate and seismic data to anticipate increasingly chaotic weather patterns and catastrophic events, in an effort to better plan for recovery.
Many MFIs have concerns over post-disaster loans, as they will almost always need to be used for living expenses, medical bills, housing, and small business recovery. Existing loans will have a longer payback and a higher default. The MFIs themselves will be dealing with the impacts from the disaster on their local staff and facilities. Recovery lending models are designed to keep MFIs strong and functioning, with adequate liquidity and capital, and with a structured plan for recovery lending.
The model for recovery lending is fairly straightforward. MFIs will need access to liquidity and capital after a disaster, they will need a plan for rapidly restructuring existing loans, and they will need to deploy new loans with longer payoffs for recovery efforts. The new factor will be to use the increasingly complex analysis of big climate and big finance data to prepare and plan. Having a plan in place will add the financial resilience to allow MFIs to address the perception of increased risk.
The Vision Fund has provided several models for MFIs to approach communities with a recovery lending plan after a natural or environmental disaster. One aspect of this planning and modelling is “before the event” funding, with goals for resilience activities for both clients and MFIs. Encouraging savings products, and small insurance programs, help many families have a very small safety net. For MFIs, using big data analysis of climate and seismic data can allow some planning and reserve. Global Parametrics is leading this new field.
Internal disaster funds can be small funds built with client fees- from a percentage of fees or a small amount set aside per client or transaction. Some larger MFIs have developed a central disaster fund as part of the operating budget, especially in communities that are chronically hit by climate disasters. Some have used external capital through grants or seed funding to start the disaster fund, with plans to support it ongoing.
For MFIs on the ground after a natural disaster, helping families and communities reestablish their homes and livelihoods needs immediate support and response. Communication infrastructure is particularly important, as people will need to know about their existing loan payoffs, where they can access emergency money, how they can rebuild their homes, and how they can restart or rebuild businesses. They need to know that the MFI will provide support, and that this support will not lead them to over-indebtedness.
Many MFIs in disaster prone regions have invested in communication and transportation to support their staff and allow this outreach in the immediate aftermath of a disaster. In the last few years, many MFIs have transitioned completely away from hard copy or paper records, and have systems with back-up storage of client data.
Recovery Lending programs can be an important tool for community recovery after a natural disaster. MFIs already have the network and support staff on the ground to provide inclusive financial services to these communities. With good data, MFIs can plan for the type of recovery lending most likely to be needed in their areas of influence. These programs should be structured with the idea that they will be self-sustaining in the future, and complementary to other types of community support and assistance offered after a natural disaster.
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