Microfinance and Disaster Management
Module 4: Microfinance in
Livelihood Restoration
Objectives
To understand:
• post-disaster livelihood restoration activities (addressed in more detail in
Module 5)
• how an MFI might modify its standard products in response to a disaster
situation, such as through loan rescheduling and loan refinancing
• new products an MFI might consider in response to a disaster situation,
such as special loan products and leasing arrangements
• how MFIs can engage positively with relief agencies that offer financial
interventions such as cash grants and cash-for-work
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Topics
1.
2.
3.
4.
5.
6.
Introduction to Livelihood Restoration Activities
Microfinance Products for Post-Disaster Contexts
Post-Disaster Product Modifications
New Post-Disaster Microfinance Products
Other Post-Disaster Financial Products
Summary
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1. Introduction to Livelihood Restoration Activities
A livelihood comprises:
• capabilities,
• assets (including material and social resources), and
• activities
required for a means of living.
A livelihood is sustainable when it can cope with and recover from
stresses and shocks, and maintain or enhance its assets and capabilities
whilst not undermining the natural resource base.
U. of Sussex, used by DFID and World bank
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Livelihood Promotion Activities - Examples
Livelihood promotion activities aim to help beneficiaries become
economically self-reliant.
Financial
Non-financial
•
•
•
•
•
•
•
•
•
Credit
Savings
Leasing
Cash-for-work
Cash grants
Skills training
Employment services
Marketing services
Business development
services
• In-kind grants
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Credit and savings are
traditional microfinance
products.
Grants and cash-for-work
are common in disaster
contexts.
MFIs need to manage
carefully the co-existence
of these products.
2. Microfinance Products for Post-Disaster Contexts
We can divide these into three categories:
1.
Modifications to existing microfinance products.
2.
New microfinance products.
3.
Financial products offered by relief agencies that are generally not
regarded as ‘microfinance’ products, but which require careful
coordination between relief agencies and MFIs to avoid negative
outcomes.
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3. Post-Disaster Product Modifications
Product
Adjustment
Loans
 Rescheduling
 Refinancing
 Loan forgiveness
 Flexibility in lending methodology
Savings
 Easy and immediate access to deposits
 Linkage of savings products to cash-for-work programs
Brainstorm: What is the difference between ‘loan rescheduling’ and
‘loan refinancing’? What is the difference between ‘loan forgiveness’
and ‘loan write-off’? What do you think about ‘loan forgiveness’?
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Loan Product Modifications
• Rescheduling: extending the term of the loan or relaxing the schedule of
payments
• Refinancing: paying out a (problem) loan by issuing a new loan. This allows
clients to begin making the loan payments again and, it is hoped, to continue
until the loan is paid.
• Loan forgiveness: a de facto grant. Loan forgiveness benefits different
people to different degrees, it may cause ‘repayment apathy‛ on future loans,
and can lead to serious decapitalisation of the loan fund.
• Lending methodology: While group-based lending results in high repayment
under normal conditions, such a program can also serve to magnify losses in
times of widespread economic stress.
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Savings Product Modifications
Emerging lessons:
• Not all MFI clients withdraw their savings in the immediate aftermath of a
disaster.
• In areas frequently affected by disasters, personal savings are generally used
for disaster preparation and during recovery stages, rather than for coping
during the relief stage.
• Demand exists for deposit services even during relief and early
recovery stages (especially when linked with cash-for-work programs).
• Not all MFIs can offer flexible ‘on-demand’ savings products.
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4. New Post-Disaster Microfinance Products
Brainstorm: What ‘new microfinance products’ can you think of
that may be relevant in a post-disaster context?
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(1)
New Post-Disaster Microfinance Products
(2)
New financial products in a post-disaster context could include:
• emergency loans (or asset-replacement loans)
• reconstruction loans
• microleasing
Brainstorm: In terms of the client’s ability to service new debt,
what are the considerations for a MFI with respect to offering
asset-replacement loans or reconstruction loans?
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Microleasing
In a simple leasing arrangement:
• The lessor (leasing company or an MFI) rents the asset to the client for a fee
payable in instalments.
• The lessor retains the title of the asset, so that the asset cannot be
sold/mortgaged/pawned.
• No tangible collateral except a cash-flow projection is required for approval of
leasing contracts.
• The term of a lease may stretch up to 70% of the estimated life of the asset.
• At the end of the lease, the client has an option of buying the asset from the
lessor at a previously agreed residual price.
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Emerging Lessons on Microleasing
• Leasing facilitates client screening in times of distress.
• Down payments can help reduce lessor’s risks, since the lessor assumes all of
the client’s business risks.
• Choice of long-term credit-worthy microfinance clients helps reduce risks if
down payments are not possible.
• Leasing provides an option for the poor to diversify livelihoods.
• Leasing can help provide grants without creating market distortions and help
create productive assets.
• Not all MFIs can and should provide microleasing, especially after disasters.
• Microleasing is appropriately provided through partnerships comprising MFIs,
leasing companies, dealers and manufacturers.
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5. Other Post-Disaster Financial Products
Other financial products in a post-disaster context could include:
• Cash grants
• Cash-for-work
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Grants and Loans in Livelihood Restoration
• Despite concerns from the microfinance community, grants are often
provided to microentrepreneurs following a natural disaster.
• The overarching recommendation is that there must be deliberate and
close coordination between relief agencies and MFIs to ensure effective
interaction between grant and loan products.
Case study: Read the case study in Handout 4.15. Make a list of
what you think are the key reasons for the success of the
grant/loan program, and explain your thinking to the group.
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Guidelines for Grants and Loans
• Grants are not suitable for all disaster situations.
• Do not mix loans and grants in a single contract. Wherever possible,
provide grants through a relief partner and loans through an MFI.
• Be transparent with the criteria for selection of grant beneficiaries.
• Provide grants for only a very short time.
• Grants should be one-off, and there should be a ‘graduation’ process to
market-based mechanisms such as micro-credit.
• Require beneficiary participation for asset replacements.
See FDC Brief 3, ‘Grants and loans for livelihood restoration following a natural disaster’
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Cash-for-work
These programs often focus on clean-up, repair or reconstruction activities
after a disaster. The program hires daily labourers for a specific period of
time and for a specified daily wage. Often the project is a communityidentified activity.
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Cash-for-work: Guidelines for MFIs
MFIs should not be directly involved with CFW because:
• it will involve activities that are well outside of their specialisation;
• the transfers made through CFW activities may be considered as grants,
sending a mixed signal to the clients about the seriousness of the MFI as a
reputable financial service provider.
However, there are ways in which MFIs can be indirectly involved with CFW
activities:
• Build consensus with CFW providers to avoid market distortions.
• Link with CFW providers and their beneficiaries to supply required financial
services, including payment services and deposit services
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MFI Partnership in Cash-for-work
There are opportunities for MFIs to partner with providers of CFW, by
providing CFW client payment services as well as deposit services.
MFIs need to negotiate the following with relief agencies to provide payment
services efficiently:
• commission rate for payment services;
• security arrangement for cash delivery;
• time schedule of cash payments;
• mechanisms for cash withdrawal;
• service charges for withdrawals.
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6. Summary
• In a post-disaster context, restoring livelihoods is a critical activity, and
MFIs have an important role to play.
• Following a detailed assessment of their clients’ situation, MFIs can offer
modifications to existing microfinance products.
• MFIs can also offer new products in response to a disaster situation.
• Close coordination is needed between relief agencies and MFIs to ensure
that grants, cash-for-work and other such interventions interact positively
with the longer-term products offered by MFIs.
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