The Role of Microfinance in Disaster Risk Management

Presentation to the Inter-Agency Task Force for the ISDR May 25, 2005

Margaret Arnold, Program ManagerHazard Management Unit

ProVention activities on role of microfinance in DRM

Microfinance and Disaster Risk Management: Experience and Lessons Learned – by Enrique Pantoja

Surviving Disaster and Supporting Recovery: A Guidebook for Microfinance Institutions – by Eileen Miamidian, Margaret Arnold, Kiendel Burritt and Marc Jacquand

Both available on proventionconsortium.org or worldbank.org/hazards

Microfinance: Valuable Tool for Poverty Reduction

Majority of MFI clients cluster above and below the poverty line

Strengthens the risk management capacity of the poor – capacity to engage in high risk/high return activities

Thus increases the prospects of escaping poverty

Disaster risk is often neglected by MFIs

Disaster risk is INTRINSIC to the MFI portfolio

MFIs serve the population at highest risk to disasters (higher exposure and lower risk bearing capacity)

Disasters represent a covariate risk that can hit an entire community, i.e., MFI client base at the same time

Household impacts

Physical impacts – death, injury, illness

Household assets – homelessness and incapacity to generate income

Income loss – also due to market disruptions

MFI impacts

Direct damages to offices, equipment, staff, systems and

records Indirect impacts

disruptions to service delivery Impacted clients cannot repay loans

Macro impacts Impacts of changes in macro picture

(inflation, devaluation, etc.) undermining of long-term efforts due to

influx of relief aid

MFIs must be prepared!

Critical to their capacity to improve the well being of their clients

Protect themselves Better serve communities – enhanced

poverty reduction

MFIs neglect disaster risk

Review found that NO MFIs had expressly decided to integrate DRM comprehensively with management of other risks

However, through experience, some MFIs have started to develop measures to prepare for operational and financial risk triggered by disasters and economic crises

Guidebook aims to help MFIs integrate DRM

Exercises and reference tools around 5 key areas:

1. Risk assessment2. Institutional preparedness3. Client preparedness4. Emergency response5. Recovery phase

Not a silver bullet, but much potential

Microfinance is one tool among a mix of available informal, market based, and public mechanisms for risk management

Great potential to Support recovery in a more effective way Contribute to ex ante risk reduction