Thursday, March 31, 2011

Passport Series: Pakistan: Part Three: Microfinance and Natural Disasters

The Kiva Passport Series is a three part, monthly series about countries that Kiva has field partners in. Typically the series includes 1) a country profile, 2) a profile of the microfinance industry in country and 3) a look into our field partners in the area, and the final part is a story of a borrower and/or lender in the country. Because Pakistan has been unsafe to travel to, Kiva staff and fellows have not been in the region to provide a story – however, this amazing country can teach us so much about microfinance and development, that we are taking this part of the series to highlight an issue in microfinance. This post will focus on how the microfinance industry is affected, recuperates, and provides assistance to development in the face of natural disasters.

In natural disasters, as in most troubles within a country, the group hardest hit is usually the poor. The vulnerable, the borderline poor and those groups under the poverty line are often swept below or even further below the poverty line than they were before. When disasters strike countries, the development of the country is greatly influential in the wellbeing and negative shocks that the disaster places on its citizens. In countries with a less developed infrastructure, there is likely a larger burden placed on the citizens – because social services and national assistance programs are harder to come by. This is where relief workers, aid programs, and economic empowerment are so desperately needed – this is also where Microfinance and Kiva’s Field Partners can have a great difference!

Pakistani Microfinance and the 2010 Floods

About 8 months ago, the north-western region of Pakistan was hit with the worst floods of their history. The UN estimates that at least 18 million people were affected by the disaster – with possibly one third of the population being temporarily or permanently displaced due to flooding. The UN also estimates that 1.7 million homes were destroyed or damaged, nearly 865,000 households received emergency shelter, and $1.96 billion in emergency response funding was needed (of which, about 56% has been provided). 

Our field partner, Asash, in Pakistan – was relatively – less burdened with the impacts of the flood than most other MFIs in the country. Asasah serves tens of thousands of borrowers through credit and other development services from Lahore in Pakistan’s Punjab province (labeled in the map below). Asasah was less affected by the floods given their geographic limitation to Punjab province. However, the country as a whole continues to suffer from the effects of the flooding.

Source: UNOCHA

Where is the opportunity for Microfinance in Post-Disaster Reconstruction?

After disasters, many factors of people’s lives, businesses, and general livelihoods are affected.  Some of the specific losses that we see in the Microfinance sector often include: small businesses ruined, meaning they can't pay back loans; MFI branches ruined; and/or formal sector jobs and sometimes even the entire sectors are ruined, providing a greater need for Microfinance and an opportunity to rebuild. There are some things within the finance industry that are pretty standard practices and can help to revitalize and continue business processes. These include: interest rate subsidies, risk mitigation funds, emergency liquidity facilities and access to liquidity from the Central Bank.

The emergency liquidity facility, for example, was something first tried in Latin America and the Caribbean and has been considered a success.  The facility and other aid programs like this, are only open to eligible MFIs that meet stringent risk management and financial criteria (such as 3 years of profits and emergency preparedness plans).   Other proposals may distort incentives and have the potential to harm progress. For example, the interest rate subsidy to clients could potentially confuse borrowers and reduce credit discipline. (Mayada El-Zoghbi, CGAP)

On a more micro level, poor households, once having obtained credit from a Microfinance Institution, are able not only to enhance their consumption and income levels, but also to improve their tolerance against idiosyncratic income shocks through improved access to credit. Microfinance provides borrowers almost an insurance network, the ability to curb possible shocks and take credit when needed – not only are they already able to access credit, but they are also raised above the economic constraints they previously faced to better be able to deal with shocks, like this natural disaster in Pakistan.

Kiva always strives for transparency as an organization, and aims to provide the most up to date information to our lenders about the MFIs we work with. When disasters happens, we work to make sure you get updates about Kiva’s involvement – like these three posts about the Philippines, Chile, and Pakistan.

For more information about Natural Disasters and Microfinance - these are some great resources for further reading: