UNITED NATIONS CAPITAL DEVELOPMENT FUND    Microfinance

Issue 9 / February 2005

Issue Table of Contents

Marketplace

Made by Microentrepreneurs

Update

on the International Year of Microcredit 2005

Upcoming Events

Conferences, events and trainings.

Links

New websites and publications.

Share your news!

If you have a current news story or know of an upcoming event that would be of interest to the network,
please email the Editor, Vanessa Ward.

By Geetha Nagarajan, Consultant, Micro & Rural Finance, and adjunct professor, American University

The recent Asian Tsunami caused by a massive earthquake on December 26, 2004 is now considered as the most devastating rapid on-set natural disaster in the past three decades with a heavy toll on lives, assets and livelihood opportunities.[1] While the disaster has affected several countries, losses in some parts of Sri Lanka that are still under civil conflicts has been immense - a double blow to the affected communities, as roughly 80% of Sri Lankans affected by the Tsunami are also affected by conflict.[2]

Well designed and implemented microfinance initiatives are now shown to be important and useful reconstruction tools in the wake of either disasters or conflicts. There now exist several lessons from many microfinance post-disaster and post-conflict experiences to draw guidelines for donors and MFIs to effectively manage the crisis situation.[3]

The current situation in Sri Lanka has raised questions regarding the relevance of microfinance for reconstruction of communities simultaneously affected by both natural and man-made disasters. I opine that microfinance can help in these double whammy situations but it is very challenging and complex. It requires contextual solutions through optimal combination of some microfinance mechanisms used in disaster and conflict environments.

Microfinance, Natural Disasters, Conflicts. In the wake of disasters or conflicts, there is a clear need for reconstruction efforts that follow the relief stage to focus on generating employment and incomes among the affected communities. Microfinance institutions (MFIs) are now shown to play an important role in that regard. Microfinance experiences to date indicate that (i) access to MFIs and financial institutions in the wake of disasters can highly facilitate the rehabilitation process of the affected communities, (ii) starting a new MFI immediately during relief stages in areas severely affected by disaster or in areas that are still very actively under conflict is not advisable, but (iii) established financial institutions (preferably with some experience in conflict affected areas) can start and operate efficient microfinance programs in conflict affected areas to create employment and increase incomes of the affected communities.

The Sri Lanka Context. The current assessments by the Asian Development Bank (ADB) in the conflict and tsunami affected areas of Sri Lanka show that many lives are lost, and people are still missing or displaced and stay in refugee camps, and assets like houses and fishing boats are lost or heavily damaged. Prior to the tsunami, people in the conflict areas were generally poor and engaged in small farming, fishing and microenterprise activities, and the local economies were weak. Indeed, very few new microfinance organizations or microfinance projects have been initiated since 2002 in the areas.[4]

A recent study commissioned by SIDA/GTZ in November 2004 identified several agencies, including international NGOs such as CARE, CARITAS, Save the Children and World Vision, the government, cooperatives and Community Based Organizations (CBOs) as providing some microfinance as part of relief and rehabilitation. But these efforts are yet to transcend into development focused microfinance organizations. Only a few MFIs, such as SEEDS, operate in some selected pockets that are connected with wider national markets. Some local NGOs such as SewaLanka that operate in volatile conflict areas include grants and in-kind soft loans as part of the humanitarian package to promote some livelihood activities.[5]

The conflict has limited development of efficient and sustainable microfinance in the north and north east regions. So far, it has been wise to hold provision of microfinance in some of these active conflict zones. However, the role of microfinance in conflict and double whammy situations needs re-thinking in the light of emerging lessons. In general, disasters generate significant local and international good will and cooperation among the affected stake holders compared to ethnic conflicts. The tsunami disaster may indeed speed up the peace process in the conflict area.

Demand for microfinance services is shown to increase after a massive natural disaster and in post-conflict situations. UNDP in Sri Lanka now estimates that high demand exists for microfinance services in the conflict affected areas and predicts that it will only increase when peace prevails. Experience now shows that microfinance can be initiated in conflict affected areas once local markets begin to function to support livelihood activities that are essential for sustained peace and economic development. Therefore, good opportunities for MFIs to provide microfinance services exist in the conflict and tsunami affected areas.

Providing microfinance services in conflict affected areas is possible but poses tremendous challenges to MFIs and their supporters. It is very difficult and requires very strong and long term commitment. Indeed, GTZ, Sri Lanka predicts that large volumes of funds are required for a long time for institutional and capacity building of microfinance institutions to provide effective services to the entrepreneurial poor in the conflict affected northeast region. Tsunami adds another layer to the challenges. Nonetheless, social returns may exceed the costs, and may yield good financial returns in the long run.

Currently, microfinance is very weak in the doubly affected area. So, the question is, do we simply wait for initiating / supporting microfinance in the double disaster affected Sri Lankan areas or take some actions? In my opinion, well thought out microfinance mechanisms can work to provide financial services to the poor entrepreneurs in these double disaster affected areas once markets begin to resume.

Some Thoughts for MFIs. The MFIs that are already operating in these conflict areas may follow most of the emerging guidelines to manage disaster situations to protect their clients and the institution. But, it is still a challenge for those MFIs to make fresh loans to these tsunami affected clients even though they are required to replace damaged or lost assets including housing.

Several donors and the Sri Lankan government have now pledged large amounts of funds for housing to relocate the affected to safer areas and for repairing damaged houses that are not located within the restricted danger zone. Housing starts generally boost local economies by generating employment and business for microentrepreneurs. Housing grants are generally unavailable to business operators. Also, such grants are often times found to be inadequate, not available on time to help with quick repairs, and not in the form preferred by the affected communities. As a result, there is a likely increase in demand for working capital loans from microentrepreneurs participating in the housing sector value chain and for housing repair loans from individuals. Liquidity constrained MFIs may find it difficult to meet the demand.

Some of the grants from the donors and government for housing related activities can indeed be used to help MFIs and also the affected communities in an efficient way. Some grants can be channeled through the MFIs instead of immediately disbursing them to the individuals. These grants can function as collateral for fresh loans made to eligible clients and released upon payment of the loans in full (such types of loans and grants have been effective in Latvia - see World Bank, 2004). They can also be used to start an individual savings account that can be drawn in case of future natural or family disasters. Alternatively, the cash grants can be disbursed by a third party agency and the MFIs can provide incentives to their clients to use the grant monies to pay back their old loans to access new larger sized loans for housing and asset replacement (such mechanisms worked well in Mozambique after the floods of 2000 – see Nagarajan 2001, CARE, Mozambique).

Another situation that is now critical involves internally displaced people and refugees due to conflict and tsunami. It is important to open access to affordable services including microfinance when they return home to start a livelihood activity. The United Nations High Commission for Refugees (2003) reported that one fourth of refugees preferred to stay back in temporary settlement areas due to lack of economic opportunities in their home lands even though it was safe to return. They were found to be well established in their camps with incomes from micro businesses that were financed primarily by grants and soft loans. In that regard, the experiences of the American Refugee Committee’s Refugee to Return (R2R) model may be worth studying for application in Sri Lanka (see Nourse, 2004 at www.microlinks.org). The R2R provides small loans to Sierra Leonian refugees in the quasi-permanent camps in Guinea and then opens access to them once they return back to their homes by issuing certificates based on their performance. This has helped the refugees to quickly start a business upon return to generate incomes.

Some Words for Donors. Donors have an important role to play in the reconstruction of the doubly affected areas using microfinance as one of the tools. But, microfinance is not a safety net nor is a compensation for sufferings endured during disasters and conflicts. Donors are advised to avoid market distorting interventions and to efficiently coordinate with one another during disaster and conflict situations so that sustainable solutions can be provided. But they are also expected to act quickly and precisely to prevent worsening of the situation. They are invariably faced with enormous tasks of (i) identifying the right type of intervention to be effected at the right time, and (ii) locating the right type of partners to effectively implement the programs.

Initially, partnerships with established and experienced local and international institutions capable of providing microfinance in disaster and conflict affected areas can be fostered for rapid response. The Transition Program at UNDP in Sri Lanka provides seed capital to Sri Lankan financial institutions to implement microfinance activities in conflict affected areas. Similarly, ADB is helping with capacity building of MFIs to operate in conflict affected areas. Concern Worldwide is partnering with SewaLanka to provide relief services and resume microfinance in the areas. These efforts need to be carefully monitored for results such as capacity building of local institutions to develop a competitive market and efficiently cater to the growing demand for microfinance.

As for coordination, the model used by the World Bank in post-conflict Afghanistan to set up a donor coordination body to channel donor funds to MFIs can be examined for relevance in Sri Lanka. Also, some international NGOs are partnering to leverage resources for a wider coverage as seen with CRS and CARITAS. It is to be remembered that the situation in Sri Lanka is still very fragile and requires very careful actions that are flexible yet follow sound practices.

The knowledge regarding the role of microfinance in disaster and conflict situations is still emerging and requires further experimentation and documentation of practices that have both succeeded and failed for learning lessons. The current situation in Sri Lanka with double disasters – natural and man-made – presents a strong litmus test for microfinance for its relevance in complex situations to extend the frontier of microfinance to volatile areas.

Footnotes

[1] The last worst natural disaster was recorded during the floods of 1970 in Bangladesh that claimed close to 300,000 lives.

[2] The share of the dead, injured, missing, internally displaced and number of refugee camps, respectively, in the conflict and tsunami affected areas to total tsunami affected areas account for 67%, 30%, 86%, 84% and 55% (based on data from the Ministry of Women and Empowerment and Social Development, Jan, 14, 2005).

[3] See papers by Nagarajan, Geetha, 2000, 2002 and 2004 for ILO and USAID.

[4] G TZ / SIDA, "Developing Microfinance in the North and East of Sri Lanka" November 2004.

[5] Sewalanka, started in 1993, functions in several districts of Sri Lanka providing financial and non-financial services to the most vulnerable and disadvantaged people and community-based organizations (CBOs). In conflict affected areas, i t operates a Revolving Loan Fund (RLF) to make individual in-kind loans such as seeds, fertilizer and other implements to returnees to resettle in their home lands. Sewa Lanka considers the RLF microcredit program as a humanitarian tool to change the 'dependency psychology' of Internally Displaced People (IDPs) who have lived as refugees for very long periods. The program is now suspended due to tsunami and staff is diverted to relief work. (Source: www.sewalanka.org.lk, Concern Worldwide, 2005.)