MICROFINANCE MATTERS - Voices of Microfinance

The terrible scale of the tsunami in the Indian Ocean has focused world attention on questions of effective disaster relief and rebuilding efforts. PlaNet Finance has declared: “In the weeks following the tragedy of the South Asian Tsunami Disaster, one should not forget that:

The most disastrous effect of the disaster may be one whereby the affected region becomes dependent on international charity...” and that

“Donors that have reacted efficiently and quickly for emergency and relief should also gather soon to define a Global Program for Reconstruction and Development in the region based on the delivery of adapted microfinance services in the region...”

Q. What do you think the role of microfinance should be in the post-disaster context?

The tsunami disaster was exacerbated by the fact that many of the communities affected were facing challenges related to chronic poverty, civil conflict and weak governance. While our first instinct might be to provide loans to repurchase assets, the microfinance community needs to step back and analyze the situation for a moment. For many victims grants, either in-cash or in-kind, will be available to replenish productive assets.

The role of microfinance in response to the South Asian Tsunami should be to help alleviate the underlying causes of the poor’s vulnerability to such disasters. While tsunamis are rare, these coastal communities are regularly exposed to other shocks like tidal waves, cyclones and monsoons. Credit-only institutions don’t provide the financial services needed for the poor to mitigate their risk from these natural disasters. Savings services would provide more security than storing cash under a mattress, life insurance would provide a young mother with some cushion if the primary income earner is lost, asset insurance would protect the critical assets necessary to earn an income, remittance services would allow for the rapid and fairly-priced transfer of funds when shocks occur, and finally legal services would help to secure property and land tenure rights. Certainly the microfinance community has a role to play in reestablishing livelihoods, but our impact could be so much greater if we also develop products and services that address the underlying causes of vulnerability.

The role of microfinance institutions as dedicated providers of credit and other financial services to the economically active poor, is very strong and urgent in the post-disaster context. The question, therefore, is not what role MFIs should play in the disaster-hit areas, the issue is how to go about playing this role under abnormal circumstances when the entire client base (the target group) has no going business to show and no assets to restart the businesses it was engaged in before the disaster hit. The credit quality of the borrowers therefore has deteriorated tremendously, from a lender's point of view, to makes them unacceptable credit risks. Under these circumstances, the socially oriented NGOs are ideally suited to hit the ground running for executing grant funded MF programs in the post disaster areas. The primary objective of these grant funded programs should be to replenish some of the equity and working capital lost by the economically active poor so that they could restart the businesses immediately. These replenishments should be seen as a kind of insurance payments, with the proviso that the end use of disbursed funds should be monitored very closely by the NGOs. As soon as these people have restarted their businesses and repaired their credit profile somewhat, the NGO programs should be weaned out quickly and replaced with market based microlending. The mandate of the NGOs should include to transfer these borrowers to market based micro lenders within six months, at the latest.

Given that greenfield MF institution building is a time consuming, costly, and slow process, whereas the credit needs of the effected people are urgent and large, the local commercial banks' branches offer the best option to replace the NGO programs by down scaling their lending operations to include lending to micro and small enterprises. The international donor community can help local banks jump start micro lending operations, by providing the banks with the requisite expertise for the setting up of and managing the specialized Micro Loan Windows. This expertise, in addition to establishing micro lending operations at the banks, would also train local staff to gradually take over operations from experts: thus creating permanent capacity at the commercial banks. This expert support would be required for around two years. While the specialized micro loan windows would lend on full cost recovery basis, the initial cost of capacity building (through experts) could be financed with grant funds from the donor agencies, to make the new line of business economically attractive to the local commercial banks. By creating permanent MF capacity at local commercial banks, the long term sustained availability of credit and other financial services to micro enterprises can be assured. To provide additional comfort to the banks and enhance the credibility of the micro lending business, IFIs can partially guarantee the credit risk of the borrowers during the initial portfolio build up phase, till the banks become familiar and comfortable with the credit quality of the micro borrowers. At a later stage, if the banks find these MF portfolios to be too small and taking disproportionately a large amount of bank management time and systems resources, the microloan portfolios could be spun off into a separate dedicated MF institution owned by the banks. IFIs can enhance the credibility of the new institution by participating as shareholder and financier, as well as by bringing in credible MF operator to manage the new company.

Syed Aftab Ahmed
Senior Manager, Global Micro and Small Business Finance Group
International Finance Corporation

A post-disaster situation is characterised by a disruption of people's livelihoods. This happens due to loss of life, property and infrastructure but also destruction of other factors of production including land and other natural resources. In addition to this, a post-disaster context entails that the majority of the population is left in poverty thereby leading to their exclusion from the formal mainstream financial system. As such, microfinance has a very important role to play in the post-disaster context. With its unique ability to provide financial services to the poor, microfinance thus stands out as a viable option to address financial needs of people in the post-disaster context.

Through its unique methodologies such as group lending, microfinance can reach out to people in post-disaster situations. Microfinance programmes can provide entrepreneurial skills training to disaster affected people. They can also enable people to access credit in order for them to conduct micro-enterprises. Furthermore, people can have access to savings and insurance services, which can help smoothen their cash flows and provide security for their investment, respectively. The ability of microfinance programmes to sustain themselves means that they can meet the needs of the majority of people in post-disaster contexts on a long terms basis. In short, microfinance has a very important role in helping disaster affected people to rebuild their infrastructure and regain their sources of livelihood.

Kennedy Bisani Lweya
PhD student in Microfinance University of Reading
United Kingdom

As member of the Board of Directors of responsAbility Social Investment Services Ltd., a Swiss company providing social investment services and products, I feel more than ever the need to promote the credit options available to poor borrowers, but also the insurance and savings options. In any country, developed or developing, emergency relief would have been welcomed.
However, what is now mostly needed, are proper financial intermediaries offering the above-mentioned services, with professional care given to due diligence and proper administrative follow-up. I am convinced that investors and financial institutions in rich countries are ready to play their part of the game, as long as they can feel assured that everyone along the chain does it too.

Jeanne Barras Zwahlen
responsAbility Social Investment Services Ltd.
Switzerland

Credit might not be the immediate answer in post-disaster and/or post-conflict environments. Often, security of whatever little assets are left behind, and micro-insurance services for the future may be more relevant. This will need to go hand-in-hand with post disaster rehabilitation efforts. Commercial credit activities, perhaps should take a back-seat in such situations, since they can be exploitative in a grossly imperfect economy, and on an already suffering population.

Due to the scale of the damage and outright destruction of families, infrastructure, and societal frameworks that previously supported daily life and economic activity in the areas affected, perhaps microcredit should be introduced on an initial subsidized basis of 3 to 5 years, with a focus on reconstruction/rehabilitation of the economy, rather than the traditional institutional self-sufficiency framework.

The credit granted to micro-entrepreneurs during this start-up period might be utilized to finance working capital needs, complementing an initial outright donation of seed capital to those seeking to start-up a new enterprise or restart an enterprise damaged or destroyed by the disaster. In the out years of the reconstruction/rehabilitation period, a planned industry wide transition could then be implemented towards the traditional framework of institutional self-sufficiency, while decreasing seed capital donations for enterprise start-up or recapitalization.

From my experience in Colombia, I would say that a well-endowed and well-managed microfinance program is considered an urgent need. Such a program will provide:

Leonor Melo de Velasco
President, Fundación Mundo Mujer and Advisor to the International Year of Microcredit
Popayan, Colombia

Savings and retail banks throughout the World Savings Banks Institute’s (WSBI) membership have been very active in the relief efforts after the Tsunami. The WSBI has acted as a conduit to receive and pass on information about the fast initiatives undertaken by its member banks to both collect and donate funds or to send personnel. But it is in the quick reactions of the local, or proximity banks in the region, where WSBI member banks have really been able to illustrate how their local presence and regional outreach can prove invaluable in supporting the socio-economy, in reacting to the crisis and in facilitating the necessary reconstruction. Local banks have reacted quickly by allocating extra staff with mobile units to the worst affected areas in order to facilitate microcredit lines at low repayment costs.

Actions like these are vital and can flourish when financial systems are able to formally harness national domestic savings in order to roll out such credit products. Where the domestic savings base is not strong enough, the WSBI network has enabled contacts to be bridged between its member banks throughout the world, some of whom will open up credit lines to South East Asian banks to reinforce their ability to offer microcredit. One of the best examples of such cooperation is the partnership agreed on between the French and the Thai Savings Banks: the French will increase the funding of the specific micro credit program open by the Thai in favour of the stricken population. This will reinforce the Thai Savings Bank’s means to support the local population in starting up again with their economic activities, and contribute to the long term reconstruction of the region. The importance of a mobilised domestic savings base cannot be disputed in such crisis conditions. It is key for economic stability and without it, countries become dependent on loans from other countries and their ability to offer financial services to the population is thwarted.

Just after a disaster, people may not be looking for credit at all. In the aftermath of a natural disaster, there may be some tendency to see microfinance programmes/institutions as just conduits to get cash to people. Initiatives that start with that premise don’t usually work out so well. As an example, when there is a natural disaster (let says drought) that affects the production of staple foods, donor/governments often respond by channeling large sums of “credit” through NGOs or other institutions to support food security goals. Often these institutions have no experience managing a loan portfolio; not only do they often have no experience enforcing repayment they will channel credit to households that simply do no have the capacity to repay it. Over the long term this generally distorts the market for sustainable finance and does more damage than good to those households that are vulnerable. Donors/governments should ensure that credit programmes are not conduits for cash transfers to vulnerable or affected populations.

Readers might be interested that UNCDF and World Bank’s Hazard Management Unit have jointly authored Managing Disaster Risk: A Guidebook for Microfinance Institutions [download pdf].

From my recent visit to Tsunami affected areas in Sri Lanka, I have noticed two levels of Microfinance (MF) problems there: at the institutional (MFI) level and at the individual borrowers level. The following are the key issues in each level.

Savings and loan record missing/ lost
Portfolio at risk because of most of the borrowers lost their entire property including loan activities and many lost family members, including the borrower
Insurance claim is more than they could afford
Office building damaged
Office property lost including cash

Loss of savings and loan passbooks
Loss of loan activity lost/entire property
Cash needed for emergencies, like medical treatment/funeral.

Achyut Hari Aryal
Technical Advisor-Microfinance, Concern Worldwide
Dhaka, Bangladesh

I believe microfinance can play two important roles in the post-disaster management of the tsunami tragedy in the South East Asian countries. Firstly, we must identify the MFIs which have been affected in the region and adopt various ways of bringing them up to their feet. For example, if the physical structures of an MFI are destroyed, then Microfinance Donors must assist in their reconstruction and also make grants available for loanable funds.

Secondly we must encourage the local people to engage in viable economic activities; otherwise they may continue to rely on the generosity of the sympathetic public and refuse to work. This type of behaviour can land them into abject poverty - a situation which microfinance may not be able to solve.

Patrick Awuku Dogbe
Treasurer, Opportunity International – SINAPI ABA Savings & Loans, Ltd
Ghana

There is a clear need for efficiently organised funding to rebuild Tsunami's victim countries. Microfinance, I believe, is the most important aspect of this financial programme. It seems, at this early juncture, that microfinance networks hold a key for channeling reconstruction and assistance funds to rural and remote communities in danger of being under-assisted or overlooked altogether. Most importantly, however, is to ensure that microfinanciers are tightly regulated. Often, in the wake of disaster, the heart rules and money is distributed emotionally and haphazardly, doing more harm than good. Microlenders are an ideal distribution system but, because of the commodity they deal in, are susceptible to corruption and other forms of dishonesty. Fund them, but keep a tight rein. I write as a journalist specialising in finance and business in Africa with a special interest in microfinance and microcredit, and can testify that lower income earners in these markets benefit most from microlenders under efficient, enforceable regulation.

The catastrophic state in which the tsunami has left its mark in the regions that were affected is incomprehendable. However, those of us fortunate enough to have escaped its wrath should first collect and understand to what capacity help is required of us, before imposing our services in areas we assume to be needed. The role of microfinance in the post-disaster context should be considered from an internal, individual needs basis. Micro-financing serves as a wonderful tool in many regions of the world, and such projects can be successful in South Asia and other post-disaster stricken areas as well, provided that our external guidance is strictly that, guidance. The entire concept of micro-financing is to provide tools to those less fortunate, so they may become empowered and self-sufficient. We have a global and humanitarian responsibility to look after each other in times of need without anyone having to feel needy. Microfinancing projects allow this united growth progress to occur efficiently.

Roxanna Mirza, N.D.
Member of the Federation of
Zoroastrian Associations of North America (FEZANA), UN NGO

It is the poor and the disadvantaged communities, particularly women who are most adversely impacted by a disaster. Consequently the microfinance institutions (MFIs) cannot ignore natural disasters; not only are they impacted by the disasters, they can significantly assist in the provision of relief operations as well as in catalyzing the path to medium and longer term recovery and rehabilitation. While a MFI cannot afford to provide cash grants to the affected communities, it can facilitate the communities to efficiently acquire and share resources provided by the Governments. Creation of rural entrepreneurs is a raison d’être for MFIs. It is therefore necessary that they assist in promoting and rebuilding entrepreneurship among the poor, particularly women, at such a time. For instance, in the countries affected by the recent Tsunami disaster, the greatest assistance is required in restoring destroyed partially damaged housing, sustainable recovery of microenterprises, and restoration of critical infrastructure. Part of the infrastructure restoration relates to creating amenities for rebuilding of livelihoods, ranging from creation of assets, providing greater access to resources and developing skills and capabilities. I believe all these issues are closely interlinked. For instance, the existing group of community based construction entrepreneurs (masons, carpenters, brick layers, plumbers, etc.) can be provided with resources by the MFIs to set up construction companies. The resources are made available to them subject to skills building (provided through public private partnerships initiatives) in line with codes and standards for disaster proof housing and infrastructure construction. Internally displaced persons (IDPs) who have lost their houses and habitats can be provided with a loan as an add-on to the assistance received from the Governments to construct their housing. They also work with the contractors in the rebuilding efforts thus earning income as well as having an ownership in the newly constructed housing as well as the infrastructure.

At the same time microfinance institutions can provide loans to the small entrepreneurs who have lost their sources of livelihoods to help them access working capital as well as necessary materials for restarting their business. Such processes will create demand for microfinance resources, create employment for local communities and provide opportunities for strengthening livelihoods. However, the above strategy assumes that the MFI has ample capacity and resources to deliver innovative and demand based products following a disaster. Ideally, for a MFI to play an effective role in the recovery process following a disaster, it should have as a strategy worked through the complexity of issues (emergency reserves, liquidity, lines of credit, etc.), designed policies and products and identified the institutions for partnerships beforehand rather than in the midst of the disaster. In the latter case too, all is not lost if arrangements can be made to build the capacity of the MFI through its collaboration with other recovery and rehabilitation agencies. Finally, MFIs have a very important role to play in the community based risk management and disaster preparedness as well as in the early warning system. Not only has the MFI to engage in risk management to protect its own assets, it can cooperate with other partners particularly the communities and disaster management agencies to define appropriate products, raise awareness and create market opportunities in disaster mitigation as well as preparedness. Increasingly insurance and reinsurance companies are looking at opportunities to proactively participate in reducing the adverse impact of disasters. Through microinsurance products underwritten by insurance companies, MFIs can assist in the delivery of such products and reducing the consequent transaction costs.

The tsunami disaster has left behind a large number of victims who belong to the vulnerable section of the society such as fishermen, farm labour, petty shopkeepers, etc. They have lost their shelter, meagre belongings and livelihood. The thrust per force has to be on rehabilitation of these victims by providing a sustainable source of income. The victims could be formed into different homogeneous groups and helped to draw up small, simple, feasible livelihood schemes befitting their skills and experiences. The groups can collectively operate their respective businesses and sustain themselves. Additionally, this will facilitate team work which is imperative to meet the challenges of the aftermath of tsunami. However, to start the group micro businesses, seed capital and operating funds are required. This is unlikely to come from the formal banking channel or be sustainable on charity. Hence, there is need for microfinance that can be provided to the victim groups through credible and experienced aid workers institutions serving in the disaster stricken areas with appropriate tie-up for funding with donor agencies, banks and governments. These aid workers institutions can facilitate to form suitable groups and guide to set up and manage the micro business activities. Simultaneously, they can help to ensure proper and effective utilisation of funds. A beginning in this direction is the cry of the hour.

Imagine how the impact of Indian Ocean Tsunami could have been vastly mitigated if people simply were made aware that disaster approached and were given the opportunity to take appropriate steps to safeguard themselves. Village Phone Operators acting as a distributed warning network could have made such preparation possible. Grameen’s Village Phone program offers opportunities for poor microentrepreneurs to purchase and operate a community public access phone business. This innovative partnership between the microfinance sector and corporate telecommunications operators creates profitable businesses for Village Phone Operators and provides a valuable communications and information service for the community which they serve.

The role of microfinance is not just in rebuilding these ravaged areas and their underlying (micro)economic infrastructures, but to learn from the experience and to put in place systems to ensure that in the event that such a disaster would recur, that the communities are better prepared.

Indeed, microfinance institutions play a significant role in alleviating local poverty in many regions and district in Indonesia. But now, it is unquestionable that it is absolutely needed and more significant in supporting many other efforts to recover and bring Aceh back before the horrible disaster. However, just introducing microfinance in Aceh will also be another disaster. Thus, we really need a well proven approach to microfinance practices (in term of viability and sustainability). This is really hard work. The microfinance schemes that need to be introduced in Aceh should not be limited only to support local small economic activities, but also basic infrastructures, including housing and social activities.

As governments and firms fiercely compete to top each other's post-Tsunami aid efforts, pledging progressively more and more money in a cascading crescendo of capital, the issue of how that money will be utilized receives scant attention. Traditionally, disaster relief, or at least the portion pledged that is ultimately allocated, is doled out as charity. There is an acute level of human need which must be met, which justifies the approach initially. But moving forward, the focus should be on building future opportunities so that the conditions that exacerbate natural disaster and turn it into human tragedy - namely, poverty and vulnerability - can be addressed. Using a large portion of disaster aid to promote sustainable strategies for the affected people, and to improve livelihoods so they won't be forced to rebuild in vulnerable areas without proper protection, is a viable strategy for Tsunami response. As the tool which most directly empowers poor individuals, includes them in economic processes rather than excluding them, and gives them responsibility for their own successes and failures, microfinance has much potential to prove its value in this effort.

Reality may dictate that micro-grants are necessary to get displaced and shaken individuals, many of whom have lost families and homes, to begin re-building, but that method seems preferable to keeping people in a traditional refugee environment where charity is the only form of help. With good planning, this strategy could revolutionize the way the world envisions aid and relief.

Microfinance can play and must play a major role in helping disaster-affected communities to rebuild their lives. Given for granted that microfinance is fundamental in the medium-long term reconstruction phase, the question should be whether Microfinance Institutions (MFIs) should be involved in the emergency relief phase or if this should just be left under the responsibility of dedicated agencies specialised in relief assistance. In my opinion it all depends from the mission and the size of the MFIs involved. During the emergency phase, the contingent situation prevents many clients from being able to repay loans and interests based on the usual financial services provided by MFIs. In this context, only those MFIs that are bigger and that can count on substantial help from their donors, can also afford to provide immediate financial assistance that will be probably used to rebuild assets not directly linked to the generation of income. Smaller MFIs would rather incur in liquidity problems, unless providing financial relief assistance is explicitly part of their “mission”. Nevertheless these MFIs, as well as the bigger ones, can play a fundamental role focusing on non-financial services. In fact they can be a privileged channel of information based on their deep knowledge of the territory and of the local communities. MFIs’ staff can then better assess real damages, help relief dedicated agencies to coordinate their efforts and in some cases provide also specific training. Finally it is important to define how long the emergency phase should last, in order to keep the concept of “relief” separated from the one of “microfinance”. The risk, in fact, is the misperception of the temporary role of the MFIs involved in financial relief assistance that could compromise the future medium-long term assistance based on the usual principles of microfinance.”

*Please note that the views expressed above are personal, and do not reflect those of the European Central Bank

The first step for a community based disaster preparedness program would be to organize people into Self Help Groups (SHGs). The primary advantage of organizing people into SHGs is that the SHGs have funds at their disposal to invest in what they feel augments their preparedness. To quote a few examples, SHGs in India in flood-prone areas have invested their funds in buying small polythene packets to keep their documents safe, elevating hand pumps to ensure a safe drinking water source, building a community structure on higher ground to keep people safe in case of floods and so on.

Another useful option to explore would be a ‘matching grant’ mechanism. The implementing agency can enter into agreements with the SHGs that we will match their savings at the end of the first year of operation of the SHGs in a 1:1 ratio. The benefit of this mechanism is that it gives them an incentive to save and also makes them more hopeful for the future. Also, since the SHGs would be then making loans out of these funds, it results in capital accumulation for the poor people. Another option can be to split the incentive into two parts - give an initial grant of say, 100 US $ to each SHG and then encourage them to save regularly with the added incentive of another 100 US $ at the end of one year to SHGs that are saving regularly. This option provides both an immediate and long-term benefit and can be particularly effective in catalyzing community based institutions to improve the socio-economic condition of their villages.

We have found that microfinance works best when done in conjunction with an existing agricultural or environmental project we are supporting. We generally do not do standalone microfinance projects. When Hurricane Jeanne hit Haiti, many of the projects we supported were destroyed. We used microfinance in two areas for disaster recovery:

Microfinance in post-disaster situations requires care. Microfinance is an excellent re-development tool for communities that have been hit by natural disasters; however, the economic, physical and social environment is significantly different to normal situations. It is vital that the response is well-thought out and that donors as well as MFIs take a long-term view of the development requirements. At a micro-level, loans for new enterprises in disaster and conflict situations are high risk and needs to be countered by the following:

Planning and diversification of business activities so there is not an over-supply of one business type - a saturation of one business type could lead to large scale business failure and low profits for business owners;
As there will be a much higher percentage of start up business loans required (usually it is only around 10-20% of all clients) there needs to be a much heavier investment into pre-loan training for establishing new businesses;
Strong focus on training in enterprise development and business management training; and
As many people will have received aid and welfare there needs to be a stronger than usual emphasis on repayment and accountability

The role of microfinance in a post-disaster context is to smooth cash flows to those who are already members of a program. In the case of a large scale disaster, existing clients should be given rehabilitation loans, and savings withdrawal should be liberalized to allow access to savings where it wasn’t accessible before. Current loans may need to be rescheduled. Note that these are interventions once the immediate needs of food, clothing and shelter are met. MFIs will be approached by individuals wanting credit who do not fit their profile, pre-disaster. MFIs should be careful in extending credit to these individuals.

There is a danger of building an emergency aid driven small enterprise sector that is supply, as opposed to demand driven. This is where one has to be very careful, and support a comprehensive recovery process as opposed to making selective interventions that cannot be supported by the overall economy (in the long-run). A natural disaster of this scale has probably left people internally displaced. This means, displaced households do not have sufficient disposable income to support the microenterprise sector by purchasing its products with a profit margin to provide profit for the SMEs and interest to MFIs. There is always a danger of focusing on the supply side and important aspects of demand are overlooked.

In extreme emergency situations, it may make sense to provide relief services tied to labour intensive work programmes through NGOs. A transition from relief to recovery could then focus at public investments aimed at improving incomes and therefore supporting the SME/financial market sector.

When an entire community disappears, it is difficult to know where to start. Physical infrastructure is necessary as well as the basics (food, shelter, medicine and clothing). The next step is figuring out how to bridge relief work into economic development. Microfinance is a tool to fill that gap. And those microfinance institutions based in the devastated communities prior to the disaster are the best ones to tackle that enormous undertaking.

Over the last few decades, in the aftermath of great tragedies (natural disaster or war), Microfinance has been a powerful weapon to help people rebuild their lives and actively take part to the reconstruction process of their countries. The traumatic experience of the Tsunami of last December begs the question of whether the international emergency support should turn out to be charity or an entry point to restore people’s dignity. The most important lesson to be drawn from past experience is that, credit without a strict financial control is nothing but charity. No matter the context, credit institutions must make sure that the loans get paid back in full, and in due time. The success of such an action, depends on the implementation of a participatory decision-making process which emphasizes the creativity and innovation of each and every member of the society, and a socio-economic formation. The main aim of this is to help people own their future by creating self-employment opportunities rather than depending on an external aid policy which cannot reduce poverty in a direct manner. In such a difficult context, Microfinance can narrowly be viewed as a powerful companion to help people rebuild their lives. In fact, the determination of people and the contribution of the UN agencies around the world as in Angola, Guatemala, Mozambique, Rwanda and Sierra Leone have shown that we can count on Microfinance to rebuild people’s lives in a way that improves their living conditions in respect of their human rights and dignity.

Microfinance is an excellent tool for enabling vulnerable groups to rebuild their lives after a disaster, and achieve economic independence. However, it is not a panacea, and should not be targeted in isolation from other measures. For example, self-employment is not for everyone: opportunities for accessing microfinance services should ideally be complemented by formal employment schemes. Also, microfinance services should be linked to appropriate vocational and business training, so that those seeking to establish a new business can develop the necessary skills. Microfinance is a means to an end. Its role in the post-disaster context should complement the greater aim: enabling those affected by disaster to improve their livelihoods.

Matthew Fleggson
Coordinator, Overseas Programmes
Leonard Cheshire Centre of Conflict Recovery
University College London UK

Rehabilitation is rather a more difficult task than relief but it is the corner stone. Effective rehabilitation through Micro Finance needs co-ordination, planning and systematic execution:

Co-ordination: Micro Finance organizations must come together to design a common strategy and demarcate the geographical area for intervention in the Tsunami affected areas. This will ensure uniformity in approaching the affected people through Micro Finance. This approach will also avoid duplication and overlapping. Networking with donor agencies and roping them wherever required would be an added strength. Planning: The loan products must be designed according to the current situation and needs of the people. The loan size and repayment period have to be worked out based on business cycle, frequency of capital requirement and the anticipated rehabilitation time frame. Importance should be given for innovation and creativeness. The Micro Finance organizations may look at mobilizing the business assets directly from the manufacturers at a best price to the fishing folks. Systematic execution: The basic principles of Micro Finance should be adhered to in the whole rehabilitation process through Micro Finance.

Microfinance in a post disaster or conflict environment can be tricky because the disaster or conflict creates different dimensions to poverty. Previously well off people as well as those who were poor prior to the disaster; all get to the same economic level. Then you have the effects of trauma that give microfinance another dimension. There are also those who become extremely vulnerable such as the sick, the elderly, children and single headed house holds. A creative microfinance strategy could have connections to all these elements if it is well designed in full participation of the communities. Partly damaged enterprises present a very strong starting point for quick solution and even before the market (buying and selling of goods and services) starts to take shape, a lot could be done with a bit of creativity. E.g. a wood workshop that requires only $5,000 to get restarted could quickly repay the $5,000 by supplying doors and windows for the school re-construction efforts and with time the normal business environment will start to take shape and normal customers will start to flow. The local bakery can supply bread to the elderly and school children as loan repayment. These sort of strategies help to recreate the local economies otherwise all the relief resources end up financing imports which delays / slows down economic recovery. In summary take a simple and creative approach to a complex problem to get things moving.

What we need in this case are solutions and not "products". The situation is one of total destruction of the physical and to some extent of the financial capital (assuming that a lot of cash was also lost) but less so of human and social capital (although many people also died) since the country should still be able to rely upon the accumulated stock of knowledge and skills already in the country to rebuild. The financial services solutions to Tsunami-type situation should be similar to what happened in Europe under the Marshal Plan when Europe had lost largely financial and physical assets but its social and human capital was still largely intact (although many people died during the war, the educational infrastructure was there to quickly train people) and they did rebuild.

The solutions for both business and personal financial needs under post-disaster situations are long term loans for operations and personal needs such as paying school fees (minimum 5 years with at least 1 year grace and interest only for the second year) and longer term (10 - 15 years loans) for infrastructure and construction to rebuild lives and businesses. Interest rates should be designed in line with long term (not short term) cashflow. The common practice of microfinance organizations to demand weekly or monthly repayments at a preconceived "market rate of interest" would be most inappropriate. Moreover, minimalist microfinance is unlikely to be adequate and there should be easy access to business development services (BDS) such as training to replace lost skilled workers, counseling and advice to match business opportunities to the post disaster situation, technology services especially for reinstalling computer and internet facilities, and information and business linkages. BDS must be focused on a small number of critical areas, must be demand led and specific to the needs of each country. The combination of focused demand-led BDS and long term loans should do the trick.

The recent tragedy in Southeast Asia has created renewed interest in development aid. In the context of the International Year of Microcredit, we think it appropriate to highlight the important place that financial services should occupy in development aid. Humanitarian aid, especially vital in the immediate aftermath of a tragedy, concentrates on basic and urgent needs: medical care, food, clothing. But beyond this phase, the affected community has to recover and rebuild: housing, infrastructure and services. This is where technical aid comes into play. Whether in answer to a tragedy or to a lack of resources in a disadvantaged region, it aims to provide local communities with the necessary means to organize themselves and meet their own basic needs. Among the methods employed education has proven itself and its impact requires no further demonstration. Similarly, access to financial services is a force for development and a necessity.

In most developing countries, over 80% of the population remains “unbanked.” This lack of access to banking services has many negative consequences for them. They lack a safe place to keep their savings and have difficulty in carrying out even modest projects because they are unable to obtain a loan. It is hard for them, under these conditions, to hope to improve their standard of living. In very poor communities one of the first things access to final services can do is help avoid decapitalization (ex. selling off livestock to send a child to school or for medical treatment). Access to productive loans stimulates economic activity and helps establish entrepreneurship. Financial services provide powerful leverage for community development by strengthening their self-sufficiency. To ensure sustainable access to financial services, local financial institutions must be set up that are owned by the community they serve and which work on their behalf. As part of the community’s collective assets they help the community to progress, and in the process they contribute to strengthening local leadership and democracy. All around the globe, networks of savings and credit cooperatives and other microfinance institutions are being set up and are growing in order to reach more people and offer them financial services which meet their needs. They play a central role in increasing the accessibility of financial services throughout the world.

A post-disaster microfinance (PDM) program can coexist with a grant program and utilize its services to assist the affected people in the South and East Asia. For a successful PDM program, a microfinance institution (MFI) can introduce a program which takes advantage of microentrepreneurs' existing skills, for example, sharing a fisherman's expense by paying a small percentage towards the purchase of a boat, or train them in a new set of skills, provide employment opportunities, and a loan for the necessary tools and utensils. It can also utilize technology to its benefit by providing a loan for the purchase of a mobile phone. The client, in return, charges a service fee to its customers for using the phone. Along with various microcredit programs, savings programs will assist clients in building their capital. MFI can encourage its clients to add a little to their savings account every week and allow them to withdraw the amount after it has reached a certain level. It can also introduce a group savings program where a group of individuals pool their money together in an account and a randomly chosen person from the group withdraws and invests the total amount towards his or her business or other activities. The account is replenished and the process continues until every member of the group has had an opportunity to utilize the money for its business, children's education, or other activities.

A post-disaster microfinance (PDM) program is not a profit motive; it must be utilized as a tool to assist in the long term development of the microentrepreneurs. Therefore, implementing a microfinance program in a relief environment is a viable, long term strategy which will help bring economic activity to South Asia, rapidly reconstruct communities, bring self-respect to the microentrepreneurs, and empower microentrepreneurs to earn and feed their families.

Akbar Khuwaja
International Management Audit Program candidate
London School of Economics

The Tsunami victims have suffered much from this disaster, and only they know the value of all that they have lost. They know best about their needs. They want more than anything to see some sparkle in their lives again. In this kind of situation microfinance would be more than effective. My only concern is the repayment programs. I think that 6 months or a year is a short time frame. Considering the fact that a pretty large area has been affected, many people are in the same condition. It might therefore be difficult for them to get revenues from their new businesses.

It is an encouraging factor that National and International charity is flowing into Tsunami affected areas for relief and rehabilitation of the affected people. A sustainable Micro-finance intervention could enable them to meet their day to day needs through a small loan, and to invest the loan amount in enhancing their small enterprises which they have been doing. The fisher folk women always want to be independent, self governed and consider human dignity as their prime asset.

The community organization of women initiated by grass root level NGOs could be facilitated with a block grant and together with their own contribution and regular savings they build a fund. They will be facilitated to govern, manage and distribute loans, from the funds as per the decision taken by themselves, through established democratic structures. The grass root level NGOs can take the role of animating them and the programme. Let us organize them for their social economical, self reliance and self sustainability.

The present outstanding of all the self help groups or the individuals who have availed micro finance should be rescheduled. The self help groups or the individuals affected should be provided with fresh trench of micro finance for their immediate livelihood. The Donor Agencies should come forward to provide support to the agencies implementing microfinance programmes with the following support: Grants for rephasing the existing micro finance; rescheduling Grants for write off of the interest on the existing loans; Grants for providing revolving fund support for the groups or the affected individuals; Revolving Loans to the implementing agencies for grant of fresh loans.

In Sri Lanka, and indeed probably in most of the coastal areas affected by the Tsunami in South Asia, it is the microentrepreneurs who have been devastated, subsistence fisher folk, small traders, retailers - the classic "Bottom of the Pyramid " entrepreneurs, brilliantly described, by Prof. C.K. Prahalad of the University of Michigan Business School, in his recent book " The Fortune at the Bottom of the Pyramid" published by Wharton School Publishing. Since the 26th of December 2004, these proud and independent people have been reduced to living on charity and meagre hand outs. This is a tragedy - a virtual second Tsunami. The Ceylon Chamber of Commerce together with some of its corporate members, the District Chambers of Commerce and the Sri Lanka Business Development Centre ( a non stock , non profit provider of business development services ) have together launched a pilot micro credit scheme, in four administrative districts, to provide funds to Micro Finance Institutions ( MFI ) in the Tsunami affected areas to lend funds at concessionary rates and related business development services to their affected borrowers, and even new borrowers, to get this "bottom of the pyramid" part of the economy jump started in a quick, effective and transparent manner. These micro businesses play a vital role in the retail distribution and wholesale collection networks of the area and unless they are up and running fast the whole local economy will be paralyzed. These small people do not deal with commercial banks, they borrow form their local MFI or a usurious money lender. We hope to have a replicable model for intervention at this level, which others can draw lessons from, very soon. Time is of the essence - we have to get these women and men back to enterprise and business again, quickly.

Charitha Ratwatte
Managing Director
Sri Lanka Business Development Centre
Colombo, Sri Lanka

In post-disaster relief and support, disabled people are rarely considered. It will be very important for the microfinance to make sure that in its involvement in the reconstruction of infrastructure and people's lives there is a clear policy and process of identifying and involving disabled people. Failure to include disabled people may actually relegate them to permanent recipients of charity, at best, at worst, nothing gets to them - this is what happens in most cases.

Policies and affirmative action must be introduced to microfinance programmes to ensure that disabled people are part of the programmes. Disabled people's organisations in the region or countries affected must be consulted if the participation of disabled people is to be successful.