The role of microfinance in dealing with disasters

A recent Newsweek article praises the role of microcredit in disaster recovery.  The piece singles out Fonkoze, the leading microfinance institution in Haiti, for their ability to get cash to its clients while bigger banks remained paralyzed. The article suggests that a new role for microfinance is to help economies respond to shattering tragedies like the Haitian earthquake.

The sentiment points to a larger insight: Microfinance can do more to help families respond to emergencies in general.  Sometimes those emergencies arrive as a national crisis that affects hundreds of thousands of people. But more often, they are local.  Sometimes the emergency is felt just by a single family in a community.  It could be an illness that keeps a husband from working and putting food on the table because he can’t pay for medical treatment.  Or it could be a bad harvest that means there’s no money to pay for children’s school fees. Research from financial diaries in India and Bangladesh shows that nearly half of the families surveyed reported a serious injury or illness in the past year. And in South Africa over 80% of families reported needing to pay for a funeral in the past year.

While the narrative of microfinance as small business finance still has currency, that’s too narrow a vision. We blogged recently about how Fonkoze recapitalized nearly 14,000 loans in the wake of the 2008 hurricane. It’s exactly this kind of flexibility that poor households need when faced with emergencies. Grameen Bank has built more flexibility into its notoriously standardized products. But why aren’t more institutions designing products flexible enough to work better with poor households’ uneven cash flows?

Without reliable tools to mitigate risks, families are often forced to sell assets, take on high-interest loans, or exhaust meager savings—sometimes pushing them further into poverty.  Addressing the root financial problems provides the seed of a new narrative about the potential power of microfinance -- and offers testable hypotheses about its broad impact.