Post-war, post-conflict and food insecure environments: risks and opportunities for microfinance institutions

POST-WAR, POST-CONFLICT AND FOOD INSECURE ENVIRONMENTS: RISKS AND OPPORTUNITIES FOR

MICROFINANCE INSTITUTIONS

1. INTRODUCTION

Microfinance is increasingly being applied to volatilescenarios as a sustainable means of providing much-neededcapital to vulnerable communities1. Traditionalmicrofinance structures, however, often fail to addressthe specific needs of post-crisis communities,overlooking a loss of income with a likelihood of defaultas one of the possible consequences. Post-war, post-conflict and food insecure environments have severalcommon features, notably economic insecurity, necessityof capital and the exacerbation of vulnerability to thoseliving below the poverty line. The microfinance industryhas innovated strategies to overcome these limitations,increasing the likelihood of entrepreneurial success andlivelihood transformation by including the poor infinance initiatives (Roodman, 2011).

It is widely acknowledged that the poor are the mostvulnerable to external shock, due to residing in hazard-

1? Microfinance differs from microcredit in that microfinance

incorporates a range of financial services (insurance, loans, savings), whilst microcredit is one aspect of microfinance that refers specifically to credit loans. Microfinance is increasingly favoured; this departure reflects the recognition that broader financial services can increase the poor’s access to crucial servicesthat can improve their chance of SME success.

prone locations and poor quality housing, economicvulnerability and agricultural dependence (Fernando,2012). In extreme situations, households may performhigh-stress irreversible and long-term detrimentalstrategies to free capital, such as liquidating assets orskipping meals, to avoid default (Mathinson, 2003).Without microfinance, vulnerable individuals remainparalysed in a vicious cycle where low credit worthinessprevents loan access from formal financial institutions,perpetuating poverty and vulnerability to disasters(Winchester, 2000). The innovative nature ofmicrofinance, however, allows social capital to besubstituted for collateral through group lending joint-liability contracts, increasing access to finance to themost marginalised individuals (Berg and Schrader, 2012).

This literature review reaffirms the potential ofmicrofinance institutions (MFIs) operating in post-conflict, post-disaster and food insecure scenarios. Aswell as improving income security and reducingvulnerability to impending disasters, MFIs can compensatefor public service and aid inefficiencies, allowingpolicy holders to better cope with the shock (Khalily,2004). Wilson describes microfinance in post-conflictsituations as a “'Trojan Horse' for peace building,reducing dependency on relief, kick starting war-torneconomies, supporting relief and development programmes,improving gender roles and increasing self-worth”(2002:10).

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Despite conflicting opinions in the literature, thispaper ultimately suggests the broader elements ofmicrofinance – microinsurance and microsavings - are bestpractices and offer the greatest potential for ensuringincome stability when faced with a crisis.

2. MFI RISKS

Following a crisis there is a greater need for investmentto begin the recovery phase, resulting in a situation ofhigh demand and low availability of microcredit loans,whereby demand surpasses the supply. MFIs are thereforepresented with two major risks. Firstly, the occurrenceof a sudden increased capital demand and constrictedavailability results in a “liquidity crunch”, causingMFIs to reject new applications for credit (Berg andSchrader, 2012). Secondly, the risk of MFI’s defaultingincreases when MFIs extend loans to vulnerable, high-riskcitizens during a period of aggregate shock (Marincioniet al, 2013; Becchetti and Castriota, 2011). Such anincident occurred for Sri Lankan NGO Agro Micro Financefollowing the 2004 Indian Ocean tsunami, where it lost24.4% of its credit portfolio and requiredrecapitalisation by UNDP and USAID to avoid a portfolio-wide default (see Figure One; Becchetti and Castriota,2011). This example highlights the vulnerability of themicrofinance provider to shock, the need for strictmonitoring to ensure the MFI’s resilience in times ofcrisis and the need to safeguard credit for their clients(Poston, 2010). Therefore MFIs are at risk of borrowers’individual default as well as the collapse at theportfolio level.

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This means that MFIs at their most vulnerable cannotalways obtain the crucial capital to offer additionalloans (Mathinson, 2003). Wilson and Nagarajan (2003)identify the persistence of client selection and theexclusion of those most in need because of their poorperceived credit worthiness, lack of collateral, highcompetition for loans and absence of previous loanrecords (Berg and Schrader, 2012). Here the risksassociated with asymmetric information can serve toreinforce the vulnerability of the most disadvantagedpeople. Winchester (2000) also highlights how creditrecord files and collateral (such as agricultural assets)are often lost in the disaster, resulting in the refusalof those previously accessing loans from formal bankscapital, and increasing the competition for loans fromMFIs.

Nagarajan’s (1997) framework of macro, meso and microlevels of post-crisis impacts (which will be exploredthrough a post-conflict lens in section 2.2) offers aninsight into how national institutions’ instability hasan impact at an individual level. At the macro-scale,inflation - causing an increase in commodity prices -exacerbates pressure on household finances due to greaterexpenditure on essentials such as food and fuel during aperiod where income is already squeezed (Mathinson,2003). Therefore as disposable income constricts, themarket for purchasing goods from local SMEs declines andresults in a loss of income and general economic activity(Winchester, 2000; Becchetti and Castriota, 2011). The Grameen Bank model initiated the concept of jointliability loans, whereby social capital and peer pressureare substituted as collateral (see Figure Two). Thismodel has been replicated throughout the microfinancecommunity, however has been criticised for failing toaccommodate atypical community structures. For exampleMohammed (2006) identified the cooperative structure of

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Somalia’s remote clan communities. Here, families withabundant assets give to those in need, meaning that eachmember of the clan (not all necessarily receiving loans)will bear the consequences of one member’s default. Thereis thus a need for an alternative collateral substitutein such communities that does not threaten the widercommunity’s livelihoods.

2.1 NATURAL DISASTERS

Mathinson (2003) summarises the economic impact naturaldisasters have on the affected communities:i. Disasters inhibit one’s ability to earn an income

through physical infrastructural damage, prohibitingaccess to markets.

ii. A squeeze in disposable income reduces the demandfor products and services and the market sizeshrinks. The household’s stock may well bedestroyed, and it may not be possible for the incomeearners to fund replacements.

iii. The prevalence of disease after a natural disastercan result in income-earners themselves becomingill, or spending their time caring for illrelatives, thus temporarily not earning money.

iv. Households increase their expenditure on commoditiesand healthcare (disease outbreak or injury duringdisaster), plus replacing household and income-generating assets.

These economic impacts, Mathinson argues, result invarious coping mechanisms to free up much-needed capital.Low-stress actions, such as reducing consumption or themigration of family members seeking labour, are easilyreversible. Medium stress strategies include sellingassets, obtaining loans and using savings. The highstress approach is largely irreversible and bears severeeconomic consequences, such as defaulting on loans and

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selling productive assets, which Mathinson understands tobe a long-term detrimental strategy.

Hammerich et al’s (2005) research into the post-tsunamieconomic situation in Aceh, Indonesia, found there to bethree levels of affectedness: i. Those worst affected lost all assets and were

financially dependent on international aid,government grants and host families.

ii. Those affected at the medium level partially lostassets; this group is ready to resume income-generating activities, but external factors (lack oftraders or financial services) prohibit this.

iii. The final level describes those indirectly affectedby local economic disturbances, such as loss ofsavings or the destruction of their cooperative;this group still needs access to capital in order tomeet higher living costs, which is difficult in aweak local economy.

Inevitably areas with high exposure to disasters, such asBangladesh to flooding or India to monsoons, are oftencaught in a cycle of pre-disaster mitigation, disasteroccurrence management and post-disaster reconstruction(Khan et al, 2008). Khan’s ‘Disaster Management Cycle’pinpoints how the completion of one process initiates thebeginning of the next process, leaving little time forcommunities of MFIs to react and manage their response.Fernando (2012) applies this cycle to highlight the needfor each stage of the process to be managed efficientlyand sustainably in order to reduce the impact and lossonce the cycle has completed.

2.2 CONFLICT

A post-conflict political situation is often one ofinstability and deep lack of security, which mirrors

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itself in a skepticism and deep distrust, particularlyconcerning lending institutions (Doyle, 1998). As aresult, individuals seeking access to finance often turnto local loan sharks, who charge excessive interest ratesand result in large debts that ultimately contribute togreater economic instability (Allen, 2009). Thissituation highlights the importance of transparent andtrusted MFIs that offer reasonable interest rates andwhose purpose is solely to benefit the clients.

Microfinance can often fill the financial services vacuumfelt in post-conflict environments. Economic and socialinfrastructure is often overlooked and deeply damagedduring war, as public services are neglected in lieu ofmilitary expenditure. The closure of banks in conflict-affected areas result in the discontinuation of formalloans, even for customers who offer collateral and areunderstood to be ‘safe’ borrowers (Ahmed, 2000). Twoyears into the second Liberian civil war, 78% of bankloans had been terminated (IMF, 2000); as Allden (2009)recognises, “this boom in microfinance… substitutes theweakness in the banking sector”. Furthermore, weaknessesin, or altogether lack of education and development ofthe necessary skills for entrepreneurship, restrict theSME’s success. This is compounded by the out-migration ofthe educated classes, who are no longer available tosupport the financial services infrastructure by helpingto educate the MFI beneficiaries in basic entrepreneurialpractice, or monitor the progress of the loans (Moraisand Ahmad, 2011).

Nagarajan (1997) theorises that conflict affects theeconomy at macro, meso and micro levels. At the macro(national and institutional) level, she describesfinancial instability, human and capital flight,destroyed transport infrastructure and the inability toaccess markets, and little government capital to maintain

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social foundations. Macro instability trickles down tomeso impacts, whereby malfunctioning nationalinstitutions no longer serve nor benefit the populationin a time of crisis. The microeconomic effects ofinfrastructural weaknesses are hyperinflation ofcommodities, poor health, lack of assets and thecorrosion of social capital and community trust.

During and post conflict, societal upheaval and thedevastation of settlements results in the displacement ofpeople: refugees. The arrival of outsiders into closecommunities threatens existing social capital, which isan important asset in times of instability and crucialfor resilience (Postelnicu, 2012). Community trust isimperative for joint-liability group lending (see FigureTwo; Armendaris and Morduch, 2010). In a fracturedcommunity, policy-holders are often unwilling to risktheir access to future credit by joint-liabilitycontracts with strangers from a different community orethnicity, preferring instead to take an individual loanbut lacking the collateral to do so (Wilson, 2002).

2.3 FOOD INSECURITY

The overarching aim of establishing MFIs in food-insecureenvironments is to ensure income generation, and in doingso smoothing seasonal consumption (Pitt and Khandker,2002). Hamlin (2011), on behalf of the FINCA suggeststhat food security should be measured in three ways:

1. The availability of food is an indicator of foodsecurity as it reflects the macro situation of foodproduction, import and export. At the micro scale,availability is shaped by the proximity to markets,physical infrastructure and transport, which isgovernmental responsibility.

2. Food access is one’s ability to obtain food, and isa function of income and commodity price, whilst

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also shaped by local production and distributionsystems.

3. Utilisation is what individuals do with the foodthey access, for example calorie consumption, foodintake frequency and nutritional value based on theFood Consumption Score (Hamlin, 2011).

Devereux and Maxwell (2001) note how low incomehouseholds facing food insecurity have insufficientincome to buy market produce, and therefore must adapttheir food consumption behaviour. Zeller and Sharma(1998) found that some households spent up to 91% oftheir income on food and when that income is reduced (dueto low agricultural production, illness or drought),people resort to health-damaging and economicallydetrimental coping mechanisms, such as skipping meals andselling key household assets. These examples of poor foodutilisation and food access suggest elements of foodinsecurity and the need for NGOs to intervene.Microcredit can thus offer important capital that cansupport a community in times of food insecurity. Mohammed(2006) and Pitt and Khandker (2002) found that lending tofarmers resulted in higher agricultural production,reduced food insecurity, income diversification, dietstabilisation and increased incomes.

Impoverished rural smallholders have the same difficultyas their poor urban counterparts in accessing credit (nocollateral, small loan demand); however this isexacerbated by their remote location (poor access toweekly meetings and high withdrawal or deposit costs fortransport) and illiteracy (potential misunderstanding ofthe MFI process) (Zeller et al, 1997). Formalinstitutions’ disinterest in providing loans to thisdemographic, due to high per unit transaction costs,moral hazard risks and low repayment rates, has causedsmallholders to turn to informal moneylenders, or loan

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sharks, in times of emergency. It is at this point wherethe discrepancies in the need and availability of low-interest capital require non-profit MFIs, who lend atreturns below the market rate. Furthermore, ruraldwellers’ limited or non-existent experience withfinancial institutions causes distrust and scepticismwith the process.

Environments that are vulnerable to drought and famine,or highly seasonal agricultural output, faceunpredictability in household income. Typically, half theyear will be agriculturally productive and income-earning, whilst the remainder faces income stagnation andtemporary food insecurity. Chaudhuri and Paxson (2001)concluded that in rural Indian households, familiesreceived 75% of their annual income within three months.Hasan (2010) attributes the seasonality of hunger inBangladesh, known as the ‘munger period’, to annualperiods of lack of income and savings. Seasonal incomefollowed by seasonal credit demand reiterates the needfor income smoothing in order to eliminate variedconsumption cycles.

Mohammed (2006) found that pastoral beneficiaries of MFIprogrammes opt to invest in their children’s education,yet Jacoby (1994) discovered in periods of aggregateshock and low income, parents withdraw children fromschool as a means to diversify familial income. Thisexample of substituting future consumption with presentconsumption epitomises high stress, detrimental actionsand reiterates the need for savings to substitute forthis exchange. Further, these periods of shock extendbeyond agricultural failure; external factors (illness ordeath in the family) similarly instigate unfavourablecoping mechanisms to prevent food insecurity (Hamlin,2011).

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3. SOLUTIONS

Mindful of these risks, the global microfinance communityhas sought to overcome the issues threatening the successof MFIs in post-conflict, post-disaster and food-insecureenvironments.

Loan default and delinquency can impact thecreditworthiness of the borrowers and inhibit them fromaccessing further finance from MFIs (Shoji, 2009). Thegroup-lending model increases this risk further as, ifthe community is struck by a crisis and one memberdefaults, each individual in that group will havedifficulties in accessing capital in the future(Townsend, 2003). Rescheduling repayments is regarded asa good option for MFIs and its clients during suchsituations, to ensure a healthy portfolio for the MFI andensuring that borrowers maintain a strong financial trackrecord. Repayment flexibility can therefore overcomeindividuals’ concerns of exclusion from future loans(Hulme, 1999). Furthermore, it mitigates the occurrenceof jeopardising actions (such as skipping meals ordependency on loan sharks) that individuals take toimmediately free up capital.

The literature has highlighted a divide in scholars whoadvise MFIs to diversify their services and those whobelieve MFIs should solely offer capital. Hudan andSeibel (2007) advocate that MFIs should offer servicesthat would aid their clients’ businesses, such asmicroenterprise training, microinsurance, consultancy andthe ability to convert payments into shares, allowinglocal borrowers to become shareholders. This incorporatesa holistic approach to microfinance, such as preparednessto future hazards, as a means of reducing long-termvulnerability. Jenkins (2003) supports the ‘livelihood

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diversification programme’, which expands individuals’coping strategies for early warning systems and a swifterrecovery process. Fernando (2012) counters this approach,inferring that offering insurance creates higher risks;MFIs will inevitably undertake adverse selection toeliminate such risks and thus exclude vulnerable clientsfrom the microfinance sector. Despite this claim,organisations such as MicroEnsure, a globalmicroinsurance organisation (see Figure Three),collaborates with existing insurance companies to reduceinsurance risk and are therefore able to offer insuranceto the poorest and most vulnerable.

3.1 NATURAL DISASTERS

MFIs are most successful when operating in recurring,seasonal natural hazards, such as Bangladesh’s floodseason (Becchetti and Castriota, 2011). Khan’s threephases of disaster management (pre-disaster, disaster andpost-disaster) exposes the cyclical nature of disastersand therefore the potential to build upon previousexperience and implement a framework that addresses eachstage. Fernando’s (2012) paper examining Sri Lankan MFIdisaster management found preliminary actions to be themost effective means of overall disaster mitigation, aconclusion which was echoed by Marincioni et al (2013)and Dhar et al (2005).

Dhar suggests borrowers could ease their insurancepremium by investing in pre-emptive measures that reducethe risk of loss or damage to life, property and assets.Marioncioni et al (2013) support the holistic nature ofmicrofinance (incorporating microcredit andmicroinsurance), suggesting it would initiate a positivefeedback mechanism of disaster prevention actions andeventually reduce the impact of the disaster. Regardless,

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disaster management attempts to secure the sustainabilityof MFIs whilst reducing the adverse selection of thevulnerable when selecting clients (Khan and Khurosaki,2007). Correspondingly, Fernando determines that long-term MFI policyholders are more resilient to disastersthan non-members.

Fernando (2012) assessed the aptitude of pre-disastermanagement measures, disaster occurrence management andpost-disaster practices regarding MFI success.

A. Pre-disaster management

Fernando identifies four fundamental pre-disaster riskmitigation tools:

i. Disaster mitigation loans and loans exclusively forinvestment into improving the strength of homes andassets to disasters increase resilience. Forexample, implementing measures to reduce flooddamage to a house.

ii. Disaster awareness programmes are crucial in savinglives by educating the community on best disasterpractice.

iii. Disaster savings accounts freeze capital until thenext disaster by restricting withdrawals, which isan effective means of setting aside money forreconstruction amidst high expenditure and squeezedincome.

iv. Disaster microinsurance is celebrated as a holisticapproach to the microfinance sector, but has dividedopinion amongst academics. Fernando (2012),Armendariz and Murdoch (2007) and Cohen and Sebstad(2005) believes that microinsurance increases thelikelihood of adverse selection, moral hazard risk

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and insurer insolvency. More recent research,however, suggests that the microinsurance field ischanging and that microinsurance providers areinnovating strategies to overcome such limitations(as seen by MicroEnsure). McCord (2012) describeshow NGOs are managing adverse selection with theexamples of restricted group size or requirement ofwhole family’s insurance.

Fernando offers two improvements to the typical micro-insurance model. Firstly, Pantoja’s (2002) ‘indexed-based micro insurance design’ employs an index ofexposure based on a triggering event (such as heavyrainfall). This ensures individual risk remainsindependent of the overall disaster risk, therebyaddressing the adverse selection and moral hazardrisks, to create an affordable insurance premium(Mechler et al, 2006). Secondly, Fernando suggests thepartner-agent insurance model, whereby a commercialinsurer and MFI collaborate, causing the commercialinsurer to bear the risks whilst gaining a new, nichemarket with low overhead costs.

B. Disaster occurrence management

MFIs can only play a limited role during the disasterincident itself; instead they assure the importance ofearly warning systems and dissemination of information(Parker and Nagarajan, 2000). There is a potential forMFIs to collaborate with the country’s national disastercentre as MFI often have close connections with acommunity who could circulate the necessary information(Fernando, 2012). Furthermore, if in close proximity theMFI could offer food, medicine and shelter for those inneed during an emergency, but again this is an extensionof the MFI’s role as a loan provider and unsustainable(Kumar and Newport, 2005). Fernando instead suggests a

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deposition centre that acts as a safe haven forvaluables during the event, but this requires anefficient early warning system.

C. Post disaster management

Fernando’s (2012) only post-disaster management strategysuggestion is loan rescheduling, either by increasingthe repayment period or changing the interest rates asdescribed in section 3. This flexibility is fundamentalin order to restore livelihoods and prevent defaulting(Ray-Bennett, 2010).

3.2 CONFLICT

Post-conflict zones bear the consequences of war longafter peace has ensued; as section 2.2 explained,citizens remain sceptical whilst the economy and socialinfrastructure lacks stability. Post-conflict literaturepoints to highly unstable and polarised communities thatthreaten the continuation of group lending (Postelnicu,2012). Ohanyan (2002) studied the governance of MFIs inBosnia and Herzegovina, finding that microcredit acted asa peacekeeping instrument and was significant in theemergence of interethnic communities and integrationbetween refugees and the original population.

Academics have found MFIs to be particularly successfulwithin refugee communities; for example, the UNHCRapplies microcredit programmes to ensure stability withinthe refugee population (Philips, 2004; Travis, 2004). TheBosnian NGO CARE offered microfinance loans on thecondition that loan recipients employed ethnic minoritiesto initiate community integration and economicopportunities for refugees (Ohanyan, 2002). However ifthis approach is not managed carefully it can insteadfuel tension if it targets vulnerable and marginalised

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groups at the expense of others (Ohanyan, 2002).

Ohanyan (2002) advocates a commercial approach toultimately be one of sustainability that addresses thelong-term needs of the community. Here, a microcreditservice will continue to be available once the NGO hasleft the country. He describes the “economically activepoor” – those with basic business skills and assets - asbeneficiaries, also suggesting that a financialinstitution will become available for smaller SMEs.Although sustainability is key to the viability of MFIs,a corporation that mainly serves those with assets is nota pro-poor approach and overlooks the aims of MFIs. Thisdebate sits at the heart of the for-profit vs non-profitmicrofinance paradigm.

Similarly, the National Bank of Cambodia (NBC) regulatesCambodia’s microfinance sector, reflecting theintegration of MFI NGOs and the formal finance industry(Flamming et al 2005 in Allden 2009). This created asuccessful local banking system monitored by state andprivate banks together, resulting in a 50% increase intotal loans between 2010-2011 and a 17% increase inborrowers during the same period (National Bank ofCambodia, 2011).

MFIs typically wait for peace to be established beforeentering a post-conflict zone, whereby they establish aproject in the most stable part of the country as thetransition to peace occurs at differential rates (Wilson,2002). In such a volatile situation, this allows the MFIto understand the risks in the context whilst developinga strategy to reduce these risks and monitor thesituation closely. When external threats lessen,borrowers tend to invest capital into assets so the valuewill increase (Wilson, 2002).

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3.3 FOOD INSECURITY

Zeller et al (1997) introduced a framework to advisepolicy makers on three pathways MFIs can apply as bestpractice for food-insecure populations2:

1. Access to credit is essential to allow individualsto invest capital to ensure long-term income andfood security.

2. Accessing liquid savings and insurance allowsbeneficiaries to undergo risks and ventures thatshould become profitable enterprises, such asinvesting in education (Meyer, 2003).

3. Financial services must be improved, possiblythrough dialogue with the government, which canstabilise food consumption.

Agricultural dependency and reliance on low incomesincreases individuals’ vulnerability to food crises, asenvironmental factors (floods or droughts) couldtemporarily or enduringly stall output and thus prohibitincome. Diversifying household incomes and assetstherefore diminishes this vulnerability by ensuring thatif one source of income deteriorates, there are otherfinancial means (Zeller et al, 1997; Wilson, 2002).Mohammed (2006) disclosed that 80% of the samplepopulation of smallholders in Somalia receiving loansowned an SME, investing in non-agricultural activitiessuch as trading to ensure income in the off-season. MFIscan thus play a crucial role here in enablingsmallholders to invest in diversification strategies andenhancing their preparedness.

2? Despite the changes that have undergone the microfinance industry

since 1997, Zeller et al’s framework remains a relevant need of food-insecure communities today.

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As highlighted in 2.3, seasonal variability of income hasled to vulnerability and fluctuations in consumption(Swift, 2003). To reduce income and consumptionoscillations, Mohammed (2006) suggests that the size ofthe loan could vary throughout the year, remaininghighest in seasons of low agricultural output and wherethe focus might be for the SME. Furthermore, the papersuggests that loan repayment could be postponed until thehigh-income season to prevent detrimental copingmechanisms and ensure a stable consumption patternresistant to shocks (Meyer, 2003). To encourage theuptake of microcredit loans and overcome communityscepticism of institutions, Sharma and Buchenrieder(2002) advise that MFIs initially charge low interestrates to potential beneficiaries. However this could bemisleading and cause excessive consumption due tounderestimating repayment rates, and further damage thereputation of institutions that could potentially ensurefood security.

Fernando’s (2012) comprehensive examination intostrategies that reduce an individual’s exposure tohazards and improve the stability of their MFIs can bebuilt on by examining how social capital can enhance thecommunity’s resilience to natural disasters. Marincioniet al (2013) describe how a collective social fund can beinvested into community development projects such asinfrastructural renovation, which would benefit thecommunity as a whole. They cite the example of agrassroots movement in Tanzania, where the communityenhanced food security during a drought by reforestation(thus securing temporary employment), social serviceenhancement (constructing schools) and improvedcommunication to disseminate information to the public.The result was an empowered community who had agency inmitigating the occurrence of food crises.

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MFI’s best practice in food-insecure environments is todraw on social capital, where tight knit support networksin rural areas share knowledge, resources, credit andinformal insurance (Swift, 2003). Hamlin (2011) goes asfar as to consider social capital as a non-financial formof saving. This example is particularly prominent withthe example of Somalia’s clan communities, whereredistribution of resources (livestock for example) tothose vulnerable to food uncertainty ensures foodsecurity of the whole community. Zeller et al (1997)suggest social capital could be used as a collateralalternative, as an extension of group loans, characterreferences and obligatory savings to avoid default.Zadisha is an online microfinance lending platform; theonline nature of the organisation encourages interactionbetween the borrower and lender, which is again anexample of drawing on on social capital to reduce risk.

Scholars and development practitioners stress the needfor precautionary insurance and savings accounts as theycreate a safety net for future insecurities and foodcrises (IFPR, 1997; Mohammed, 2006; Zeller et al, 1997).Meyer (2003) understands that endorsing insurance andsavings as investments against future hazards shouldincrease their uptake and reduce the need forcounterproductive high stress coping strategies.

4. CONCLUSION AND POLICY RECOMMENDATIONS

The literature surrounding the application ofmicrofinance to post-crises communities highlights anumber of successes and best practices, whilst stressingthe existing limitations and offering suggestions forimprovement.

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The literature emphasises common incidences of highstress and counterproductive coping mechanisms ofindividuals when facing a crisis. This reflects a lack ofbeneficiaries’ education concerning financial bestpractice during economic hard-times, an absence ofsustainable long-term objectives and the perceived lackof alternatives. Despite Fernando’s (2012) concernsregarding adverse selection, if microinsurance andsavings accounts were promoted to the community andmanaged effectively, there could be a positive trade-offbetween these impacts. This would create financial safetynets in the wake of a disaster and reduce the need forsuch coping mechanisms. The benefits of applying abroader microfinance approach, incorporating microcredit,microsavings and microinsurance, have been evident acrossthe literature and within each type of crisis this reporthas addressed. Borrowers’ vulnerability in a period ofcrisis is greatly reduced with access to such financialservices, increasing the resilience of the community todisasters. Microsavings and microcredit are integral toKubaru’s mission; both field partners apply compulsorysavings accounts and have an opportunity to offer furtherdisaster insurance products, which are highly effectivein reducing the long-term loss due to the disaster.

The importance of social capital and community is acommon denominator across post-conflict, post-disasterand food insecure microfinance scholarship. Thesignificance of close-knit communities manifests itselfin both the viability of the group lending model and interms of improving resilience to disasters, be it frompeer support in refugee camps, donating livestock duringa drought or infrastructural improvements to communitybuildings in flood-prone areas. The feasibility of thegroup lending model in supporting communities in the wakeof a crisis, however, is contingent on the flexibility ofrepayment systems to ensure individuals do not default

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and therefore reduce others’ chance of obtaining futurecapital. Kubaru’s field partners again recognise theadvantages of loan rescheduling during a crisis period,allowing borrowers more time to repay loans when adisaster greatly reduces available capital and increasescapital demand.

This report also highlights the potential for MFIs, inenvironments where disasters occur regularly and can bepredicted (flood season, droughts), to encourage theimplementation of pre-disaster mitigation measures. Thisoffers the potential for integration with the governmentand, where applicable, disaster management centres, soearly warnings can be issued and public services canprepare, which would ultimately reduce loss of life andassets. Further, risk mapping could establish the mostvulnerable policy-holders and allow MFIs to actaccordingly (pre-disaster: evacuation and informationdissemination; post-disaster: amend repayment plans)(Mathinson, 2003). GDMPC, Kubaru’s field partner in thePhilippines, focuses their microfinance efforts towardsthose vulnerable to typhoons and floods. Their policiesare adapted accordingly and include emergency relief, forexample the HELP community development programme thatdistributes goods during emergencies, and LIPAD, a groupof volunteers trained in disaster rescue. Furthermore,Kubaru’s partners in both the Philippines and BurkinaFaso encourage their beneficiaries use microsavings as atool to support their client base.

In summary, microfinance is an effective instrument inpromoting entrepreneurship and economic development forvulnerable communities. This report has stressed therisks of implementing microfinance in post-disaster,post-conflict and food insecure environments – of whichthere are many – but also solutions to these issues andbest-practice suggestions. For communities vulnerable to

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such crises, the importance of a safety net, such asinsurance and savings accounts, is paramount. Further, itis imperative that MFIs understand and respond to thespecific needs of individuals in their criticalsituations, for example the flexibility of loanrepayments and the availability of non-financial services3

as an additional means of support.

6. BIBLIOGRAPHY

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Armendariz, B., Morduch, J. (2007) The economics of microfinance. London: MIT Press.

Becchetti, L., Castriota, S. (2011) Does microfinance work as a recovery tool after disasters? Evidence from the 2004 tsunami. World Development. 39(6): 898-912.

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Chaudhuri, S., Paxson, C. (2001) Smoothing Consumption Under

3? Such as: integration between community groups to build social

capital, low-cost community outreach programmes, educating policy holders onpost-crisis financial best practice and SME advice to reduce severity of coping mechanisms, disaster safety education and tools/ technology for the rapid dissemination of information in the aftermath of a disaster.

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Income Seasonality: Buffer Stocks vs. Credit. Colombia University, Department of Economics, Discussion Paper Series

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Devereux, S., Maxwell, S. (2001) Food Security in Sub-Saharan Africa. South Africa: University of Natal Press.

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