Microcredit is widely recognized as a useful tool to help reduce
poverty. The possible benefits of microfinance to abate the impact
of natural disasters, however, have not been fully explored. The
new and promising concept of microfinance for disaster reduction
deserves increased attention. As the applicability of the microcredit
is still somewhat experimental, it merits further investigation.
Despite a current lack of conclusive results, the financial community
has concrete examples that demonstrate that microfinance can be an
effective tool for reducing the impact of disasters on certain populations.
In Bangladesh, for instance, those who were already benefiting from
microfinance were more able to recover from the 1998 floods. Microfinance
helped develop greater coping capacity and reduced community vulnerability.
In addition, through post-disaster loans, microfinance can help poor
households recover more quickly.
So far, microfinance institutions have been involved mostly with post-disaster
recovery. There is a need, however, for microfinance to be perceived
as a potential tool to better prepare communities before natural hazards
strike. Some pre-disaster microfinance projects are underway and working
very well. We asked experts and colleagues from various backgrounds
including microcredit institutions, UN organisations, commercial and
development banks, re-insurance companies, NGOs, academics and disaster
risk institutions to share their point of view on the issue.
The potential of microfinance for disaster risk management is enormous.
The consultative Group to Assist the Poor (CGAP) estimates that microfinance
institutions have reached more than 80 million clients. At the Microcredit
Summit, the potential market for microfinance was estimated at about
3 billion people.
Although microfinance can help protect communities from disasters,
many challenges remain. These are often linked to the traditional mandates
and organizational structure of microfinance initiatives. The initiatives
are often at risk themselves and not sufficiently strong financially
to survive large natural disasters. When a disaster strikes they may
not be able to respond adequately to a large volume of claims and may
not have sufficient liquidity. The use of microcredit for investment
in disaster risk management also requires that the community is aware
of the positive impacts of preventive measures and a degree of confidence
in financing and insurance institutions, both of which are often lacking.
In short, microfinance has great potential for reducing the impacts
of disasters but must be further developed for this purpose. Microcredit
can complement other disaster recovery mechanisms to rebuild the
lives of people affected by catastrophes, as well as help make
less vulnerable and more sustainable. The current Indian Ocean tsunami
recovery provides an opportunity to verify that microfinance is a
strong tool to help alleviate the suffering of the poor.
Salvano Briceno, Director
Inter-Agency Secretariat of the International Strategy for Disaster