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 communities 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 Reduction
UN/ISDR