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Coping with Floods in Bangladesh :
Implications for the Microfinance Industry

How do microfinance organizations operate during a natural disaster?

A new paper summarises findings from an investigation into the Bangladesh floods of March 2000.

Contextual issues indicate that:
product design is not the only element
impact of disasters is seldom uniform across households
products offered by an MFI in a disaster should be flexible
terms and conditions of loan rescheduling determined on a client-by-client basis

Savings products have the potential to play a significant role in helping clients manage the impact of disasters, but compulsory savings products provide only limited benefit for two reasons:

difficulties in accumulating meaningful balances due to the small size of regular contributions and no incentive to contribute more than the required amount. Clients have to contribute for several years before they can accumulate a balance large enough to offset flood-related losses - average losses in 1998 were around 1000 times more than a weekly payment
difficulties in meeting substantial demand for withdrawals where Grameen Bank, for example, reported that 95 percent of affected clients' compulsory savings had been withdrawn. Having lent out funds collected as savings, some organisations struggled to find sufficient liquidity to meet the demand for withdrawals in affected areas and this also has long term consequences. By creating open access savings products, other organisations were able to increase client accumulated balances rapidly, showing the advantages of voluntary withdrawal access and unbundling savings from loans. Greater frequency and convenience of collections can also help clients to accumulate larger balances faster which increases their protection and avoid liquidity crises

Credit products can play an important role in reducing the negative effects of disasters:

Pre-disaster or preventative products where several MFIs have experimented with adjusting their loan repayment schedules to reduce required repayments during the flood season and encourage more protected houses or the purchase of small boats--assets that help reduce losses when the floodwaters rise
Emergency relief where immediately after a disaster, MFIs may be able to reschedule existing loans to reduce the burden on affected households and provide new, quick disbursing emergency loans to replace income sources temporarily lost because of the disaster. MFIs can use new loans to help clients repair and replace damaged or destroyed assets. Loans are smaller than average in size and for shorter terms than normal and reported repayment rates were similar or better than normal MFI rates
Reconstruction loans are important since clients may not have the capacity to take on more debt. This is problematic for reconstruction loans used to finance assets, such as latrines or houses. MFIs that had difficulty sourcing funds for relief loans also struggled to find funds for reconstruction loans
Outstanding issues include factors that influence clients to decide whether to use financial coping mechanisms in disasters, the extent preventative loans reduce households' losses and future potential for preventative loans in the face of disaster

Insurance products none of the MFIs in Bangladesh provides insurance against disaster-related losses.

Product delivery lessons include:

customising solutions according to clients' situation
making local staff customise in an efficient and timely manner
giving clients options such as choosing between different withdrawing from savings or taking an emergency relief loan
protecting client records and information from destruction or damage

The paper concludes that there is no one product or set of products that all MFIs can use to fully cope with disasters. However, the Bangladeshi experiences highlight that client preferences, the degree of disaster exposure, and the size of an MFI, will all likely influence which products or product adaptations are most appropriate in a given situation.

Nagarajan, Geetha; Brown, Warren Microenterprise Best Practices (MBP) Project,
Development Alternatives
, USAID, 2000, Maryland, USA
 Editor : Muhammad
Executive Editor : Khalid Shams 
Editorial Advisory Board: Argentina : Pablo Broder, Buenos Aires     Australia : Shan Ali, Sydney     Chile : Benardo Javalquinto, Santiago     Colombia : Mauricio Fernandez, Bogota     France : Maria Nowak, Paris     Germany : Nancy Wimmer, Munich     Malaysia : David S. Gibbons, Kuala Lumpur     Philippines : Dr. Cecilia D. Del Castillo, Bacolod City     USA : Alexander Counts, Washington DC
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