Module 2: Client Preparedness

Microfinance and Disaster Management

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Objectives

To understand:

• the impact of natural disasters on poor households• risk management strategies used by poor households• financial products that can help poor households reduce

vulnerability to disasters

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Topics

1. External shocks faced by poor households

2. The economic impact of external shocks on poor households

3. The economic coping mechanisms of poor households

4. Financial products for client-level risk mitigation

5. Product Development for Disaster Preparedness

6. Summary

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1. External Shocks Faced by Poor HouseholdsIndividual

• Sickness/injury of family member, especially main income earner

• Death of family member, especially main income earner• Theft• Fire• Other

Community• Natural disasters – drought, famine, earthquakes,

floods, cyclones, volcanoes, tsunami, etc.

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2. The Economic Impact of External Shocks on Poor Households

Case study exercise:1.Read the scenario on the handout2.How might a major flood impact on the economic

position of the Singh household?

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Economic Impacts (2)

1. Temporary inability to earn income• Impact of the disaster on customers/employer• Destruction of trading stock

2. Increased basic expenditures• Rising prices of food, fuel etc., due to shortage of supply• Increased health risks (and subsequent costs)

3. Damage to, or destruction of, income-generating assets• Crops, livestock, equipment damaged/destroyed/lost

4. Damage to, or destruction of, household assets

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3. The Economic Coping Mechanisms of Poor Households

Case study exercise:

How might the Singh household cope with the economic impact of a severe flood? Categorise your answers as low-stress, medium-stress and high-stress mechanisms.

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MFIs should offer products to help clients avoid high-stress coping mechanisms

Low-, Medium- and High-stress Coping Mechanisms (1)

Low-stress coping Modify

consumption Budget Call in small debts Draw on insurance

Medium-stress coping

Use savings Sell non-essential

household assets Borrow from

friends/family Migrate for work Take on new work

High-stress coping Sell productive

assets Default on loan(s) Drastically reduce

consumption

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What is the cost and impact of these coping strategies on households?

• Reduce consumption: Reduced physical health

• Migrate to work: Less coherent family unit

• Borrow: Increased debt burden

• Sell (productive) assets: Reduced income potential

• Drawing on savings and utilising remittances are better coping strategies.

Low-, Medium- and High-stress Coping Mechanisms (2)

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Common financial products for disaster preparedness of microfinance clients include:

• Savings

• Remittances

• Credit

• Insurance

4. Financial Products for Client-level Risk Mitigation

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Savings

Brainstorm: How can a MFI encourage its clientsto accumulate savings?

• Households that have accumulated cash savings will be better placed to cope financially following a natural disaster.

• Whether they collect deposits themselves or not, MFIs can encourage their clients to accumulate savings as a buffer against disaster events.

• MFIs might achieve this by educating clients about the advantages of accumulating savings, designing and applying incentives, and providing an effective savings service.

• Savings must be available for withdrawal at disaster times.

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Remittances• In many communities where MFIs work, some family members

work elsewhere (e.g. abroad), and remit funds to support their families.

• Remittances are an opportunity for MFIs to mobilise client savings.

• In many countries, only formal financial institutions or licensed wire-transfer firms are allowed to engage in remittances. MFIs should explore ways they can link with them.Brainstorm: Describe the nature of migrant

labour in your communities. Where do people go to work? How do they remit funds?

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Credit

Disaster-preparedness loansTo help clients prepare for disasters, in regions that have regular and predictable disasters such as floods.

• Offer an interest rate to encourage take-up of the loan.• Raising awareness among clients of disaster-preparedness

planning.

Disaster-designed loansWhen severe natural events can be anticipated, the repayment schedule is reduced during the flood season.

• Not a post-disaster reaction, but built into the original loan contract.

• The MFI is planning for the impact of the disaster, requiring it to think ahead with respect to cash flow and liquidity.

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Disaster-preparedness Loans

Brainstorm: For what purposes might MFI clientsin your area use ‘preventative’ loans?

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Microinsurance

Microinsurance is the protection of low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of risk involved.

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Features of Microinsurance

• Relevant to the risks of low-income households• As inclusive as possible• Affordable premiums payable in small amounts• Small benefit amounts• Clearly defined and simple rules and restrictions• Easily accessible claims documentation requirements• Fast payment of benefits• Client education• Micro-insurance attitude: help people to manage risks

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Microinsurance Products (1)

Brainstorm: What personal insurance products can you think of?

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Product Definition

Life Provides protection against the economic loss caused by the death of the person insured.

Outstanding Balance

Repays the outstanding balance on loans upon the death of the borrower. Occasionally, partial or complete disability coverage is also included.

Funeral Pays expenses associated with the funeral of the insured person. Sometimes the insurance is organised through funeral providers.

LoanRepays the balance on loans in default beyond a specified period, regardless of the cause of default. Not to be confused with outstanding balance life insurance.

AssetReplaces specific items - e.g. equipment or buildings - when they are lost or damaged. The insured items, and any exclusions, are defined in the contract.

Microinsurance Products (2)

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• All but the simplest insurance measures are beyond the capacity of most MFIs.

• It is difficult to achieve sufficient scale (there needs to be zero chance of all clients simultaneously affected by a disaster).

• Defining procedures for determining when a payment should be made, for what losses and for how much, are difficult.

• Cost is usually prohibitive because premiums are proportional to risk, and poor households generally face high risk.

• Not easily marketed.• It is often best if the MFI acts as a link between clients/groups

and reputable insurance companies capable of providing general insurance.

Microinsurance Challenges

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5. Product Development for Disaster Preparedness

The key steps should include the following:

1. Conduct disaster risk and vulnerability assessment of MFI clients

2. Train clients in disaster-preparedness, e.g. using this module as a basis. If possible, partner with specialised training institutions so that offering this service does not impact the sustainability of the MFI.

3. Use a systematic approach to product development for disaster preparedness. MicroSave’s methodology for conducting market research and product development (see next slide) is recommended.

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ProblemDefinition

ConceptDevelopme

nt

QualitativeResearch: FGD/PRA

QualitativeResearch

Plan

ProductReady forPilot-test

Refine theConcept intoa Prototype

Quantitative Research:Prototype Testing

Understanding clients’ needs

Refining/testing the product prototype

Market Research and Product DevelopmentProcess Overview

Source: Microsave

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6. Summary

• Listen and learn from clients’ risk mitigation and coping mechanisms in the face of disasters.

• Identify those products and services a MFI can offer to mitigate the effect of disasters.

• Develop appropriate products, conduct vulnerability assessment and crisis mapping.

• Raise awareness in clients of disaster risk mitigation strategies.