Module 4: Microfinance inLivelihood Restoration

Microfinance and Disaster Management

SLIDE 2 of 20 – MODULE 4: MICROFINANCE IN LIVELIHOOD RESTORATION

Objectives

To understand:

• post-disaster livelihood restoration activities (addressed in more detail in Module 5)

• how an MFI might modify its standard products in response to a disaster situation, such as through loan rescheduling and loan refinancing

• new products an MFI might consider in response to a disaster situation, such as special loan products and leasing arrangements

• how MFIs can engage positively with relief agencies that offer financial interventions such as cash grants and cash-for-work

SLIDE 3 of 20 – MODULE 4: MICROFINANCE IN LIVELIHOOD RESTORATION

Topics

1. Introduction to Livelihood Restoration Activities2. Microfinance Products for Post-Disaster Contexts3. Post-Disaster Product Modifications4. New Post-Disaster Microfinance Products5. Other Post-Disaster Financial Products6. Summary

SLIDE 4 of 20 – MODULE 4: MICROFINANCE IN LIVELIHOOD RESTORATION

1. Introduction to Livelihood Restoration Activities

A livelihood comprises:

• capabilities,• assets (including material and social resources), and• activities

required for a means of living.

A livelihood is sustainable when it can cope with and recover from stresses and shocks, and maintain or enhance its assets and capabilities whilst not undermining the natural resource base.

U. of Sussex, used by DFID and World bank

SLIDE 5 of 20 – MODULE 4: MICROFINANCE IN LIVELIHOOD RESTORATION

Livelihood Promotion Activities - Examples

• Credit• Savings• Leasing• Cash-for-

work• Cash grants

Financial Non-financial

• Skills training• Employment

services• Marketing services• Business

development services

• In-kind grants

Livelihood promotion activities aim to help beneficiaries become economically self-reliant.

Credit and savings are traditional microfinance products.

Grants and cash-for-work are common in disaster contexts.

MFIs need to manage carefully the co-existence of these products.

SLIDE 6 of 20 – MODULE 4: MICROFINANCE IN LIVELIHOOD RESTORATION

2. Microfinance Products for Post-Disaster Contexts

We can divide these into three categories:

1. Modifications to existing microfinance products.

2. New microfinance products.

3. Financial products offered by relief agencies that are generally not regarded as ‘microfinance’ products, but which require careful coordination between relief agencies and MFIs to avoid negative outcomes.

SLIDE 7 of 20 – MODULE 4: MICROFINANCE IN LIVELIHOOD RESTORATION

3. Post-Disaster Product ModificationsProduct Adjustment

Loans Rescheduling

Refinancing

Loan forgiveness

Flexibility in lending methodology

Savings Easy and immediate access to deposits

Linkage of savings products to cash-for-work programs

Brainstorm: What is the difference between ‘loan rescheduling’ and ‘loan refinancing’? What is the difference between ‘loan forgiveness’ and ‘loan write-off’? What do you think about ‘loan forgiveness’?

SLIDE 8 of 20 – MODULE 4: MICROFINANCE IN LIVELIHOOD RESTORATION

Loan Product Modifications

• Rescheduling: extending the term of the loan or relaxing the schedule of payments

• Refinancing: paying out a (problem) loan by issuing a new loan. This allows clients to begin making the loan payments again and, it is hoped, to continue until the loan is paid.

• Loan forgiveness: a de facto grant. Loan forgiveness benefits different people to different degrees, it may cause ‘repayment apathy‛ on future loans, and can lead to serious decapitalisation of the loan fund.

• Lending methodology: While group-based lending results in high repayment under normal conditions, such a program can also serve to magnify losses in times of widespread economic stress.

SLIDE 9 of 20 – MODULE 4: MICROFINANCE IN LIVELIHOOD RESTORATION

Savings Product Modifications

Emerging lessons:

• Not all MFI clients withdraw their savings in the immediate aftermath of a disaster.

• In areas frequently affected by disasters, personal savings are generally used for disaster preparation and during recovery stages, rather than for coping during the relief stage.

• Demand exists for deposit services even during relief and early recovery stages (especially when linked with cash-for-work programs).

• Not all MFIs can offer flexible ‘on-demand’ savings products.

SLIDE 10 of 20 – MODULE 4: MICROFINANCE IN LIVELIHOOD RESTORATION

4. New Post-Disaster Microfinance Products (1)

Brainstorm: What ‘new microfinance products’ can you think of that may be relevant in a post-disaster context?

SLIDE 11 of 20 – MODULE 4: MICROFINANCE IN LIVELIHOOD RESTORATION

New financial products in a post-disaster context could include:

• emergency loans (or asset-replacement loans)

• reconstruction loans

• microleasing

New Post-Disaster Microfinance Products (2)

Brainstorm: In terms of the client’s ability to service new debt, what are the considerations for a MFI with respect to offering asset-replacement loans or reconstruction loans?

SLIDE 12 of 20 – MODULE 4: MICROFINANCE IN LIVELIHOOD RESTORATION

In a simple leasing arrangement:

• The lessor (leasing company or an MFI) rents the asset to the client for a fee payable in instalments.

• The lessor retains the title of the asset, so that the asset cannot be sold/mortgaged/pawned.

• No tangible collateral except a cash-flow projection is required for approval of leasing contracts.

• The term of a lease may stretch up to 70% of the estimated life of the asset.

• At the end of the lease, the client has an option of buying the asset from the lessor at a previously agreed residual price.

Microleasing

SLIDE 13 of 20 – MODULE 4: MICROFINANCE IN LIVELIHOOD RESTORATION

Emerging Lessons on Microleasing

• Leasing facilitates client screening in times of distress.

• Down payments can help reduce lessor’s risks, since the lessor assumes all of the client’s business risks.

• Choice of long-term credit-worthy microfinance clients helps reduce risks if down payments are not possible.

• Leasing provides an option for the poor to diversify livelihoods.

• Leasing can help provide grants without creating market distortions and help create productive assets.

• Not all MFIs can and should provide microleasing, especially after disasters.

• Microleasing is appropriately provided through partnerships comprising MFIs, leasing companies, dealers and manufacturers.

SLIDE 14 of 20 – MODULE 4: MICROFINANCE IN LIVELIHOOD RESTORATION

Other financial products in a post-disaster context could include:

• Cash grants

• Cash-for-work

5. Other Post-Disaster Financial Products

SLIDE 15 of 20 – MODULE 4: MICROFINANCE IN LIVELIHOOD RESTORATION

Grants and Loans in Livelihood Restoration• Despite concerns from the microfinance community, grants are

often provided to microentrepreneurs following a natural disaster.

• The overarching recommendation is that there must be deliberate and close coordination between relief agencies and MFIs to ensure effective interaction between grant and loan products.

Case study: Read the case study in Handout 4.15. Make a list of what you think are the key reasons for the success of the grant/loan program, and explain your thinking to the group.

SLIDE 16 of 20 – MODULE 4: MICROFINANCE IN LIVELIHOOD RESTORATION

• Grants are not suitable for all disaster situations.• Do not mix loans and grants in a single contract. Wherever

possible, provide grants through a relief partner and loans through an MFI.

• Be transparent with the criteria for selection of grant beneficiaries.• Provide grants for only a very short time.• Grants should be one-off, and there should be a ‘graduation’

process to market-based mechanisms such as micro-credit.• Require beneficiary participation for asset replacements.

See FDC Brief 3, ‘Grants and loans for livelihood restoration following a natural disaster’

Guidelines for Grants and Loans

SLIDE 17 of 20 – MODULE 4: MICROFINANCE IN LIVELIHOOD RESTORATION

Cash-for-work

These programs often focus on clean-up, repair or reconstruction activities after a disaster. The program hires daily labourers for a specific period of time and for a specified daily wage. Often the project is a community-identified activity.

SLIDE 18 of 20 – MODULE 4: MICROFINANCE IN LIVELIHOOD RESTORATION

Cash-for-work: Guidelines for MFIs

MFIs should not be directly involved with CFW because:

• it will involve activities that are well outside of their specialisation;

• the transfers made through CFW activities may be considered as grants, sending a mixed signal to the clients about the seriousness of the MFI as a reputable financial service provider.

However, there are ways in which MFIs can be indirectly involved with CFW activities:

• Build consensus with CFW providers to avoid market distortions.

• Link with CFW providers and their beneficiaries to supply required financial services, including payment services and deposit services

SLIDE 19 of 20 – MODULE 4: MICROFINANCE IN LIVELIHOOD RESTORATION

MFI Partnership in Cash-for-work

There are opportunities for MFIs to partner with providers of CFW, by providing CFW client payment services as well as deposit services.

MFIs need to negotiate the following with relief agencies to provide payment services efficiently:

• commission rate for payment services;

• security arrangement for cash delivery;

• time schedule of cash payments;

• mechanisms for cash withdrawal;

• service charges for withdrawals.

SLIDE 20 of 20 – MODULE 4: MICROFINANCE IN LIVELIHOOD RESTORATION

6. Summary

• In a post-disaster context, restoring livelihoods is a critical activity, and MFIs have an important role to play.

• Following a detailed assessment of their clients’ situation, MFIs can offer modifications to existing microfinance products.

• MFIs can also offer new products in response to a disaster situation.

• Close coordination is needed between relief agencies and MFIs to ensure that grants, cash-for-work and other such interventions interact positively with the longer-term products offered by MFIs.