Floods and microfinance: Lessons

OPINION

Ammar H. Khan

Floods and microfinance: Lessons from the past • • Businesses and enterprises in urban areas will be adversely affected in the coming months due to a lack of demand and the disruption in the supply chain from rural areas. Most MFPs have already collected the installment for the month of August (up to 90%), however, collection for the next few months will Pakistan is amongst the top five countries affected by climate change making it vulnerable to natural disasters. In the last two decades, the country has faced numerous catastrophes including floods, droughts, torrential rains and heatwaves. These natural disasters have badly remain a challenge in the flood-affected districts. Due to the challenges highlighted above, MFPs working in the above-mentioned districts: • May face issues with maintaining liquidity, portfolio quality and profitability which will affect their ability to meet minimum capital requireimpacted Pakistan’s economic wellbeing. However, the prevalent ments, covenants with financiers and the ability to mobilise more funds. situation due to the floods in 2022 has been unprecedented with • Will experience problems in making timely repayments to their lenders. huge losses in lives and businesses. International and National Best Practices: The communities at the bottom of the economic pyramid are Experiences and studies on disasters from India, Bangladesh and Pamore vulnerable and face the brunt of such disasters. The micro- kistan have shown that efforts and resources by the government and NGOs finance sector provides financial services to such communities are mostly focused on rescue and relief efforts, however, rehabilitation and and has extended loans of Rs 400 billion to almost eight million revival of livelihoods of the affected communities also require equal attenclients. The table below presents a province wise distribution of tion and resources. Important lessons learned from past disasters applicable flood affected districts (66 total affected districts -- NDMA) along to the microfinance sector are as follows: with the total portfolio deployed and clients served by the MFPs. • Immediately carry out a rapid assessment of potential portfolio losses Pakistan Microfinance Investment Company (PMIC), once the flood affected areas are accessible. Pakistan Microfinance Network (PMN) and MFPs are proactively • Establish close contact with clients as soon as possible, and maintain evaluating the situation and taking stock of the loss of livelihoods communication with them more frequently. and assets of the clients affected by the floods. MFPs on the • Offer non-financial emergency services to improve customers’ well-beground are currently involved with relief work for the clients they ing and connect them with local relief and rehabilitation authorities. serve and shall have a better understanding of the true impact of Link clients and communities with the PDMA, health and other public the catastrophe once the flood waters recede and clients can re- departments to ensure all public services are made available to the turn to their houses. The initial assessment suggests the following: affected communities. Provision of vegetable seeds and fodder to farmers • Continuity of the business operations will remain a challenge for the period between two major crop cycles to revive their farms. for the institutions as access to branches and offices remain • Allow borrowers to withdraw savings/fixed deposits without any penlimited because of standing water. alties. • Non-connectivity with clients who are displaced from their • Ensure business continuity and disbursement to clients to rebuild their homes and villages will pose challenges to MFPs in maintain- businesses and livelihoods. Blend grants, fresh loans and deferment of ing contact. existing loans to provide capital to clients to re-establish their business• Houses have been severely damaged, and people are being es. forced to live in temporary shelters. • Reschedule loans on a case-by-case basis rather than offering a blanket • The cotton and chili crops have been badly damaged by the moratorium on loans by regulators. Deferment of loans (on a case-tofloods. In contrast the crops of banana and sugarcane have case basis) for clients that have lost their crops, shops and other means been damaged partially. of livelihoods based on the assessment by the MFPs. • Farmers are forced to sell their livestock at cheaper prices • Organisations switched from group liability to individual loans. because of lack of fodder and drinking water. • Financiers to MFPs provide additional liquidity to meet additional demand from clients for business revival and to manage their operations. • Creation of a disaster management fund to provide grant funding to those clients who are severely affected and are unable to restart their busiThe writer is an nesses without financial support. Provision of grants and loans for restoration of their houses. For this purpose, bilateral independent and multilateral financial institutions and other development agencies should be approached. Furthermore, NSER data macroeconomist could also be used to target clients for various financial interventions. and • Regulators to review the situation closely and provide regulatory relief to those MFPs which are genuinely affected by floods. energy analyst. Insights from the recent COVID-19 have shown that though an outright moratorium in the short term seems like the best option to provide relief to the clients in the medium to long term such a step adversely affects the credit discipline and welfare of the clients. At the same time, it has huge financial implications for the government and disrupts the sustainability of MFPs.