Financial Inclusion – a key tool for weathering economic shocks

28/05/2018

US-based MicroVest has been a lender to microfinance institutions and banks serving small businesses in the developing world for over 15 years.  Here, investment officer Giulio Areinamo describes how MicroVest and the MFIs it lends to can work together to help vulnerable communities when disaster strikes


Giulio Areinamo

One of the key points of the monumental Paris Agreement on climate is “the importance of averting, minimizing and addressing loss and damage associated with the adverse effects of climate change.” One such adverse effect is the multiple natural disasters that have plagued the world in the past few years, and one way the issue is being addressed is through financial inclusion.

The impact of these natural disasters is far-reaching, and disproportionately affects poorer countries. After humanitarian needs are met, a person’s ability to effectively rebuild their life is highly dependent on their financial situation. Insurance plays an important role in helping people manage these risks, but there is still significant work that needs to be done to expand access to low-income communities. This is especially true in emerging markets where access to affordable insurance is often a luxury.

People who have an array of financial products can more quickly rebuild when a disaster hits

Financial resiliency at a community level is needed for low-income communities to better withstand the economic shocks of natural disasters. To do this, financial inclusion—that is, expanding access to financial services—is critical. People who have an array of financial products, including savings, insurance, and access to a credit line, can more quickly rebuild when a disaster hits.

For instance, immediately after a natural disaster, there is a shortage of cash that follows. People need access to cash to buy plywood to rebuild their homes, hire contractors to move fallen debris, and to find short term shelter. Middle and higher income families rely on a combination of credit cards, savings, and insurance to cover these costs. Low-income communities in developing countries, however, often do not have access to a mix of financial products that can help them manage that aftermath—they are often limited to a few costly options, or none at all.

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Microfinance institutions (MFIs) are well-suited to accommodate the financial needs of low-income communities after a disaster. They already have the financial infrastructure set up and relationships in the community to quickly evaluate the creditworthiness of potential borrowers. MFIs are also leaders in designing products and services that cater to the unique needs of the local communities where they work. Some institutions have already started innovating new climate related services—the climate-insurance product launched by VisionFund is a great example of this.

 Hope rebuilt through co-operation

International lenders who work with MFIs that service the poor also have an important role to play in building financially resilient communities. Although the following example relates to a non-climate event, the same considerations would apply following a climate disaster such as a hurricane. In 2016, Ecuador was hit by a 7.8-magnitude earthquake. The epicenter was along the northern coastline in one of the poorest regions of the country. MicroVest had four portfolio companies in Ecuador, including two with headquarters on the coast, which were most heavily impacted. Microfinance has always been an important resource for people who are underbanked, but it is particularly crucial in times, like after a natural disaster, when access to cash is limited.

The MFI’s clients were not a high credit risk, they simply needed to delay the timing of their payments to deal with more immediate needs

One of MicroVest’s clients, Fundación Espoir, had its headquarters at the epicentre of the earthquake, and it was difficult for the organization to get its operations back up and running immediately. In addition to taking care of their own employees and building damages, Fundación Espoir saw an immediate decline in the repayments of their clients’ loans. Most of Fundación Espoir’s borrowers are microentrepreneurs whose sales dipped post-disaster. Fundación Espoir had worked with these clients for years, however, and the loan officers on the ground understood that these cashflow problems were a short-term issue. Fundación Espoir’s clients were not a high credit risk, they simply needed to delay the timing of their payments to deal with more immediate needs.

This presented a conundrum for Fundación Espoir. Fundación Espoir was in the best position to expand access to credit to people so that they could rebuild after the earthquake, but the immediate aftermath restricted their balance sheet from doing so. To help ease this tension, Fundación Espoir’s international lenders, including MicroVest, worked to restructure Fundación Espoir’s debt after the earthquake. This allowed the organization to rebuild its operations quickly and service the high demand of people who needed access to capital. In total, Fundación Espoir restructured $4 million worth of their clients’ debt, and within a few months, their repayment rates were back up to pre-earthquake levels. Low turnover levels at the institution along with strong relationships between loan officers and borrowers also contributed to a relatively stable portfolio.

MicroVest was able to work through this situation with Fundación Espoir because the institution has been a trustworthy client for MicroVest. Likewise, it was much easier for Fundación Espoir to restructure the debt of their own clients who had already proven themselves reliable borrowers. After initial humanitarian needs are met and long-term rebuilding begins, access to credit is an important component of jumpstarting the economy. Building a credit history over time can make people better prepared to utilize MFIs when these economic shocks happen.

Goal 17 of the United Nations Sustainable Development Goals identifies partnerships with financial services as a priority. Moreover, financial inclusion is listed explicitly as an enabler for 7 of the 17 goals. In the case of natural disasters, after initial humanitarian needs are met, the financial sector has an important role to play in the rebuilding efforts. The sector must continue innovating in order to effectively meet the financing needs of communities impacted by natural disasters.


Disclaimer: This document is being distributed for information purposes only. This does not constitute an offer or a solicitation to purchase or sell any security, and nothing herein should be construed as such.

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