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Promoting Inclusive Markets and Financial Systems

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Financial Services Can Help Avert Crisis in Today’s World: Here’s What We Have to Get Right.

Building access to financial services has long been a pillar of poverty reduction efforts.  But what do financial services mean in a context when these very efforts are repeatedly derailed or set-back by global shocks and stresses? Here’s what we have to get right for financial services to make a difference for resilience.

Scientists warn the 2015 El Niño could be the strongest and longest recorded, continuing well into 2016.  If predictions hold true, droughts, floods, heat waves, and cyclones across Asia and Africa could set millions emerging out of poverty back below the poverty threshold.  Millions already in extreme poverty would be in crisis.  The effects of such disasters are often most pronounced in contexts marked by inequality, weak governance and deep-rooted grievances. Scholars recognize that severe droughts in Syria led to crop loss, food price shocks and a large, disenchanted urban migrant population, aggravating political grievances and hastening what now marks the worst, protracted humanitarian crisis of modern times.  The real danger from a bad El Niño lies in its connectedness to other modern-day risks, and their combined potential long-term effects.

The international development community has recently and rightfully placed disaster risk reduction and resilience at the forefront of the global agenda.  At Mercy Corps, we have made it a global agency priority to test what really matters for resilience in different contexts, and understand what exactly traditional humanitarian assistance must do differently to meet this imperative.

From conflict-ridden Somalia to storm-battered Philippines, Mercy Corps’ research and experience has shown that financial services are an essential building block of resilience.  As a coping strategy, savings, credit, and cash transfers provide shock-affected households with secure sources of cash for food purchases, and restoring or branching out into new income sources which in turn keep markets going.  These same services help keep children in school and preserve productive assets. Insurance mitigates the effects of disease, death, or asset loss, helping families get back on track.

Financial services can also help households adapt for the future.  Savings and credit can foster diversification of income streams, investments in improved shelter and more effective livelihood strategies. For example, access to credit that allows the purchase of a clean cook stove, better seed storage or fertilizers, means vulnerable households can reduce unsustainable livelihood practices that escalate land degradation and lead to health hazards. Our work in Ethiopia showed that improved access to credit for input suppliers and buyers can incentivize their expansion to more remote, riskier markets, increasing chances households can get goods to markets even when faced with shocks.

But financial services do not automatically avert crisis.  Research from the Philippines showed that formal savings and credit pre-typhoon did not help Yolanda-affected communities cope in the storm’s aftershock. Resilience assessments from Myanmar showed inflexible credit and resulting debt burden made households more vulnerable to shocks.

In order for financial services to work for resilience, we must be mindful of these risks, and be intentional in how we work with financial services providers and communities to build resilience.  Getting this right will remain an iterative process, but we have a solid foundation for what to keep in mind:

  • Analyze and understand shocks and stresses, who is affected, and how:  Building resilience requires a thorough assessment of hazards and how they affect different segments of society, including gender, ethnic, or religious groups.  This analysis should inform which risks financial services should address, for whom, and how.
  • Support diversified products for diverse resilience needs:  To manage risk, financial services must allow households to respond quickly to immediate threats, while managing for future ones.  One product won’t do the trick.  Developing access to a suite of the right kind of products with diverse end goals is critical for resilience.
  • Remember the financial system is also vulnerable:  Even the most appropriate suite of products won’t be helpful if households can’t access them when they need them most.  Financial service providers are also often affected by disasters or conflict. Physical access might be severed and liquidity may be limited.  Working on financial services for resilience should be coupled with risk-mitigating measures for financial service providers themselves.
  • Knowledge, attitudes and behaviors matter:   Resilience is ultimately determined by how people use the resources they have.  Knowledge, skill sets, and practices around financial services therefore matter.  Our Philippines research showed that savings uptake among disaster-affected households was highest among those with strong financial literacy skills.  Developing capacities to use products and services effectively towards risk mitigation is critical.
  • Don’t forget the informal:  Many of the most shock-prone communities live in remote areas, and in deep poverty.  It is simply not immediately feasible or profitable for financial service providers to meet the unique needs of remote populations.  Digital access helps, but is not a cure-all.  Financial service programs should strategically understand where informal measures support resilience, particularly where the financial system itself is fragile.
  • Be prepared to work on the enabling environment:  Our research in Nepal found that social, gender, and caste norms determine who is able to access financial services, even where products or infrastructure may exist.  Government regulations in Indonesia prevent banks from insuring the liquidity of microfinance institutions in times of disaster.  Informal and formal rules and regulations are often an obstacle to making financial services work for resilience.  Initiatives must be prepared to affect the enabling environment, and bring transformational change to enhance access.

There is no simple answer to reducing risk and averting crisis in today’s world, but it is vital we focus on what has been proven to work.  Financial services have a good track record.  In order to meet the resilience imperative, we must focus on ensuring financial services can support the most vulnerable communities to remain on a development pathway.

Interested in learning about FSPs and their ability to respond to and prepare for disasters? Join us at the SEEP Network’s 2015 Global Network Summit taking place on Monday, September 28! Mercy Corp will contribute to discussions on the role of preparedness and resiliency planning in helping to mitigate the negative impacts of crisis for both financial service providers and their clients and the need for greater coordination.

Olga Petryniak is a resilience specialist, primarily leading multi-sector, multi-scale development initiatives that integrate climate change adaptation (CCA), disaster risk management, market systems development, natural resource management, and governance in a holistic, integrated approach to resilience. As the Regional Resilience Advisor for Mercy Corps’ South and Southeast Asia programs, she works in integrated resilience strategy, program design, implementation, and measurement. She has worked with civil society, government, community groups and the private sector in 10 countries.

The SEEP Network’s Global Network Summit brings together microfinance association leaders, international development organizations, financial service providers, and other industry stakeholders to provide global perspectives on the advancement of financial inclusion and to collectively strengthening their institutional capacity through discourse and peer exchange. This year’s event will focus on the need for risk mitigation strategies to address client vulnerabilities as well as for the development of more inclusive and resilient financial systems. The new Disaster Risk Reduction (DRR) program will be launched at this year’s GNS. 

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