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Floods and financial crises: What is a network’s role in risk management?

by on Sep 9, 2011  |  posted in Microfinance, Post-Disaster  |  0 Comments
Image by IRIN Photos
From natural disasters to political upheaval, a number of threats can put microfinance institutions (MFIs) and their clients in jeopardy. As a result, microfinance networks increasingly need the ability to take fast, effective action in response to crises that threaten their member MFIs.

Case in point: Pakistan in July 2010. When severe flooding left a fifth of the country’s landmass underwater, Pakistan Microfinance Network (PMN) mobilized to pave the way toward economic recovery.

Within two weeks of the start of the flooding, PMN had surveyed its members and compiled a registry of all affected branches and clients. Determining the scope of the disaster helped the network develop a coordinated response plan, which they sent to donors and investors.

In mid-September, PMN chief executive Syed Mohsin Ahmed met with the heads of major banks to help craft a national flood response plan from the financial community. The plan was presented to the State Bank of Pakistan, which in November announced a Rp. 10 billion concessional finance scheme for microfinance organizations and other financial institutions to help rebuild businesses that had been damaged or destroyed.

Having collected branch-level data on all their members prior to the flooding proved to be a huge asset to PMN’s response. This helped them improve influence with donors and government leaders, Ahmed said:

“When the crisis came we were able to use the system we had built and the relationships we had to deliver a quick response. The result was that, for the first time, microfinance institutions were included as part of the government’s response to a crisis. The State Bank also listened to our advice to not declare a blanket write off of all loans in the affected areas, but to let us deal with it on a case by case basis. We demonstrated that our members knew which of their clients were most affected, and which would need help the most.”

Networks can lead the way in managing internal risks as well as external disasters. The recent upheaval in India’s microfinance industry has shown that a number of threats to MFIs come from within, including abusive collection practices, client over-indebtedness, and repayment crises.

In 2003, PMN began their Microfinance-Credit Information Bureau (MF-CIB) initiative to guard against situations like the one that developed in India in 2010, when risks like multiple lending and over-indebtedness grew into a full-blown disaster.

PMN’s credit bureau minimizes such risks by providing clients’ credit profile, including their creditworthiness and repayment capacity. This is an urgent need in Pakistan where nearly half of microfinance clients are served by non-regulated institutions with no credit history of their customers.

Whether natural or economic in origin, crises never have easy solutions. However, through a proactive approach and willingness to marshal their unique position and resources in a crisis, networks can make a huge difference in the overall well-being of both member institutions and their clients.

Sources: A presentation by Moazzam Iqbal of PMN at the MENA Network Summit in Amman, June 2011; and the Citi Network Strengthening Program Final Evaluation by Larry Reed, November 23, 2010.

PMN is a network of 12 microfinance providers, representing approximately 90% of microfinance outreach in Pakistan. 

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