On November 8, 2013 Typhoon Haiyan drew a path of destruction across the Central Philippines that left millions of Filipinos homeless, injured, and without a viable livelihood. Despite prudent preparations of households, families and communities, this unprecedented event severely impacted all aspects of individual, family and community resilience.
Across the world, disasters triggered by natural hazards pose an increasing risk, especially to the poorest entrepreneurs, with the most extreme of these events often creating debilitating impact that sets back economic progress for years.
Microfinance is now a critical component of the financial lives of the poor, but typically, after a disaster strikes, microfinance institutions (MFIs) reduce their lending – in response to reduced capacity from impaired balance sheets and perception of credit risk. This makes it even more difficult for poor entrepreneurs and the economies they operate in to recover.
With the help of a recovery loan, Myrna from Leyte was able to build back her business of making brooms. Photograph by Orlando Ducay.
But following Typhoon Haiyan, VisionFund’s Philippine MFI – Community Economic Ventures (CEVI) chose to give the opposite a try. Working alongside the World Vision Typhoon Haiyan Response Team, they implemented a ‘recovery lending’ strategy. Clients were allowed to access fresh loan capital to jump start their businesses, requiring only that they articulate a plan for a viable use of the funds.
Five Important Lessons Learned:
An in-depth review of the economic recovery of over 4,000 client households badly affected by Typhoon Haiyan over the 18 months following the calamity helped derive recommendations for future financial disaster risk management solutions. Five key findings emerged:
1. Recovery lending enabled rapid client recovery: 96% of clients reported that the loans had supported their recovery, with half of those reporting recovery as “full” or “better than before the typhoon.”
2. Recovery lending was affordable and did not lead to over indebtedness: both on-time repayment rates and write off ratios were better than CEVI’s averages for regular loans; while impact evaluation evidence indicates that very few clients, only 3-6%, faced substantial difficulty in paying loans.
3. Recovery lending compliments other relief and recovery mechanisms: clients used the loans to supplement remittances and aid they received, enhancing the speed and depth of their recovery.
4. Recovery lending covers its costs and does not have an abnormal credit risk: CEVI’s recovery lending project charged interest rates that fully covered the costs of making the loans, while write offs were lower than average, creating an economically sustainable solution.
5. Preparation “before the event” is needed to optimise speed and effectiveness of recovery lending: Traditional MFI funding sources were scarce, while relief funding was difficult for CEVI to access. Our research indicates that this is typical after disasters and limits MFIs ability to deploy recovery lending.
The immense success of the project led VisionFund to continue developing this approach, seeing the potential it has to help recover livelihoods in similar future disaster situations.
“Our house was destroyed during the storm, our clothes and things inside the house washed away into the sea. We had nothing to eat because our boats were destroyed. The loans helped me buy fish and sell to earn an income. That allowed me to buy food to eat and buy house supplies from the market,” says Jessica from Malangabang Island. Photograph by Orlando Ducay
To ensure funding is available to support such responses, VisionFund is building an innovative insurance-backed liquidity fund supported by grants from the UK government (DFID), the Rockefeller Foundation, FMO (the Dutch Development Bank) and the Asian Development Bank.
This Financial Disaster Risk Management (FDRM) scheme combines climate science, financial modelling, weather index derivatives/insurance and liquidity funds to ensure funding for a recovery lending response tuned to meet our MFI and client needs with an annual cost of under 2% of the MFI portfolio.
VisionFund’s biggest takeaway from this initiative is that people affected by disasters are extremely resilient and practical. Providing access to loans for rebuilding livelihoods supports not just their own capacity but the economic recovery of their community. Working together, World Vision and VisionFund programmes provide a variety of recovery options to communities for deep and long-lasting impact.
Written by Michael Kellogg, Regional Business Development Manager Asia, VisionFund International