Module 2: Client Preparedness Microfinance and Disaster Management

SLIDE 2 OF 22 – MODULE 2: CLIENT PREPAREDNESS Objectives To understand: the impact of natural disasters on poor households risk management strategies used by poor households financial products that can help poor households reduce vulnerability to disasters

SLIDE 3 OF 22 – MODULE 2: CLIENT PREPAREDNESS Topics 1.External shocks faced by poor households 2.The economic impact of external shocks on poor households 3.The economic coping mechanisms of poor households 4.Financial products for client-level risk mitigation 5.Product Development for Disaster Preparedness 6.Summary

SLIDE 4 OF 22 – MODULE 2: CLIENT PREPAREDNESS 1. External Shocks Faced by Poor Households Individual Sickness/injury of family member, especially main income earner Death of family member, especially main income earner Theft Fire Other Community Natural disasters – drought, famine, earthquakes, floods, cyclones, volcanoes, tsunami, etc.

SLIDE 5 OF 22 – MODULE 2: CLIENT PREPAREDNESS 2. The Economic Impact of External Shocks on Poor Households Case study exercise: 1.Read the scenario on the handout 2.How might a major flood impact on the economic position of the Singh household?

SLIDE 6 OF 22 – MODULE 2: CLIENT PREPAREDNESS Economic Impacts (2) 1.Temporary inability to earn income Impact of the disaster on customers/employer Destruction of trading stock 2.Increased basic expenditures Rising prices of food, fuel etc., due to shortage of supply Increased health risks (and subsequent costs) 3.Damage to, or destruction of, income-generating assets Crops, livestock, equipment damaged/destroyed/lost 4.Damage to, or destruction of, household assets

SLIDE 7 OF 22 – MODULE 2: CLIENT PREPAREDNESS 3. The Economic Coping Mechanisms of Poor Households Case study exercise: How might the Singh household cope with the economic impact of a severe flood? Categorise your answers as low-stress, medium-stress and high-stress mechanisms.

SLIDE 8 OF 22 – MODULE 2: CLIENT PREPAREDNESS MFIs should offer products to help clients avoid high-stress coping mechanisms Low-, Medium- and High-stress Coping Mechanisms (1) Low-stress coping  Modify consumption  Budget  Call in small debts  Draw on insurance Medium-stress coping  Use savings  Sell non-essential household assets  Borrow from friends/family  Migrate for work  Take on new work High-stress coping  Sell productive assets  Default on loan(s)  Drastically reduce consumption

SLIDE 9 OF 22 – MODULE 2: CLIENT PREPAREDNESS What is the cost and impact of these coping strategies on households? Reduce consumption: Reduced physical health Migrate to work: Less coherent family unit Borrow: Increased debt burden Sell (productive) assets: Reduced income potential Drawing on savings and utilising remittances are better coping strategies. Low-, Medium- and High-stress Coping Mechanisms (2)

SLIDE 10 OF 22 – MODULE 2: CLIENT PREPAREDNESS Common financial products for disaster preparedness of microfinance clients include: Savings Remittances Credit Insurance 4. Financial Products for Client-level Risk Mitigation

SLIDE 11 OF 22 – MODULE 2: CLIENT PREPAREDNESS Savings Brainstorm: How can a MFI encourage its clients to accumulate savings? Households that have accumulated cash savings will be better placed to cope financially following a natural disaster. Whether they collect deposits themselves or not, MFIs can encourage their clients to accumulate savings as a buffer against disaster events. MFIs might achieve this by educating clients about the advantages of accumulating savings, designing and applying incentives, and providing an effective savings service. Savings must be available for withdrawal at disaster times.

SLIDE 12 OF 22 – MODULE 2: CLIENT PREPAREDNESS Remittances In many communities where MFIs work, some family members work elsewhere (e.g. abroad), and remit funds to support their families. Remittances are an opportunity for MFIs to mobilise client savings. In many countries, only formal financial institutions or licensed wire- transfer firms are allowed to engage in remittances. MFIs should explore ways they can link with them. Brainstorm: Describe the nature of migrant labour in your communities. Where do people go to work? How do they remit funds?

SLIDE 13 OF 22 – MODULE 2: CLIENT PREPAREDNESS Credit Disaster-preparedness loans To help clients prepare for disasters, in regions that have regular and predictable disasters such as floods. Offer an interest rate to encourage take-up of the loan. Raising awareness among clients of disaster-preparedness planning. Disaster-designed loans When severe natural events can be anticipated, the repayment schedule is reduced during the flood season. Not a post-disaster reaction, but built into the original loan contract. The MFI is planning for the impact of the disaster, requiring it to think ahead with respect to cash flow and liquidity.

SLIDE 14 OF 22 – MODULE 2: CLIENT PREPAREDNESS Disaster-preparedness Loans Brainstorm: For what purposes might MFI clients in your area use ‘preventative’ loans?

SLIDE 15 OF 22 – MODULE 2: CLIENT PREPAREDNESS Microinsurance Microinsurance is the protection of low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of risk involved.

SLIDE 16 OF 22 – MODULE 2: CLIENT PREPAREDNESS Features of Microinsurance Relevant to the risks of low-income households As inclusive as possible Affordable premiums payable in small amounts Small benefit amounts Clearly defined and simple rules and restrictions Easily accessible claims documentation requirements Fast payment of benefits Client education Micro-insurance attitude: help people to manage risks

SLIDE 17 OF 22 – MODULE 2: CLIENT PREPAREDNESS Microinsurance Products (1) Brainstorm: What personal insurance products can you think of?

SLIDE 18 OF 22 – MODULE 2: CLIENT PREPAREDNESS ProductDefinition Life Provides protection against the economic loss caused by the death of the person insured. Outstanding Balance Repays the outstanding balance on loans upon the death of the borrower. Occasionally, partial or complete disability coverage is also included. Funeral Pays expenses associated with the funeral of the insured person. Sometimes the insurance is organised through funeral providers. Loan Repays the balance on loans in default beyond a specified period, regardless of the cause of default. Not to be confused with outstanding balance life insurance. Asset Replaces specific items - e.g. equipment or buildings - when they are lost or damaged. The insured items, and any exclusions, are defined in the contract. Microinsurance Products (2)

SLIDE 19 OF 22 – MODULE 2: CLIENT PREPAREDNESS All but the simplest insurance measures are beyond the capacity of most MFIs. It is difficult to achieve sufficient scale (there needs to be zero chance of all clients simultaneously affected by a disaster). Defining procedures for determining when a payment should be made, for what losses and for how much, are difficult. Cost is usually prohibitive because premiums are proportional to risk, and poor households generally face high risk. Not easily marketed. It is often best if the MFI acts as a link between clients/groups and reputable insurance companies capable of providing general insurance. Microinsurance Challenges

SLIDE 20 OF 22 – MODULE 2: CLIENT PREPAREDNESS 5. Product Development for Disaster Preparedness The key steps should include the following: 1.Conduct disaster risk and vulnerability assessment of MFI clients 2.Train clients in disaster-preparedness, e.g. using this module as a basis. If possible, partner with specialised training institutions so that offering this service does not impact the sustainability of the MFI. 3.Use a systematic approach to product development for disaster preparedness. MicroSave’s methodology for conducting market research and product development (see next slide) is recommended.

SLIDE 21 OF 22 – MODULE 2: CLIENT PREPAREDNESS Problem Definition Concept Development Qualitative Research: FGD/PRA Qualitative Research Plan Product Ready for Pilot-test Refine the Concept into a Prototype Quantitative Research: Prototype Testing Understanding clients’ needs Refining/testing the product prototype Market Research and Product Development Process Overview Source: Microsave

SLIDE 22 OF 22 – MODULE 2: CLIENT PREPAREDNESS 6. Summary Listen and learn from clients’ risk mitigation and coping mechanisms in the face of disasters. Identify those products and services a MFI can offer to mitigate the effect of disasters. Develop appropriate products, conduct vulnerability assessment and crisis mapping. Raise awareness in clients of disaster risk mitigation strategies.