Income-generation in post-conflict situations: is micro-finance a useful strategy?
by Ton de Klerk May 2003

Many humanitarian crises are protracted. Political solutions are not found, the economic situation hinders successful reconstruction and development, and development agencies are slow to take over from their relief counterparts. Humanitarian agencies are working increasingly in the ‘grey zone’ between relief and development. In this environment, agencies are looking for more durable solutions than those offered by traditional relief work. Income-generation activities may offer one such answer by making beneficiaries less dependent on relief assistance, and helping in their economic and social reintegration.

This article is based on an evaluation of the Danish Refugee Council (DRC)’s income-generation programmes in Azerbaijan, Georgia, Serbia, Montenegro and Somaliland, conducted in 2001. These programmes used a range of strategies: grants; interest-free or low-interest loans; and interest-bearing loans aimed at establishing sustainable micro-finance programmes.


Grants are the most appropriate tool for income-generation projects in the early post-conflict phase, when conditions do not allow for the issuing of loans. Clients are not yet ready to plan for the future and for long-term economic activities, and their financial situation may not allow loan repayments.

Although there is a widely-held view that the same agency should not implement both grant and loan programmes, in later phases most DRC programmes had complementary grants alongside regular loans, intended for more vulnerable beneficiaries. The continued availability of grants was appreciated by programme staff, and communities appeared to accept the introduction of stricter financing regimes if grant programmes remained in place. However, there needs to be a clear distinction between grant recipients, selected on the basis of vulnerability, and loan applicants, and the credit functions of each programme need to be kept separate.

The economic impact of grants appeared to be related to their size, and to the criteria used to select beneficiaries. If grants are too small to ensure that the economic activity can be sustained, the economic impact will be limited. Similarly, a tailored approach is required: beneficiaries should be selected on the basis of ‘business assessments’, and the products delivered should meet their individual business needs. So as not to exclude most vulnerable groups, redistribution mechanisms can be applied. Direct beneficiaries are selected on the basis of their business prospects, but requested to distribute part of their production, or to provide free services, to these vulnerable groups.


It is difficult to define the point at which loans can be introduced. Socio-economic surveys or impact monitoring of grant programmes can provide information on the repayment capacity of beneficiaries, but these tools are rarely used. Introducing an interest rate can prepare beneficiaries for the interest payments that a micro-finance institution will require in the future. Although any undue competition with micro-finance institutions should be avoided, favourable loan terms might be possible for those high-risk groups typically excluded from micro-finance programmes. This should not conflict as long as these target groups are clearly distinguished.

Loan applications should be assessed on the basis of the economic potential and sustainability of the proposed activity, and the applicant’s repayment capacity and credibility. If vulnerability rather than ‘business’ criteria predominate, repayment problems are likely. An initial selection can be done by vulnerability, but this must be followed by a proper business assessment. In any loan programme, the repayment discipline of the beneficiaries should be of primary concern: if repayments are not enforced, massive delinquency will follow. This will have a negative effect on any future micro-finance programme.

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Not all loan programmes are micro-finance programmes; some may simply aim to help beneficiaries start and develop economic activities. The aim of micro-finance programmes is rather to assure sustained access to financial services. This can be done through formal institutions, and through informal mechanisms such as community-based saving and credit groups.

Formal micro-finance institutions require strict financial management. To be sustainable, the income from interest payments and service fees needs to cover all operational costs, non-repayment losses, capital costs and depreciation of capital due to inflation or devaluation. Proper management information systems are needed to monitor financial performance, and senior staff need to be trained in how to run a ‘banking’ programme. Long-term commitment is also required: three to five years to establish a viable micro-finance organisation, and a minimum loan capital of at least $200,000. Equally important are the determination and personal qualities of staff and the capacity to attract new donors.

While some DRC projects in Eastern Europe and the former Soviet Union developed into micro-finance programmes, in Asia and Africa the focus has been on community-based micro-finance. Since these informal systems are managed by community members, the costs can be kept low. The use of organisational principles of traditional systems, such as rotating savings and credit groups, can give these systems great strength since the participants are familiar with them. A major weakness is that traditional systems are often based on relatively short rotating cycles. In most of the DRC’s programmes, the plan was to hand over the revolving funds to the communities for communal investments. The programme developed into two components: grants for the most vulnerable beneficiaries and, following the Kosovo crisis, for displaced people; and micro-credit for economically-capable groups. Separate criteria and implementing procedures were applied to each component. This parallel approach proved successful, and beneficiaries and local counterparts were extremely supportive. In 2002, the micro-credit component was handed over to a local NGO, though the success of this transition depended upon legal conditions, which were not at the time favourable, and on securing long-term funding.

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How appropriate is micro-finance for a humanitarian agency?

The main reason for developing a micro-finance programme is the absence of financial institutions that meet the needs of poorer sections of a community. They thus fill an institutional gap. For a micro-finance programme, sustainability is an overriding aim, requiring cost-recovering interest rates and the protection of a high-quality loan portfolio. However, this can lead to risk avoidance, and may exclude the very people and sectors that humanitarian agencies aim to assist.

There is no clear answer to the question of whether micro-finance is the right choice for a humanitarian agency. Some argue that the repayment capacity of beneficiary groups is greatly underestimated. Furthermore, without a micro-finance programme the target group has to rely on informal sources such as money-lenders, who charge even higher interest rates. The opinion of staff in some of the evaluated programmes was that the interest charged was not prohibitive; others were concerned that revenues from the economic activities, agriculture for example, were too small for high interest charges, or to allow beneficiaries to repay loans.

A programme aware of its humanitarian mandate should be willing to take more risks and include more vulnerable beneficiaries and sectors, or the programme could include mechanisms designed to benefit the wider community. In the DRC’s programmes in Azerbaijan, for instance, loan recipients paid into a fund that was used to finance community projects, instead of paying a standard interest fee. Others suggested the use of guarantee funds for such groups as a means of reducing risk. It was also noted that priority attention be paid to cost-efficiency. Efficient micro-finance, resulting in reasonable interest rates to recover programme costs, would be affordable for most clients.

The evaluation of the DRC’s programmes showed that there is no one-size-fits-all income-generation strategy for a humanitarian agency working in the ‘grey zone’. Micro-finance is attractive since it offers a durable solution, but it requires proper technical and financial support and a long-term commitment on the part of the humanitarian agency. Micro-finance also risks excluding vulnerable target groups.

A humanitarian agency should ask itself whether it really wants to get involved in the development of micro-finance. Specialist micro-finance agencies are better equipped to support such programmes. In some regions, there is a proliferation of small micro-finance programmes when only a few larger ones have a chance of continuity. An alternative strategy would be to work in the gap between grant or soft-loan programmes and proper micro-finance. Grant or loan programmes applying best practices in micro-credit can be seen as a start; they prepare clients and programme staff for future micro-finance practices. Beneficiaries can upgrade to micro-finance programmes once their asset base has been rebuilt. Soft loan programmes can upgrade to micro-finance programmes or later merge their funds with such institutions. Such a strategy would make it easier for a humanitarian agency to act within its humanitarian mandate, while broadening the social impact of these programmes by linking them with community development efforts.

Ton de Klerk conducted the field studies for the evaluation of DRC’s income-generation programmes, which was carried out by Quest Consult. He can be contacted by email at, or at

References and further reading

Ton de Klerk, Synthesis Report: Review of IGA Programmes of Danish Refugee Council (Copenhagen: DRC, April 2002).

Tamsin Wilson, Microfinance During and After Armed Conflict: Lessons from Angola, Cambodia, Mozambique and Rwanda (London: DFID, March 2002). Available at

Geetha Nagarajan, Developing Micro-finance Institutions in Conflict-Affected Countries: Emerging Issues, First Lessons Learnt and Challenges Ahead (Geneva: ILO, 1999). Available at

UNHCR Manual on Self-Reliance, Employment and Micro-finance (Geneva: UNHCR, December 1997).