The Role of Savings and Remittances in Unstable Situations: Reflections after Hurricane Mitch

Hurricane Mitch was the worst disaster to hit Central America in over 200 years (see issue 13). The economies of Nicaragua and Honduras have been set back at least 20 years and even if external debt is totally erased, these countries can never survive economically as they are. The financial systems of Central America have likewise been devastated. In Nicaragua, an association of 14 non-conventional financial institutions, ASOMIF, estimates US$6–7m in losses. What lessons can this tragedy offer to microfinance practice?

Microfinance Institutions’ Perspectives

After Mitch, microfinance institutions (MFIs) grappled with three issues: damage to their infrastructure and communications, liquidity problems, and problems related to managing their loan portfolios.

Demand for credit is usually high at the end of the year, and for the harvest and holiday period. After Mitch this coincided with needs for emergency credit. Users in heavily affected areas withdrew deposits from savings cooperatives and MFIs experienced many late payments, higher operational costs, and lost interest on income. New funds and lines of credit were slow to arrive as institutions prioritised humanitarian relief. Few MFIs had any or adequate reserve funds; several had proposed reserves in prior years but donors had turned them down.

A priority for MFIs was to analyse rapidly their loan portfolio and carry out visits to borrowers’ projects to assess damages and renegotiate loans. MFIs worked to respond to the demands for emergency credit, for short-term commercial credit which helps liquidity, and for agricultural production in less affected areas to improve food supplies. MFIs also met together to set common policies for negotiating with affected borrowers, produce reports based on common standards, and announce a joint ‘no loan forgiveness’ policy. [1]

Lessons for Credit Policy

Hurricane Mitch hit countries with relatively well-developed MFIs that had between five and 25 years experience and capital of hundreds of thousands to millions of dollars. This discussion therefore concerns how established MFIs deal with crisis rather than whether or how microcredit is a response to crisis.

Mitch was a ‘rapid onset’ emergency; it was also the ‘worst disaster’. It reinforced awareness that for Central Americans, crisis is a common occurance: in recent years communities have suffered not only natural disasters but also military interventions, civil war and genocide, monetary devaluations and macroeconomic crisis. Instability is therefore the norm.

Good practice models of microfinance, however, are based on assumptions of relative economic and social stability. [2] Microfinance prioritises income promotion – credit for production and microenterprise – in which users receive sums to invest and expect to repay from future, higher income flows. Good practice recommendations include ways to identify stable, growing sectors, select low risk borrowers, and establish efficient follow-up and collection procedures.

But instability and crisis mean inability to predict the future (especially when emergency preparedness programmes are inadequate). Today’s strong economic sectors may not always be stable, future income flows not always higher, nor current best borrowers always ‘low risk’. High repayment may not be a function of efficient systems. Good practice may depend more on reducing vulnerability and protecting income.

There is much to learn from how families and economic projects survive disasters. In addition to large events, families cope with many smaller crises – local crop failure, illness and death, market changes or job loss – on a fairly regular basis. Families save (build reserves) in assets, animals or cash and manage their vulnerability by diversifying livelihoods. An agricultural family may also receive income from a brother in the US, bicycle repair services, migrant harvest work, cultivating cut flowers, or from a daughter working in the maquila industry (assembly for export factories in free trade zones). The risks of poverty and deprivation are therefore distributed geographically and between various family members. At times family crisis is managed through reciprocal contributions between neighbors and relatives. Enterprises and people cope with disasters through extensive informal networks to transfer resources from place to place.

These strategies are based on protecting income and smoothing consumption through crisis. In addition to the ‘credit’ aspect of these informal systems, a guiding principle is to use parts of current income (savings, transfers and solidarity: social insurance) to build up resources to respond to unexpected expenses in the future or big drops in income. It should be noted that survival strategies during disasters are gendered and warrant a much longer discussion than space permits. In general, women participate more than men in reciprocal networks and informal social insurance and savings. Where MFIs offer deposit services, a majority of account holders are women.

The advantages of MFI collaborations

Only a few MFIs in the region have developed savings, insurance or money transfer services, partly because of legal codes and stringent requirements for financial institutions accepting deposits. URAC, a regional peasant’s union in Mexico, has built a microfinance system based on the savings of more than 7,000 campesinos. Among other services they have a special fixed-term deposit account for childbirth and for school fees. Member cooperatives of the Honduran association of small coffee producers (CCCH) have also developed savings systems for the young, and CCCH is researching harvest insurance mechanisms. FEDECACES and CARUNA, federations of savings and credit unions in El Salvador and Nicaragua respectively, have money transfer systems. Fedecaces has established a family remittance agreement with insitutions in the US linked with members’ savings accounts in rural El Salvador. Since men migrate more for work more than women do in Central America, providing low cost accessible remittance services becomes a women’s issue.

These financial services played an important role in the aftermath of Hurricane Mitch. Caruna and Fedecaces reported that users with deposits found themselves better off than their neighbours as they were able to use savings to handle immediate family needs for food, medical care and transportation. Both institutions needed to provide for unexpected savings’ withdrawals to maintain members’ trust. Significantly, they were able to do so precisely because they were federations: internal agreements allowed cooperatives in heavily damaged areas to access funds from the national institution or from cooperatives which were not so affected. An advantage of associations of MFIs is that they manage and distribute risks during crisis.

Remittances have played a key role in rebuilding livelihoods after Mitch. Since the hurricane, thousands more Nicaraguans have joined the (estimated) half million migrants working in Costa Rica. In December 1998 the presidents of the Nicaraguan and Costa Rican Postal Services announced a system of money transfers between the two countries directed at this population. The service fee (5 per cent of the amount transferred) is half the average fee of commercial services and banks which expect to handle a combined US$8–10m this year. Although the Fedecaces US remittance service was new, the number of transfers tripled in the month after the Hurricane.

Conclusions

An analysis of instability points to several arguments in favour of MFIs developing savings and transfer services:

1. Improving local savings mobilisation will allow MFIs access to intermediate local capital without being so dependent on external resources. The potential of MFIs as financial intermediaries and not simply credit providers needs to be emphasised.
2. Such services help to protect investments in diverse economic projects even when certain areas suffer crisis or certain livelihoods are not viable in the short term. MFIs should identify more clearly the range of risks that families and borrowers face, and promote mechanisms to amerliorate these risks. Linking together savings, transfers, risk distribution mechanisms and credit protects users’ income and thus enhances institutional stability.
3. Savings, transfers and risk distribution mechanisms should not only be considered ‘hedges’ against loan default. For certain people, these services may be more appropriate or effective means to accumulate and access sums for economic and social uses. Three specific recommendations include:
   1. Carry out surveys to understand the target population’s current savings and social insurance practices.
   2. Explore mechanisms to lower the transaction costs for individuals and institutions of small cash deposits.
   3. Research families’ use of money transfer mechanisms – formal and informal – between rural and urban areas and across national borders.
4. Finally, microcredit alone may not respond to key issues of poverty reduction. Poverty reduction, a main rationale for many MFIs, is not only about promoting income but about lowering the risk of periodic poverty and deprivation. Savings and transfers smooth consumption and reduce vulnerability. This is especially important for women, since gender relations heighten women’s risk of sudden deprivation such as that caused by abandonment, undesired pregnancy, and domestic or street violence. Sen and others affirm that the threat of falling into poverty can be as constraining and disempowering as the impact of occasional deprivation. Reducing these fears can be an efficient outcome of MFIs. [3]

On a larger scale, MFIs need to build reserves and develop creative mechanisms for distributing and managing risks between and across institutions. Fundamentally, MFIs’ challenge of reconstruction and recapitalisation in the aftermath of Hurricane Mitch is about building institutions that recognise that we are now preparing for the next ‘mitch’. Instability is the norm. Microfinance good practice must address the needs to reduce vulnerability, protecting as well as promoting income. As part of this vision, savings, reserves and transfers play a critical role.

Notes

[1] ASOMIF (Asociación Nicaragüense de Instituciones de Microfinanzas), Managua: Proyecto de Emergencia: Fondo de Crédito y Capitalización de Microfinanzas 1 December 1998.

[3] McGeehan, Sarah (1999 working paper for ACORD) Credit and Savings Schemes in High Inflationary Contexts

[3] Ibid 2