December 26th marked the one-year anniversary of the devastating tsunami that swept across Asia, killing over 200,000 people. Syed Hashemi, Senior Microfinance Specialist for the Consultative Group to Assist the Poor (CGAP), has been following the microfinance community’s involvement in the reconstruction process. Interview conducted by the staff at Microfinance Gateway.

Q: One year on, how do things look today in Aceh and Sri Lanka?

Hashemi: What really struck me was the resilience of the people affected by the tsunami. Government and donor efforts at rehabilitation have been slow, and often inadequate, but people have depended on each other, on kinship and community networks, and have started rebuilding their lives. A lot more remains to be done, especially in constructing housing, repairing infrastructure and revitalizing the economy. And it’s not always a dearth of money. It’s also about effective coordination, planning and implementation.

Q: How are the affected MFIs coping?

Hashemi: In Sri Lanka alone, 27,000 clients of MFIs (Microfinance Institutions) were affected. Many clients lost their lives. Many more lost their livelihoods and were unable to pay back their loans. We were on the phone with organizations such as Sanasa and SEEDs immediately after the tsunami and learned that many branches were destroyed, documents were lost or damaged. The MFIs were often the first on the ground burying dead bodies and providing shelter and relief. They paid off on insurance policies, provided access to savings and sometimes provided emergency credit. But MFIs need funding to help pay for their structural losses. They need to develop a write-off policy and conduct a case-by-case review (rather than a blanket write-off). They need to develop a long-term strategy to more effectively engage in financial services with a strong commitment to sustainability. The good news is, the MFIs are thinking creatively, listening and actively trying to address long-term issues.

Governments and donors should avoid muddling aid and credit by offering cheap loans. If people have lost everything, they probably need to be given money, not lent it. “To disguise this through a subsidised loan undermines the whole operation.” After grants, a phase of cash-for-work (on reconstruction, say) is often needed before microcredit comes into play. Source: Syed Hashemi in The Economist, 'Microcredit and Disasters: Starting Over', Dec 2005.

Q: What role can microfinance play in order to effectively "build back better"?

Hashemi: It seems to me that if microfinance is to play an effective role in "building back better", the following needs to happen:

First of all, we need greater coordination between government, donors, international NGOs and local institutions. Secondly, we need increased efforts on following good practice microfinance. A solid body of evidence exists on what is “good practice” microfinance, but too often policy makers and donors, in their haste to do good, violate some of the simplest rules. Thirdly, we need to sustain long-term capacity building efforts. What people have to realize is that microfinance is not a quick fix. It is about building a sustainable, inclusive, financial sector. And this is a slow process.

Next, we need a focus on improving the policy environment. I’ll just mention one issue here: policy changes to allow international MFIs to set up independent operations rather than being forced to work through local NGOs. This will bring in new models, expand outreach, and create healthy competition in the sector. In Afghanistan, where the entire financial sector was in ruins at the end of the war, and there was very little local capacity, we brought in organizations such as BRAC and FINCA to get the microfinance sector moving. Donor coordination, support from the government and funding from an operationally independent Apex staffed with technical experts, turned the sector around. Eight institutions, committed to financial sustainability, have over the last two years created a client base of around 150,000. I see this as a valid model for Aceh.

And finally, what is very important, is closer coordination with livelihood activities. At the very least, people receiving livelihood support and skills training could benefit greatly from becoming microfinance clients.

Q: There was an enormous outpouring of money for tsunami victims, some of it targeted for microfinance activities. In your opinion, is there too much money for microfinance?

Hashemi: We were initially very worried about a flood of funding for microfinance, which, in the absence of strong retail institutions, would have posed a serious threat to the long term sustainability of the sector. Many of the donors have since then scaled back their ambitions and their commitments and focused on capacity building. There is still real pressure, both in Sri Lanka and in Aceh, to disburse a lot of money. In fact, if one looks at the commitments still floating around, it is far greater than any real field-level absorptive capacity. Very interestingly, however, some good institutions are finding it hard to get easy access to the funding levels they require.

Q: In early December, a post-tsunami round-table on microfinance co-hosted by GTZ and the World Bank took place in Colombo with about 20 participants from Aceh, Sri Lanka and India. What were the lessons coming out of the workshop?

Microfinance is much more than simply an income generation tool. By directly empowering poor people, particularly women, it has become one of the key driving mechanisms towards meeting the Millennium Development Goals, specifically the overarching target of halving extreme poverty and hunger by 2015." -- Mark Malloch Brown, Chef de Cabinet, Office of the Secretary General to the United Nations.

Hashemi: The meeting was to a great extent a reaffirmation of basic good practice principles: we need to get donor coordination right, shouldn’t subsidize interest rates, governments should promote a regulatory environment that works for microfinance, and grants should be separated from loans. Dirk Steinwand of GTZ in Sri Lanka pointed out how important the correct and appropriate sequencing of post disaster activities is – starting with relief, food aid and shelter, moving to cash grants and temporary employment, and then on to livelihood support and access to capital. We also realized how vital it is to bring international NGOs early on into the discussion on microfinance, since too often they engage in it without having relevant knowledge or expertise. Local information and knowledge is also crucial, and donors and international NGOs really need to tap into those sources more than they have in the past. The lessons from India brought to light how little microfinance had been happening in the tsunami-affected areas in India.

We intend to bring out a short 4 page “do’s and don’ts” based on our experiences, to help guide microfinance practice in post disaster situations.

Q: Looking ahead, how do you see things evolving?

Hashemi: It is important to accept that microfinance is not a magic bullet and is only one part of an overall strategy to rebuild the tsunami-affected areas. There has to be better infrastructure, improved shelters, access to health and schooling, a vibrant Small and Medium Enterprise (SME) sector, and above all greater political security. But microfinance does have a fundamental role to play in ensuring the long term inclusion of poor people in economic life. We have learnt a lot from other disasters and post-conflict situations such as Afghanistan and are building on those experiences and lessons. The process will be slow but it is imperative that we get it right from the start.






Contributed by Consultative Group to Assist the Poor and the Microfinance Gateway. Excerpted with permission from the Microfinance Gateway.

To read another Global Envision article about microfinance, see Micro-Finance Travels Fast in a Poor Country.



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