MICROFINANCE PAPER WRAP-UP: Beyond Economic Benefits: The Contribution of Microfinance to Post-Conflict Recovery in Asia and the Pacific, by Pascal Marino

“Beyond Economic Benefits: The Contribution of Microfinance to Post-Conflict Recovery in Asia and the Pacific” was written by Pascal Marino, published in 2005 by The Foundation for Development Corporation in Brisbane, Australia, and presented at the University of Melbourne conference “Aid and Development in Conflict Environments: What are the lessons?” The full text of this report is 14 pages and available here. The paper is a literature review and synthesis of research on the impact of microfinance in nine different post-conflict countries in Asia and the Pacific, with a focus on Afghanistan, Indonesia (Maluku), Papua New Guinea (Boaguainville), Sri Lanka, and Timor Leste. It focuses on the difficulties in operating microfinance institutions (MFIs) in post-conflict zones and on the intangible benefits of microfinance through social capital enhancement: social mobilization, empowerment, democracy building, conflict resolution, refugee reintegration, and organization building.

Beyond economic damage, armed conflicts cause a decrease in social capital through loss of trust, diminished interaction, and increased tension between ethnic groups; as well as a decrease in human capital through death, displacement, loss of self-esteem, and trauma. Based on a literature review of research from Stacey Heen in Camaroon; Dave Larson of USAID’s Microenterprise Best Practices Project; Geetha Nagarajan of the Microbanking Standards Project; the Organization for Economic Cooperation and Development (OECD); and the International Labor Organization, Pascal Marino argues that microfinance builds peace on four different levels:

1) Reconciliation and conflict resolution

Microfinance promotes reconciliation and conflict resolution both through poverty alleviation, where the conflict is fueled through persistent lack of revenue, and by creating contact between hostile groups to reduce mutual prejudice: “Essentially, interethnic business relationships nurture peace and reconciliation in a community.”

2) Resumption of a ‘normal’ life

Microfinance requires stability to be viable, and thus it provides an economic incentive to resume “normal life”. It also offers a sustainable alternative to humanitarian-aid. Credit officers become “agents of trauma healing,” by discussing with borrowers about business and future prospects. MFIs have also offered “credit plus” services such as health education, literacy, human rights and reconciliation awareness, and psychological counseling.

3) Enhancing social capital

By promoting regular interaction, multi-ethnic MFIs can rebuild trust and cooperation among community members over time. However, Mr. Marino argues that the process of reconciliation never be forced on belligerent ethnic groups.

4) Reintegration of refugees and demobilized soldiers

By financing business development and house construction, and promoting collaboration with local populations, MFIs facilitate the reintegration of refugees, and provide ex-combatants with an economic stake in laying down their weapons. “When people need to earn a living to survive, ‘business is business,’ and conflict becomes secondary.”

The author then summarizes the literature pertaining to the experiences of MFIs in different post-conflict countries:

Afghanistan

Constraints to the development of a microfinance industry included extensive war damage to physical and human capital, destroyed institutions, an economy based on opium, a very low population density, insecurity in rural areas, and distrust of financial services as many people had lost their financial savings in bank collapses. These obstacles resulted in additional costs and lower sustainability levels for MFIs.

With lack of functioning financial institutions, the estimated demand for microfinance was at least one million households. The newfound government established an apex organization called the Microfinance Investment Support Facility for Afghanistan (MISFA) to provide grants, loans, and technical support to MFIs. The author described the experience of MISFA and its partner MFIs. The MFIs dealt with the many obstacles by operating primarily in relatively safer urban settings, investing in human resources development and hiring expatriate staff to fill key management positions. MFI Child Fund Afghanistan issued loans to groups of ex-combatants and local famers, linked by joint liability. The first loans benefit the ex-combatants, and the rest of members were encouraged to collaborate with them to ensure repayment so that they could then access a loan. For more information on the microfinance sector in Afghanistan, and on the experience of MISFA, see this article published by MicroCapital.

Indonesia (Maluku)

The 1999-2000 conflict in the province of Maluku, divided the market for goods and services along Christian and Muslim lines. MFIs were forced to work with one religious group. Mr. Marino cites the experience of Olivier Gaucher, a project officer for an MFI run by humanitarian aid organization Mercy Corps. Local market places at the border of Christian and Muslim communities that were financed by MFIs provided rare opportunities for interaction between the groups. In one case, two conflicting fishing groups began to work together after receiving microfinance. “Market forces, liberated by the access to microfinance, proved to be stronger than internal divisions.”

Papua New Guinea (Bougainville)

The ten year rebellion and a claim for independence against the central government ended in 1998 with a halted economy and destroyed infrastructure. Only one sub-branch of a commercial bank continued to operate. The central bank and local government initiated the Bougainville Microfinance Scheme (BMS). The author cites work by John Newsom, the former team leader of the BMS. At first the project included training in literacy, numeracy, community development, vocational and management skills. People from opposing sides participated in the workshops, which promoted peace and reconciliation.

Sri Lanka

The Tamil Tiger separatist movement ended in 2001 after years of conflict had destroyed formerly successful financial systems in the north and east. Population displacement, dependency on subsidies, militia groups, lost property rights, and lack of skills among clients and staff were constraints to microfinance development. However, most clients were relatively well-off prior to the conflict, and only needed a kick-start to resume economic activity. In assessing the impact of microfinance on conflict resolution, the author describes the experiences of MFIs run by the humanitarian aid organizations CARE and the Danish Refugee Council (DRC). He argues that MFIs brought people together and focused on cooperation, rather than on differences. The microcredit methodology using small groups created a base for reconciliation and coexistence, and contributed to re-establishing the social capital of conflict-affected communities.

Timor Leste

Following East Timor’s referendum on independence in 1999, 90 percent of its public infrastructure was destroyed by Indonesian troops and pro-autonomy militias. Low-population density, small size of the market (60 thousand households), difficult geographical terrain, a lack of skilled human resources, and a weak banking sector resulted in MFIs carrying higher operating costs and risks, lower self-sufficiency, and a dependency on donors. MFIs invested heavily in hiring expatriate staff and training local personnel. Mr. Marino cites Simon Lynch who described MFI Opportunity International‘s experience in East Timor, and finds that microfinance acted as a catalyst for reconciliation, as mutual guarantees put people in situations where they had to confront issues of trust and confidence.

By Ryan Hogarth, Research Assistant

Additional Resources:

“Beyond Economic Benefits: The Contribution of Microfinance to Post-Conflict Recovery in Asia and the Pacific”, by Pascal Marino, The Foundation for Development Corporation: 2005