MICROFINANCE PAPER WRAP-UP: “Disaster Resilience Through Financial Inclusion;” by Jeanette Moling, Johanna Nyman, Laura Ramos; Published by AFI

This paper addresses the links between disaster risk reduction (DRR) and financial inclusion, focusing on how policymakers and regulators can contribute to community resilience. Between 1999 and 2018, extreme weather events resulted in estimated direct losses of 495,000 lives and USD 3.5 trillion in damages. Disastrous weather events impact economies across the world through the “destruction of physical assets, income, creditworthiness and the fiscal base – and a shift in immediate needs like food and shelter.” Among the types of DRR strategies, the authors cite mitigation, preparedness, response and recovery.

To explain the role of financial inclusion in DRR, AFI refers to “4 Ps of inclusive green finance (IGF) – Provision, Promotion, Protection and Prevention.” IGF redirects finance from activities that may increase climate change to supporting sustainable activities and adaptations to climate change, consistent with the goals of DRR.

Preparing financial systems for disasters can include digitizing financial services and having plans to provide fast post-disaster access to cash. Regulators and policymakers also can establish risk-sharing mechanisms, including disaster risk insurance and credit guarantees, to alleviate the adverse effects on citizens and businesses.

In regard to disaster response, the authors note the importance of central banks “ensuring sufficient cash is in the economy and financial stability is maintained.” Among the potential mechanisms for stabilization are the lowering of reserve requirements for financial institutions and quantitative easing. Regulators also can temporarily relax know-your-customer (KYC) requirements and allow no-frills accounts to increase citizens’ financial options. Financial institutions, with existing infrastructure and customer bases, constitute an efficient mechanism for distributing government aid.

To rebuild economies and ecosystems, the authors argue that financial inclusion is needed to direct financial resources to vulnerable groups most affected by the disaster as well as to support micro-, small and medium-sized enterprises (MSMEs) and other private-sector actors. The paper closes with the following recommendations: (1) using disaster reconstruction and recovery facilities to help “financial institutions withstand the impact of disasters;” (2) allowing individuals early access to pension funds for short-term aid; (3) strengthening disaster-risk financing and risk-sharing mechanisms, along with performing risk assessments and modeling; (4) planning for recovery, including by strengthening institutions dedicated to risk assessment; (5) expanding risk reduction efforts to include resilience, including in relation to climate trends, such as sea-level rise; (6) aligning domestic policies with international efforts; (7) increasing intergovernmental coordination; and (8) strengthening ecosystems as part of sustainable recovery strategies that preserve biodiversity.

This is a summary of a paper by Jeanette Moling, Johanna Nyman, Laura Ramos; published by the Alliance for Financial Inclusion; February 2021; 27 pages; available at https://www.afi-global.org/wp-content/uploads/2021/02/AFI_IGF_disaster-resilience_SP_AW_digital.pdf

By Bradley Shulman, Research Associate

Additional Resources

AFI homepage
https://www.afi-global.org/

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