How can microfinance catalyze development and reconstruction in areas emerging from conflict?
Microfinance services can:
- support clients' survival strategies during a conflict;
- prevent the collapse of small businesses and household economies;
- contribute to the rehabilitation of small businesses and household economies; and,
- reduce unemployment and underemployment thereby increasing stability.
A sound microfinance institution (MFI) can also contribute to the development of the financial infrastructure of the country, and advocate for a conducive financial regulatory environment.
What are the main challenges of providing microfinance in a conflict-affected environment?
MFIs face several conflict-related operational and financial challenges in such environments, including:
- increased security risks to their staff, clients, and assets;
- human resource constraints as managers, staff, members, or other support groups are lost, leave their country, are called to support the war efforts, or leave for better job or educational opportunities;
- increased operational risks caused by other microfinance programs that are not motivated by long-term development goals or which are responding to political and self-interest motivations of local officials; and,
- increased administrative and operational costs and lower returns on investments. Providing microfinance services to such complex, and in some cases mobile, communities requires tenacity and innovation.
Is microfinance always an appropriate tool in a conflict-affected environment?
Not always, although there are surprisingly few environmental pre-conditions for microfinance services to operate successfully:
- Trust is the key condition for informal microfinance. Trust in this context refers to mutual trust between the informal contract holders, i.e. the money lender and the borrower or ROSCA group members. It is based on the lender's knowledge of the borrower's reliability to uphold the agreement, as well as their livelihood activities and assets that they have to support the agreed-upon terms.
- A more stable population and increased security are needed for semi-formal microfinance services.
Indeed, relatively few conditions are required for microfinance to "work" in conflict-affected areas (see Nagarajan and Doyle for more on this). In general, organizations should adhere to good practice principles in providing microfinance in post-conflict environments. When they cannot, alternatives such as grant-based programs should be prioritized. See Tucker et. al. and CGAP's Focus Note 20 for more guidance; also see the sidebar on ARC's work with mobile populations. Among other things, ARC has found that sustainability should not be the priority in providing microfinance in refugee camps. Instead, the focus should be on developing a healthy credit culture in the client population in anticipation of accessing microfinance services when they return home.
Recent Research on Post Conflict Microfinance
In 2001, Concern Worldwide, with technical support from The Springfield Centre, initiated a rigorous three-year DFID-funded study on microfinance in war-affected contexts. The Post Conflict Microfinance Project's (PCM) field research in Angola, Cambodia, Mozambique, and Rwanda showed the significance of risk in factoring into clients' decisions to access financial services. The increased vulnerability of people living in war-affected areas manifests in distinct patterns of demand for financial services with savings as a high priority and the need for tiny, flexible, short-term loans for income generating activities. In addition to helping to clarify customer preferences (the demand-side), the research highlighted supply-side lessons. In-depth market research examined i) existing financial systems, ii) the changing environment and iii) client preferences.
This research concluded that the main difference between microfinance in war-free and war-affected contexts should be the characteristics--terms and conditions, pricing, delivery channels, internal systems--of the products offered. Three main lessons emerged:
- Principles of good practice need to be adhered to no matter how harsh the conditions. If this is impossible, attempts to develop the microfinance market are probably inappropriate;
Serving Mobile Populations
Although population stability has been considered one of the prerequisites for microfinance in conflict, recent research indicates that adapted financial services can be provided successfully to refugees and other mobile populations (see Manalo 2003 for a general discussion of how conflict creates new categories of clients). In West Africa, American Refugee Committee, International (ARC) has developed an effective approach, Refuge to Return (R2R), which links financial services to refugees in their country of refuge with those in their country of return through a transferable credit history system. By taking a long-term view to service delivery, providing a strong incentive for repayment and applying sound microfinance practices, the R2R approach has enabled ARC to successfully provide loans to Sierra Leonean refugees in Guinea and Liberia, and build the leading microfinance institution (MFI) in Sierra Leone to serve them upon their return. More information on microfinance and refugees can be found at:
- AMAP Refuge to Return: Operational Lessons for Serving Mobile Populations in Conflict-Affected Environments [Link Coming Soon!]
- ARC Powerpoint Presentation
- The Alchemy Project
- Market research for design and for monitoring is essential. The most important factor in assessing whether or not to do microfinance is the demand for services, while security and stability of the population contribute to a conducive environment; and,
- Organizations must make a long-term commitment to the development of an MFI if they choose to get involved in microfinance. Failure to do so causes serious damage to the local MF sector.
The research preceded the creation of an innovative MFI, Abazamukana, in Rwanda in the aftermath of the 1994 genocide. See pages 21-25 of this ODI document for more information.
Building on this research, Concern is now mobilizing a broad base of practitioners and policymakers to move Toward Principles of Good Practice for Microfinance in War-Affected Contexts.
What role should donors play?
Institutions following sound principles for sustainability must not be undermined by others providing competing services below cost or in ways that cannot be sustained. In conflict-affected environments, then, donors should:
- Consult each other regarding appropriate interest rates and other terms on which assistance to any given institution is supplied;
- Ensure that their microfinance specialists communicate and coordinate with colleagues in other professional areas to ensure that any microfinance components within those sectors conform to microfinance good practices;
- Produce clear guidelines on the kinds of projects to be supported; such guidelines should emphasize that any intervention in the microfinance market must lead to long-term, sustainable development, rather than short-term gains;
- Influence the behaviour of microfinance retailers, government and Central Banks.
Comments or questions? Email Isabelle at info@concern.net.