8.5.4. Vulnerability and Financial Adaptation in Developing Countries
Spreading the risks of catastrophes presents special difficulties in developing
countries, particularly rural areas. In general, there is very limited use of
commercial insurance because of long histories of economic instability, fluctuating
and prohibitive insurance costs as related to agricultural prices, lack of enforcement
of building codes and land-use regulations, subjective evaluation of risk by
consumers ("it won't happen to me"), and non-monitored economies.
In some developing countries, government-organized crop and disaster insurance
exists on paper, but with large debt loads and weak economies, many such programs
are inactive. In many cases, governments are unable to respond to public expectations.
A World Bank/UN Development Programme (UNDP) workshop reports that disaster
mitigation is evolving from the phases of relief and contingency planning, technical
preparedness, and structural solutions to a phase in which there is a greater
emphasis on reducing social and economic vulnerabilities and investing in long-term
mitigation activities. However, formal sector mechanisms may completely bypass
the poorest households. Therefore, the need to develop informal and flexible
financial instruments such as microfinance for disaster mitigation has become
extremely important (World Bank, 2000).
Although targeted microfinance programs have been able to meet the financial
needs of individual households, the same attributes of microfinance also could
be applied to deal with natural disaster reduction. There is a potential for
microfinance to provide explicit and implicit insurance to households (World
Bank, 2000). However, limitations of microfinance as a risk-reduction mechanism
arise from issues of moral hazard (see Section 8.3.4),
inadequate monitoring of credit programs after large spatial shocks, and reduction
in informal insurance arrangements provided by social networks. There also is
the possibility of governments committing much less to relief programs in the
wake of a disaster if affected communities are served by microfinance institutions.
Small microfinance programs without access to reinsurance may collapse in a
natural disaster. For nationwide disasters, even the largest microfinance programs
may require international arrangements (World Bank, 2000).
Several microfinance organizations in Bangladesh have been seriously affected
by the floods in 1998 in terms of maintaining savings mobilization, credit repayment,
and cash availability. Larger microfinance organizations with greater capitalization
and preparedness cope better with disasters than small microfinance organizations,
many of which get completely wiped out. There is now a recognition of the need
for providing a financial cushion for the unexpected. It could be provided through
a Central Reserve Fund/Emergency Fund and bigger microfinance organizations
such as Grameen Bank setting aside part of their funds to meet the contingencies
of natural disasters (World Bank, 2000).