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WFP / Giulio d'Adamo

Chapter 12.1 Financial mechanisms and services for risk reduction

Introduction

Photo: WFP / Giulio d'Adamo

Economics and finance are central to DRR because poverty can make people vulnerable to many different hazards, and certain patterns of socio-economic development can expose people to greater risks. It follows that appropriate economic development and the reduction of poverty are essential elements of any risk reduction strategy, as are more targeted measures to provide financial security in risky environments and support recovery after disasters. This chapter focuses on financial services that are important contributors to DRR at local and community levels, in particular insurance, micro-credit and other kinds of micro-finance.

Financing arrangements and services can support households’ financial resilience before and after disasters; they can also play a role in expanding local initiatives. Loans, which are primarily invested in productive enterprises that generate income, are also used to cope with present or potential crises that threaten livelihoods – for instance, by laying in stocks of food, making improvements to farmland, repairing houses, buying tools or other productive equipment, digging wells and irrigation systems, acquiring new skills and making gifts to family and friends so that reciprocal favours can be asked later. Money is often borrowed to deal with household crises – especially those caused by sickness or a death in the family (which has both emotional and economic consequences), but also by such shocks as food shortages, sudden price increases, loss of employment or theft. After a disaster, credit is used to speed up recovery by replacing lost assets and helping people to get back to work. In urban areas, community savings funds are used to pay for slum upgrading, housing improvements (which often includes strengthening homes against hazards) and income generation. Urban communities also use their collective savings to defend themselves against the threat of eviction, negotiate for secure tenure and finance their own improvement schemes.

Disasters hit poor households particularly hard financially because they have little or no savings to see them through the worst of the event and support their recovery. If their savings are kept at home they may be lost in the disaster. If they need to rebuild homes as well as livelihoods their financial needs can be considerable. If the disaster’s impact is severe and widespread, they find it harder to borrow from friends and relatives or obtain credit from shops; clients may no longer be willing to pay for their goods and services and local markets may not be functioning. Money held by informal savings groups may have been lost, and local bank branches where they have deposited money may be destroyed or closed. As a result they may have to sell productive assets such as tools, equipment and livestock, which they rely on for their livelihoods. Cut off from cash income, they are forced to turn to informal money lenders, whose normally high interest rates may well rise still further in a crisis.

Figure 12.1 The financial impact of disasters on households

ODI 2015

The financial impact of disasters on households

C. Churchill (ed.), Protecting the Poor: A Microinsurance Compendium (Geneva: International Labour Organization and Munich Re Foundation, 2006), http://www.munichre-foundation.org/home/Microinsurance/MicroinsuranceCompendium.html, p. 28.

At present, most people living in poor communities, in hazardous locations and in low-income countries have little access to formal financing options for DRR. Moreover, only a small proportion of disaster recovery needs are met by external humanitarian assistance. However, provision of finance is a complicated, technical area of work. DRR agencies do not generally have the specialist skills and experience required, while many providers of financial services know little about poor communities’ needs or how to work effectively at community level. Partnerships between the two kinds of organisation are necessary. This will take time, as there is a great deal of understanding and learning to be shared.