The poor in developing countries are the most exposed to natural catastrophes and microfinance organisations may potentially ease their economic recovery. Yet, no evidence on MFI strategies after natural disasters exists.
This paper aims to fill this gap by building a dataset which merges bank records of loans, issued before and after the 2004 Tsunami by a Sri Lankan MFI recapitalised by Western donors, with detailed survey data on the corresponding borrowers. Evidence of effective post-calamity intervention is supported since the defaults in the post-Tsunami years (2004-2006) do not imply smaller loans in the period following the recovery (2007-2011) while people hit by the calamity receive more money. Furthermore, a cross-subsidisation mechanism is in place: clients with a long, successful credit history and those not damaged by the calamity pay higher interest rates. All these features helped damaged people to recover and repay both new and previous loans. However, the paper also documents an abnormal and significant increase in default rates of non-victims suggesting the existence of contagion and/or strategic default problems. For this reason the authors suggest reconversion of donor aid into financial support to compulsory microinsurance schemes for borrowers.
Centre for Studies in Economics and Finance (CSEF)
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