Disaster Loan Funds for Microfinance Institutions: A Look at Emerging Experience

Rapid-onset natural disasters—such as floods, hurricanes, or earthquakes—have the potential to cause significant damage to the livelihoods of clients of microfinance institutions (MFIs) and to MFIs themselves. In response, MFIs and donors in Bangladesh, Central America, and Poland have experimented with the development of disaster loan funds (DLFs) to reduce their exposure to disaster-related losses. DLFs are financial reserves, usually established by an initial donor grant, held against the occurrence of a disaster. When disaster strikes, money in a DLF is made available to MFIs so that they can make loans to affected households to help them cope with the effects of the disaster.

This paper describes the DLFs developed by Bangladeshi Rural Advancement Committee (BRAC), BURO Tangail, CARE, and Palli Karma-Sahayak Foundation (PKSF)2 in Bangladesh after the 1998 floods; the Inter-American Development Bank (IADB) in Central America after Hurricane Mitch; and Fundusz Mikro in Poland after the 1997 floods. Although all of these funds are new and relatively untested, they do provide useful material to open the debate on whether and how DLFs should be developed for a broader range of MFIs. The information in this paper provides information and material to fuel these debates and begins to frame some of the issues to be discussed further as more experience with DLFs emerges.