Earthquake! (and Disaster Mitigation through Microfinance)

By Kate Bennett, KF16, Peru

Last Friday morning my Fellows Blog post mentioned the devastation of the 2007 Peruvian Earthquake in Ica, Peru and the surrounding areas. At 2 PM local time later that day, another earthquake shook the city.

Kiva Fellow David Connelly, my predecessor here at Kiva Partner Caja Rural Señor de Luren, has written before about the 2007 8.0 magnitude earthquake. The statistics are chilling: 519 people dead, 1366 injured, and some 76,000 homes collapsed. “After two and a half years,” he wrote in 2010, “Ica is still very much recovering.” Last week’s comparatively modest 6.9 magnitude earthquake made it clear as day that the wounds are fresh.

Moments after the quaking abated, Peuvians tore out of buildings into the streets. The roads flooded with vehicles screaming out of Ica, trying to reach homes and families on the city’s peripheries. Co-workers clutched at each other outside, waiting for tremors, which arrived dutifully shortly thereafter. While the earthquake itself had not unsettled me, the sight of a city in sheer terror was consummately unnerving.

Ica, in many ways, is a modern city. It is the capital of its department in Peru. We have several large supermarkets, wide asphalt avenues with obeyed stoplights, and our very own over-priced coffee house, where I sit now and where I sat at the time of the quake. The buildings here are solid, new, and given the events of the last decade, built to be earthquake-proof.

Though standards of construction and seismic mitigation efforts were doubled during reconstruction in Ica, time and financial constraints did not afford this kind of purposefulness beyond the borders of the city. This is where you’ll find the truly vulnerable population and Kiva’s target market. They may live in fragile and overcrowded adobe homes. They may live with instable or nonexistent access to water, electricity, and gas lines. Their transportation infrastructure is meager. Faulty ATMs spell for limited access to liquid assets. Peru’s poor, those already on unsure financial footing, are those impacted greatest by natural disasters.

Let me give you a scenario for the average micro-enterprise in the wake of a natural disaster. Say you lend $25 to Kiva borrower María, to invest in her small store, where she sells sodas, candy, and pastries. She is making repayments on time, selling goodies to her neighbors, and flourishing in the way that we hope that every Kiva borrower will. But what happens to her store in the wake of a disaster?

Within moments of the event, costs accrue. It’s possible that her physical business- the building, her cash register, her products- are damaged or destroyed in the event. María now must pay to repair or rebuild, and might be without income in the interim. Meanwhile, her neighbors, experiencing similar interruptions in income, have stopped buying her sodas and candy. Even if her store is still standing and her cash register still works, she may be without electricity, and therefore unable to open the register or to operate past dark. Not to mention, if María was stocking dairy products, they just went bad.

And even if she’s lucky enough to find that her store is fine and her neighbors still have their disposable income to buy sodas and candy, she’s still not out of harm’s way. All of the sudden, the small business or company from which María bought her soda and candy are unable to produce these goods, because the water services have been shut off and their production facilities have been damaged. And even if they could keep making candies for María to sell in her store, they’re now unable to reach her store due to damaged transportation infrastructure.

The economy cannot function at normal levels in the wake of a severe natural disaster. Consider the direct economic losses, such as destroyed or severely damaged buildings, transportation infrastructure, energy and water infrastructure, environmental infrastructure (such as dams), and other private property. These result in innumerable disruptions of the business sector; production facilities, economic markets, and distribution systems are stalled or stopped altogether. And when micro-enterprises come into the picture, these private sector interruptions become a personal tragedy as well. Damages to personal items, injury, or death all bear heavily on a small business owner’s livelihood and their day-to-day lives.

So what, then, can microfinance do to alleviate the effects of a natural disaster? What role should microfinance institutions assume? In normal conditions, microfinance seeks to expand access to financial services- whether savings, credit, or insurance- to those traditionally excluded from the credit market- by poverty, geographic isolation, loan size, or other barriers from traditional banking institutions. Microcredit specifically (what we do here on Kiva) addresses two needs of borrowers. It smooths existing income and protects against fluctuations in livelihoods, a “micro-disaster insurance,” if you will. Microcredit also works to boost income by removing capital constraints and allowing for micro-enterprises to realize their potential. The point being, it serves certain needs of the poor.

However, the needs of the poor shift dramatically in the wake of a natural disaster. Affected parties are not interested in expanding their micro-enterprises. Frankly, in the case of a catastrophic disaster and a disrupted economy, this could be considered imprudent. What affected parties require is some form of speedy mitigation, direct assistance, and a return to normalcy. Their own immediate changes in behavior may include a “reduction in consumption, sale of assets, migration, withdrawal of savings and borrowing and using remittances to mitigate the effects of a disaster” (Parker and Nagarajan 2000). Their coping mechanisms, in short: access all available liquid assets, and apply prodigiously.

As such, disaster relief does not call for market-driven microfinance but for well-allocated aid or subsidized credit, as controversial as that idea may seem. This may not be an appropriate task for financially self-sustainable microfinance institutions in the open market. But Kiva Field Partners are in a much better position to provide this support.

After the disastrous 2007 earthquake hit in Peru, Kiva Partner Caja Señor de Luren provided a six-month grace period to a large portion of their affected portfolio. Virtually all restructured clients repaid their loans on time and clients were able to make a full recovery. Furthermore, Caja Luren’s partnership with Kiva enables them to reach out to riskier clients, those impacted most heavily by the earthquake, in a time of extreme need.

But even when subsidized and cheaper microfinance products are unfeasible or inapplicable, microfinance institutions have other means of alleviating the effects of a disaster. Microfinance institutions can proactively offer micro-insurance and support disaster preparedness leading up to the event, and retroactively provide the invaluable service of financial liquidity of savings to their clients in case of a disaster.

Microfinance, even in normal conditions, is not without its limitations. In a time of upheaval and economic collapse, this may be doubly so. But microfinance can support clients before and after the fact. Through improved access to microfinance services, clients can build and fortify their productive assets, be they economic, human, or social. Access to financial services can restore borrowers’ livelihoods and enhance the preparedness of clients for the next possible disaster. Here in Ica, there’s no telling how far off that might be.

This blog post was invaluably informed by “Can Microfinance Meet The Poor’s Financial Needs in Times Of Natural Disaster?” by Joan Parker and Geetha Nagaraja. To read the article in its entirety, click here.

Kate Bennett (KF16) is thrilled to be working in Ica, Peru with Kiva Field Partner Caja Rural Señor de Luren. For more on Kate’s experiences with Caja Rural Señor de Luren or life in Peru, follow her work here.

If you have any other questions about Caja Rural Señor de Luren’s work in Ica, send Kate Bennett a message via her lender page or check out their Field Partner page.

And better yet, to continue supporting Kiva and Caja Rural Señor de Luren in rural Perú, join Caja Rural’s lender team or check out their currently fundraising loans on Kiva!