Clients Affected by Conflict
The increasing prevalence of conflict, especially among the world’s poorest nations, has compelled USAID and other donors to intensify their focus on economic development strategies for rebuilding conflict-affected communities. USAID sees microfinance as one of multiple economic recovery tools aiding countries emerging from conflict.
Although microfinance is now widely considered an important component in rebuilding and sustaining economic recovery, its potential has not yet been realized. Some programs focus only on microcredit despite demand for other types of financial products. Many programs have failed due to inappropriate use and faulty design of institutions and products that do not suit the environment. Applied research to identify demand, design institutions and products, and derive practical solutions for effective use of microfinance for conflict-affected areas is scarce. Furthermore, lessons that could help manage microfinance institutions during sporadic, quick and low-intensity conflicts have been almost non-existent.
USAID‘s Microenterprise Development office (MD) is working to help improve the state of microfinance practice in conflict-affected areas (see the Conflict space on microLINKS). MD aims to understand and develop policies, programs, and responses that appropriately address immediate and long-term economic needs in conflict areas; to disseminate information and learning on the topic to practitioners and donors; and to advance best practices in conflict-affected environments.
MD’s research agenda has included examination of the minimum environmental conditions required for initiating microfinance in conflict-affected areas, the types of institutions that are most effective in providing microfinance in these areas, and the type and sequencing of financial products needed to effectively serve those affected by conflict.
Several conclusions have emerged from this research. The preconditions for initiating microfinance may differ depending on the type of community served and the magnitude of damages caused by the conflict. Likewise, it is clear that the financial services and products offered in conflict zones must be specialized and adapted to the context. For example, while savings mobilization may be appropriate in some situations, it is not in others.
MD currently has two priority areas for research: 1) examining donors’ roles in supporting microfinance in conflict areas; and 2) developing a better understanding of possible institutional linkages and partnerships, and their potential impact on creating a stronger microfinance industry in conflict areas.
KNOWLEDGE AND PRACTICE
MD has sponsored a variety of knowledge generating activities related to conflict. The research team has published case studies on implementing microfinance programs for mobile populations and exploring opportunities for youth in conflict-affected countries. Additional case studies document how microfinance institutions or other financial services programs in conflict countries can link with, and build on, other economic recovery activities. These include:
- A case study on the Child Fund Afghanistan Microfinance and the Afghanistan Rural Finance Corporation illustrates the effects of working at different levels of enterprise financing in a conflict setting.
- A study on Kosovo addresses the realities of a post-conflict environment by examining linkages between microfinance and livelihood programs.
- A Burundi case study highlights an MFI that integrates conflict resolution training within its institutional development (loan officer training) and its community bank lending methodology to integrate improved ethnic relations into its operations.
- A study on Nepal analyzes the implementation and operation practices of Nirdhan, a leading MFI providing financial services to poor microentrepreneurs in rural Nepal.
Since 2007, MD has organized a series of workshops, bringing together practitioners and donors who work in conflict-affected environments to discuss the state of the practice, identify key lessons, and set the agenda for new learning and information sharing. To help identify additional research needs and tools development, MD has conducted an inventory of existing tools for the industry.
In April 2008, MD hosted an online Speaker’s Corner discussion, Civil-Military Cooperation on Economic Recovery in Iraq and Afghanistan. The objective of the event was to discuss the serious developmental needs in Iraq and Afghanistan and the different ways that actors on the ground are trying to work together to respond. A complementary Note From Afghanistan: Civil-Military Cooperation in Microenterprise Development examines the concept of Provincial Reconstruction Teams (PRTs) and how they have impacted civil-military relations in Afghanistan.
Literature reviews and assessments of current best practices, lessons learned, and delivery methods for microfinance activity also have been published. Additional work is underway on an assessment tool, which will be developed collaboratively.
Learning from Practice
In addition to the MD office’s research initiatives, USAID and its development partners are daily learning lessons on the ground through the implementation of financial sector development projects in conflict settings. Through the FIELD Support Leader with Associates mechanism, USAID is implementing programs in the West Bank and Gaza as well as in Afghanistan.
The Agriculture, Rural Integration and Economic Strengthening (ARIES) Program in Afghanistan is the largest USAID rural finance program ever awarded, at $100 million. ARIES aims to build a sustainable financial sector capable of serving the poor during, not after, conflict. In this pursuit, ARIES is establishing a network of rural financial institutions and providing technical assistance to commercial banks to increase access to credit among microfinance institutions. Since its launch in September 2006, this approach has allowed ARIES to reach 70,000 rural clients, and the MFIs and businesses it supports are well on their way to operational sustainability.
There are challenges, however, including determining how to balance rapid growth with the need for sound operational systems and the realities of a restrictive security environment. Nonetheless, by employing commercial approaches during the conflict, ARIES is establishing sustainable institutions capable of providing long-term financial stability to the households and enterprises they serve and, through this, enhancing the security of both their clients and the broader communities in which they operate.
The Small and Microfinance Assistance for Recovery and Transition (SMART) Program is a two-year initiative in the West Bank and Gaza. Designed to both sustain the microfinance industry during the current crisis and strengthen its capacity to meet the needs of clients in the future, SMART integrates short-term grants with technical assistance targeting the long-term commercialization of the sector. Through this mix of technical assistance, training, access to commercial capital and product development through grants, credit lines and bank guarantees, SMART is helping MFIs use the current decline in credit demand to prepare for sustainable growth in the future.
These programs point to a number of trends that could inform future financial sector strengthening programming in conflict-affected environments, among them:
- Enhanced support for MFIs and the commercial financial sector can be successfully provided during conflict; for example, by boosting access to financial services among small and medium enterprises.
- Technology innovations—such as expanded mobile phone banking and ATM access in areas otherwise unreachable by MFIs—offer promising opportunities to overcome challenges posed by poor security environments.
Across USAID, on-the-ground experiences in conflict settings are exposing lessons like these on a daily basis, resulting in substantial learning opportunities. MD will continue to research, document and disseminate lessons emerging from these experiences to improve practice and more effectively meet the needs of the poor.