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An introduction to disaster risk financing – Part I – Understanding disaster risk financing at the macro level

Posted on by MSC

Super Cyclonic Storm Amphan ripped through Bangladesh and the eastern Indian states of West Bengal and Orissa in May, 2020. It left behind more than a hundred dead and millions of lives disrupted. The financial damage is certain to be severe with West Bengal alone predicting losses amounting to USD 13.2 billion. Most of the damage was uninsured and had no disaster risk transfer mechanism in place.

Responding to such disasters is a herculean effort. The top priority is always to save lives. MSC’s work on disaster risk financing projects has enabled our partners to understand the topic better and design need based solutions addressing the disaster recovery needs of the low- and moderate-income (LMI) segments, and MSMEs. Through a two-part blog, we summarize our experiences in the field of disaster risk financing and its application at regional, national, and consumer levels. In the first part of this blog, we provide an introductory, macro overview of layered disaster risk financing, while in the second part, we focus on disaster risk financing approaches from an inclusive finance perspective.

When Amphan struck, India and Bangladesh evacuated millions to safety well ahead.[1] Preparing for disasters and managing their impact has been standardized by most nations by now. The standard framework adopted to manage disaster response is summarized below:


Source: MSC analysis

The need for finance in disaster risk management

Disasters cause monetary losses by damaging physical infrastructure, assets, and lives. The absence of a risk transfer mechanism, therefore, makes rehabilitation even more expensive. Lending to rebuild is further complicated by the different types of disasters and their varied impact. Since the effects of climate change disproportionately affect poor communities around the world, disaster risk financing as a risk transfer mechanism therefore assumes critical relevance. Several stakeholders including policymakers, insurers, financial services providers, and entities are working to develop the resilience of LMI segments against climate change and disasters need,. They, therefore, need a well-grounded understanding of climate change and disaster risk financing mechanisms.

A layered approach to disaster risk financing

At the national level, a country can assess its risk financing options through a risk layering approach. The idea behind a risk layering approach is to identify the best-suited risk financing tools that are proportional to the severity of the risk and the fiscal capacity of the government. Simply put, disaster risk financing must be cost-effective, yet not compromise a country’s financing requirements at the time of a disaster. Layered disaster risk financing options are illustrated below:

Source: MSC analysis

In the following section, we briefly assess what each of these three layers of financing options entails.

The first layer is the national reserve funds, which generally refer to annual budgetary allocations, contingent budgets, and allocations made by a government in response to disasters. These funds are typically used to cope with localized, low-severity, but high-frequency events like floods, landslides, and earthquakes, etc. The economic capacity of a country would generally determine the amount of such funding. However, due to the implications of huge expenses, most developing countries find it difficult to fund large-scale anomalous disasters.

The second layer comprises contingent credit lines. These pre-arranged credit lines disburse loans to act as precautionary lines of defense in the event of disasters of medium to high severity and meet government expenditures over and above the disaster reserves.

An example of a contingent credit line is the Catastrophe Deferred Drawdown Options or CAT DDOs offered by the World Bank. This innovative contingent line of credit provides immediate liquidity to countries in the event of natural disaster. Funds become available for disbursement after the drawdown trigger—typically the member country’s declaration of a state of emergency. The full commitment amount is available for disbursement at any time within three years from the signing of the financing agreement.

The third layer is risk transfer solutions. The objective is to transfer the financial risks that arise from high-severity, low-frequency disasters from countries or individuals, or both, to a third party in place of a risk premium. Such solutions provide a contractual right to countries or individuals to receive pre-defined funds at the time of a disaster. These solutions can take the form of sovereign insurance or regional risk pools, CAT bonds, and consumer insurance solutions.

We discuss each of the risk transfer mechanisms in more detail below.

  1. Sovereign risk pools

Through sovereign catastrophe risk pools, countries may pool risk in a diversified portfolio, retain some of the risks, and transfer excess risk to the reinsurance and capital markets. Since the likelihood of a major disaster afflicting several countries within the same year is low, diversification or “geographically spreading the risk” among participating countries creates a more stable and less capital-intensive portfolio. Sovereign risk pools are therefore, less expensive to reinsure. Examples of such risk pools are the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) and South East Asia Disaster Risk Insurance Facility (SEADRIF).

  1. CAT Bonds

A catastrophe (CAT) bond is a debt instrument that serves the dual purpose of raising debt and transferring financial risk in the books of the insurance companies. Countries that face disaster risks issues these bonds. Insurance companies and re-insurers are typically the sponsors who pitch the bonds to the potential investors. These instruments promise a higher yield to investors compared to traditional fixed income instruments. In normal circumstances, investors receive coupon payments along with PAR value at the end of maturity. In the event of a disaster, the sponsors suffer financial loss due to claims linked to prior indemnity, indexes, and parameters. In such a circumstance, the sponsors have the right to default on further payments to investors.

The Philippines is a primary example of a country that has used CAT bonds at the national as well as the city level.

An emergent approach used by actors, such as the World Bank has been to combine a CAT bond with a Pandemic Emergency Fund (PEF). A PEF is a mechanism that provides additional financing as non-reimbursable grants in response to outbreaks with pandemic potential. The World Bank pioneered this approach in the Maldives.

  1. Consumer-level risk transfer solutions

Consumer-level risk transfer solutions are insurance products or programs that provide coverage against disasters and natural calamities. Such solutions can be classified into agricultural and non-agricultural insurance solutions.

Agriculture insurance

Agriculture insurance solutions take one of two forms: state-supported or subsidized agriculture insurance and commercial agriculture insurance.

Agriculture insurance programs are an instrument of choice for farmers and rural communities to cope with the risk of disaster. The provision, administration, and oversight of agricultural insurance programs help a country manage the systemic risks of disasters, such as widespread drought or floods that affect a large number of farmers simultaneously. The cost of managing systemic risks that arise from catastrophic events and affect the agriculture sector is many times higher than the cost of premiums it would take to insure them. For example, the World Bank estimates that a widespread drought in India could generate crop-yield losses as high as three times the average annual crop loss experienced in a normal year. Traditionally, governments in India have mitigated crop failures or other natural disasters by providing post-disaster direct compensation as a relief measure, or through farmer loan waiver schemes—which while popular cannot be regarded as a sustainable mechanism to meet disaster-induced crop losses. The last major waiver in India in 2008 saw the government write off outstanding loans worth USD 7.8 billion for more than 30 million small and marginal farmers.

Insurance, on the other hand, not only reduces the cost of relief but allows governments to make fiscal plans for natural disasters and crop failures. It does so by well-defined premium subsidies for agriculture insurance taken by farmers, thereby allowing the government to gauge its proposed outlay and budget for it. In the event of a disaster, the insurance companies compensate the farmers from their own risk pools without government subsidies. Hence, insurance limits the government’s exposure when a disaster strikes while ensuring optimal risk coverage and compensating the losses of farmers. The biggest state-supported agriculture insurance program among emerging economies is the Pradhan Mantri Fasal Bima Yojana of India.

Non-agriculture disaster risk insurance

Non-agricultural disaster risk insurance solutions protect against damage to property and materials of value in the case of disasters such as floods, earthquakes, typhoons, and cyclones. While property insurance against risks like fire and theft is not new, coverage against disasters is nascent. Many micro and inclusive insurance companies have been experimenting with cash benefit products for low- and middle-income segments. These are typically pre-defined insurance products, where payout are triggered when the insured disaster occurs, irrespective of the damage incurred. We examine this in greater detail in part 2 of this blog.

Getting the disaster risk financing product mix right

Disaster risk financing tools and approaches to mitigate future losses should be a function of the types of disasters to which a country is most vulnerable, as well as potential future humanitarian and financial losses that could arise if such disasters occur. While incorporating the product design features of insurance, countries must also consider the requisite resources to rebuild the infrastructure that has been destroyed using better quality, disaster-resistant material.

Governments must strive for a portfolio mix of disaster risk financing instruments based on accurate risk assessments, desired coverage, available budgets, and cost efficiency. See the second part of this blog here.

COVID -19 recovery is likely to fail women- digital financial services can help, if designed well

Posted on by MSC

COVID19 has affected women in many ways- financially, socially, physically, mentally. Response from policymakers and providers needs to be gender transformative so that fundamental gender issues like social norms, access to resources, etc are addressed. Can digital solutions help? What can be the design elements to develop truly gender centric programs, policies, and products to help women cope with the crisis brought by the pandemic?

Read our strategic insights to know more.

 

What does it take to nudge low- and moderate income(LMI) population segments to adopt DFS

Posted on by MSC

With development programs aligning to BMGF’s D3 Digitize, Direct, and Design (D3 approach), there is an increasing focus on directing government payments and cash transfers in women’s accounts. It is critical to ensure that the ecosystem allows women to access this money and use it with full autonomy and confidence. Their ability to do so is essential for their empowerment process.

Despite enrolling for bank accounts, the use of conventional financial services through brick-and-mortar structures is often restricted for women owing to existing socioeconomic norms and limited mobility. DFS has proved to be a solution that could overcome these challenges. DFS not only acts as a catalyst for women’s economic empowerment, but it also promotes the overall economic development of a country as a whole. However, the adoption of DFS amongst the LMI, especially women has been limited. Considering the increasing need for digital payments, MSC conducted a behavioral research study to understand what a DFS transaction journey looks like for a first-time user.

We find that both men and women respond to different nudges for adoption. Furthermore, they have different use-cases as well. Our findings reveal that encouraging the use of DFS is a design challenge for FSPs. Understanding behavioral biases, social norms, and the status quo for women will be the cornerstone of user-centric financial products.

 

A phone can only do so much: Why mobile access isn’t leading to digital financial service usage among women in India

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COVID -19 recovery is likely to fail women- digital financial services can help, if designed wellIndia has made significant progress in financial inclusion in recent years. However low-income working women are not benefiting from this progress, even when they receive their wages digitally. To better understand why, BSR’s HERproject and MSC have researched the financial behaviors of female garment workers in India, with support from the Bill and Melinda Gates Foundation.

Our research confirmed that being paid into a bank account and owning a mobile phone do not automatically lead to usage of digital financial services (DFS), and that greater efforts are needed to build female workers’ knowledge, confidence, and agency in this area. At the same time, financial service providers in India are not considering gender when designing new services – a theme explored in recent MSC research on the real story of financial inclusion in India.

Below, we’ll explore the reasons for this lack of progress – and what the financial inclusion sector can do to address it.

Women garment workers have low confidence while using formal financial services

“We don’t want to access the ATM, we don’t have the time, we are scared that the ATM card may get stuck in the machine. We don’t need to go since we have support from family members.”

– A female worker in a HERproject factory in Bangalore

Our research found a significant gender gap in the usage of financial services between male and female garment workers, and suggested this gap is due to persistent gender norms. Despite being paid into bank accounts for several years, the women in our survey had low financial agency, especially when accessing formal financial services. For instance, 57% of women reported needing assistance using ATMs, compared to 10% of men. Likewise, most men surveyed visit the bank (86%) and ATMs (91%) alone; less than half of women reported the same. And 48% of women reported that they share their PIN with others when using ATMs, including strangers.

Our findings on savings were more positive, with 83% of women reporting that they saved a portion of their salary, compared to only 10% of men. However, more than a quarter (27%) of women used informal financial channels to save—such as savings groups and chit funds. Women are also more likely to take credit from informal sources than men. This data suggests that, in terms of agency, knowledge and practice, the women surveyed were less likely to act independently when accessing formal financial services. A key takeaway from the report is that more should be done to help them manage their risk exposure – largely by shifting their use of financial services from the informal to the formal sector.

Why aren’t women garment workers using Digital Financial Services?

Our research shows that workers—especially women workers—were already being paid into accounts, and that the majority had mobile phones. Even so, they were not using DFS.

Mobile phone ownership—particularly smartphone ownership—is an entry point to DFS inclusion. But it does not automatically result in DFS adoption – which includes using digital methods to store and transfer funds; to make and receive payments; to borrow, save, insure and invest; and to manage finances. The GSMA’s The Mobile Gender Gap Report 2020 states that even mobile users who are aware of the capabilities of the mobile internet do not possess the digital literacy and skills needed to convert their phone ownership into DFS. And though 81% of women in our study owned a mobile phone, 31% shared that they were not comfortable operating it. What’s more, women were more likely to own a feature phone than a smartphone – just 36% of women respondents owned smartphones (32% less than men).

Our data shows that the slow uptake of DFS is related to a distrust of new technologies, which are perceived to be more complicated than cash. Unsurprisingly, there is a strong relationship between the comfort of using a mobile phone and the use of mobile banking services. And we found that, irrespective of gender, there’s a positive relationship between education level and the likelihood of owning a smartphone. However, only 44% of women who reported being “very comfortable” operating mobile phones used them to make financial transactions – a percentage that fell to 34% of women who felt “somewhat comfortable.”

Perhaps predictably, women under 25 (one-fifth of all female respondents) were also more comfortable using mobile phones compared to older women. And more than half of these young women-owned a smartphone, compared to less than 40% of women aged 26 and older. This suggests that age and gender are significant barriers to DFS usage, as are formal education levels. It also suggests that the key barrier of low technological literacy must be overcome if DFS usage is to grow. The best way to achieve this is via targeted, gender-responsive financial and digital capability and confidence-building education.

But despite their higher rates of phone ownership, the use of mobile and internet banking was not prevalent among young, educated smartphone owners of both genders. Yet low digital literacy does not fully explain why only 3% of women (compared to 22% of men) reported using mobile banking. When asked about their use of mobile technologies for other purposes—like watching videos, taking pictures, playing games, reading the news or using social media—there was little difference between genders. Such disparities again suggest that underlying gender norms – such as women deferring to men on managing finances, men’s control over financial resources, etc. – influence who uses DFS. Therefore, efforts to improve financial literacy and DFS usage must be combined with efforts to address these underlying gender norms.

Supporting women garment workers in accessing Digital Financial Services

Based on MSC’s continued studies and BSR’s HERproject’s ongoing experience working with low-income women in global supply chains, it’s clear that programs that raise women’s skills and confidence with technology – combined with improved access to financial services – consistently result in the adoption of DFS and greater financial inclusion. Addressing long-standing gender norms via these interventions will further support DFS adoption and financial inclusion while boosting the growth of the broader digital economy in India.

Our research shows an overwhelming need for the delivery of such interventions in India’s garment industry, while also highlighting where such interventions are most needed. Through HERproject, BSR’s efforts to support digital financial capability and women’s empowerment in India will continue, leading to greater financial resilience and financial inclusion for this underserved population.

For the full research report see the Financial Behavior of Female Garment Workers in India.

This blog was also published on Next billion on 04 November 2020

Will the Pandemic Exacerbate or Mitigate the Digital Gender Gap?

Posted on by MSC

As the COVID-19 pandemic spread across the world, economies were forced into lockdown to help slow the transmission of the virus. These measures had a devastating effect on livelihoods, particularly those of low-income households, and women, who face a unique set of challenges. The pandemic has deepened the gender divide along with income, assets, jobs, and livelihoods.

How COVID-19 has impacted women

New research examines how the COVID-19 outbreak has disproportionately affected women, who faced significant challenges before the pandemic. Among the effects on women are:

  • Higher exposure to risk as women are more likely to work as front-line health workers and caregivers.
  • Greater vulnerability to economic uncertainty.
  • Increased intimate partner violence.
  • Barriers to sexual and reproductive healthcare.
  • A larger drop in the mobility of women relative to men, jeopardizing their employment and business opportunities.
  • Negative coping strategies, such as the distressed sale of assets, predatory loans from informal moneylenders, and cutting down on essential consumption and meals.
  • Reduced access to the social and credit groups which women relied upon for support and solidarity.

Government responses hindered by the digital divide

In response to the crisis, governments stepped up support in the form of cash transfers, food distribution for low-income groups, and temporary employment schemes for casual workers. Targeted cash transfer schemes were particularly popular, distributed through already existing platforms or newly built digital platforms. India distributed $260 billion in cash transfers, and Bangladesh $11.9 billion.

Unfortunately, the gendered digital divide made it harder for women to access these cash benefits. In low-and-middle-income countries, women are 8 percent less likely than men to own a mobile phone, and 20 percent less likely to use mobile internet or own a smartphone. Unlocking access to mobile devices remains a fundamental problem due to the cost of phones and internet access, as well as varied regulatory policies such as requirements for e-KYC (know your customer) documentation.

Has women’s digital usage increased during the pandemic?

In Bangladesh, the pandemic brought about an unprecedented increase in digital payments. The number of garment workers, a large portion of whom are women, receiving their wages digitally went from 1.5 to 4 million, a 260 percent increase. Enrollment in digital payments for social safety net payments distributed by banks and non-bank financial institutions jumped from 1.5 to 7.5 million, an increase of 500 percent. Service providers like BRAC also contributed to the increased use of digital finance, fast-tracking digital wallet projects, and making digital cash transfers to 575,000 wallets.

Digital payments have surged elsewhere too. MSC’s research shows that women are spending more time on their phones, their use of digital interfaces has increased and they are more inclined to use formal financial services. However, the increase in time women spend on their phones has not resulted in a proportionate increase in the use of DFS; here, the increase remains less than their male counterparts.

What do women need to embrace digital?

This crisis has the potential to accelerate women’s adoption of digital services. But what will it take to bring them into this digital world more fully?

Kajal, a woman from the Odisha state in India, faced the challenge of paying for her son’s rent during the pandemic. She was cornered into going digital as she did not want to risk traveling to the bank in person during the pandemic, and her son encouraged her to pay via mobile app. She was aware of the service and had seen her peers use it, but some coaching from her son gave her the needed push to utilize this digital channel.

Millions of women have a similar experience to Kajal’s, first-time users who were initially resistant to use digital channels. They adopt digital out of necessity, and only with the help of supportive intermediaries. MSC’s research on ‘What does it take to nudge low- and moderate-income population segments to adopt DFS?’ found that first-time users are often apprehensive and intimidated by difficult user interfaces, but a strong use case and the availability of a troubleshooter nudges them to use digital services.

We also found that women face more challenges than men in adopting DFS, including lack of gender centrality in product design and orality skills; hence focused efforts must be made to ensure equitable access.

We must act now to eliminate the digital gender divide

While it is not yet clear what impact COVID-19 will ultimately have on women’s digital adoption, it is clear that we must urgently prioritize women’s digital literacy and access. Connected women represent the potential for a quick recovery – think of a garment factory worker in Bangladesh sharing photos via her smartphone to show management the progress of her work, a female farmer in India checking crop prices on the Internet or a small business owner in Indonesia switching to online bookkeeping. At this moment, we are at a crossroads; we can either allow the crisis to exacerbate the existing gender divide, or act now to accelerate change by supporting millions of women and girls to realize their full potential.

Join us for an engaging session on 11 Nov, 9:00am – 10:30am IST / 10 Nov, 10:30pm – 12:00pm EST as we discuss: “Pandemic in Asia: Women’s digital financial services adoption and resilience.” Register here.

This blog was also published on FinDev Gateway on 02 November 2020. 

 

Opinion | Designing financial products for women

Posted on by MSC

Marketers from a growing range of industries have gone to great lengths to create consumer markets that are segmented along gender lines—from soaps to two-wheel vehicles to vacation packages. However, financial services providers (FSPs) remain largely oblivious to the needs of women.

Across the globe, a billion women remain financially excluded, with a gender gap of 9% persisting stubbornly in developing countries. Further, the 2017 Global Findex survey conducted by the World Bank found that in India, while the gender gap in access to bank accounts has decreased to 6% from 20%, the percentage of women who are active users (35%) is less than that of men at 47%. Poor financial product design for women contributes to this.

The micro-credit movement brought these women into the formal financial fold for the first time, with loans and passbooks issued in their names. But they were not necessarily considered active consumers of financial services. Rather, they were often seen just as conduits to push credit into households with the hope of eventually lifting people out of poverty. There is limited evidence on the scale-up and success of women-led enterprises financed by micro-credit.

In a similar vein, governments in developing countries institutionalized conditional cash transfers (CCTs) to link social transfer payments to women’s bank accounts. But again, broadly, CCTs have been built with an emphasis on the social welfare of the family, rather than the economic benefit of individual women beneficiaries.

In these financial services models—both of which are pioneering and landmarks in their own right—women have been conflated with ‘family’ and considered merely an avenue to pursue social welfare. Financial service providers are the channel for the delivery of CCTs and microfinance. They have been surprisingly lackadaisical and unimaginative in sensing a business opportunity around the millions of poor women who have bank accounts at their retail branches.

There is an urgent need to consider women as a distinct segment with specific financial services requirements, without disguising male-focused products as gender-neutral. To enable this change, one needs to study the myriad social and behavioral impediments impacting women, and use this knowledge to design customized financial product offerings.

Innumeracy, distinctly apart from illiteracy per se, acts as a cognitive barrier and hinders women from developing familiarity with FSPs or their business correspondents (agents). Often, men take advantage of this handicap, using it as a pretext to deal with FSPs on ‘behalf’ of the women in the household, who, they claim, “would get duped or would be unable to transact”.

There is a need to actively employ oral informational management tools such that these women can transact independently. Also, women prefer to learn and work with their peers. A collaborative approach reduces financial risk within a peer group and helps pool resources like time and labor. FSPs must make use of this critical element, given the strong influence it has on the uptake of personal financial services by poor women.

Behaviourally as well, women customers take more time to develop trust in a particular agent, requiring more interaction with him or her. The presence of women agents can help in this context, especially because women customers consider them more trustworthy and better at maintaining confidentiality. Evidence from India suggests that financial service providers haven’t invested many resources in supporting women agents and their enterprises. An agent network Accelerator study conducted by MicroSave found just 8% of women business correspondents in India.

Studies have shown that women-owned enterprises have stronger repayment records with non-performing loans being 30-50% lower than male entrepreneurs. They also have a likelihood of availing more products (up to three times) than men. This is a significant business opportunity that FSPs fail to utilize. The FSPs can use big data analytics to make sense of gender-disaggregated data points. Specifically, they can assess and track the benefits of providing financial services to poor women, both in terms of repayment and social benefits to households. FSPs can also use proxies, such as adherence to cash transfer schemes, as a measure of financial discipline and stable cash flows.

Furthermore, women-led micro-enterprises expect much more than the delivery of financial products—especially in terms of business advisory support in managerial capacity-building, bookkeeping, technological up-gradation, skill development, and legal procedures to scale-up their businesses. Also, women-led micro and small enterprises not only struggle to access capital but also to formally register their enterprises. This restricts their business development activities and engagement with e-commerce distribution channels.

By providing support on all these fronts, financial services providers will gain by getting access to a more credit-worthy customer segment. In turn, they will transform the lives of women entrepreneurs and reduce the gender gap in access to financial services—all this while positioning themselves as engineers of social change for good.

An immediate push to bring gender-centricity as a lens and a mindset to the forefront of the policy framework and product design can do wonders. It will bring about gender equality in the financial services space, adding a customer base of vastly underserved women. FSPs have to be mindful of the impact that each design attribute will have on the lives of women. The twin advantages of pursuing this course will be to transform women’s lives and offer a business value proposition for financial services providers.

This blog was also published on Livemint on 22 October 2020