Benjamin Collier

Loan portfolio performance and El Niño, an intervention analysis

Purpose - This paper illustrates that natural disasters can significantly threaten financial institutions serving the poor. The authors test the case of a microfinance institution (MFI) in Northern Peru, where severe El Nino events create catastrophic flooding. Design/methodology/approach - Portfolio-level, monthly data from January 1994 to October 2008 were examined using an intervention analysis. The paper tested whether the 1997-1998 El Nino increased problem loans and estimated the magnitude of the effect. Findings - The results indicate El Nino significantly increased problem loans, specifically the level of restructured loans. While restructured loans averaged 0.5 percent of the total loan portfolio before the El Nino, the estimated cumulative effect of El Nino indicates that an additional 3.6 percent of the portfolio value was restructured due to this event. Research limitations/implications - Future research could build on these results by modeling insurance-type mechanisms for the MFI. Additional research that replicates these analyses in another context would be highly valuable for comparison across natural disasters and financial institutions. Practical implications - The findings demonstrate that the correlated risk exposure of many small borrowers can significantly affect the lender and the importance of considering bank management in assessing disaster risk of a financial institution. Social implications - Lender strategies to minimize losses may require long-term restructuring that perpetuates the effects of the disaster in the community. Originality/value - This paper may be of particular value to researchers and practitioners hoping to improve the effectiveness and efficiency of MFIs concentrated in regions exposed to natural disaster risk.

Increasing the Resilience of Financial Intermediaries through Portfolio-Level Insurance against Natural Disasters

Financial intermediaries [FIs] in developing and emerging economies are poorly equipped to manage natural disasters. These events create losses for FIs, eroding capital reserves and compromising their ability to lend. Portfolio-level insurance against disasters can improve FI management of these events. We model microfinance intermediaries [MFIs] exposed to severe El Niño in Peru that can now insure against this disaster risk. Our analyses suggest that insurance allows these lenders to manage this risk more efficiently and effectively. These risk management improvements can translate into better financial performance, expansion of banking service outreach, lower interest rates, and reduced volatility in access to credit. Based on these analyses, a large MFI in Peru with which we collaborated is now managing its disaster risk using El Niño insurance.

The Roles of Weather Insurance and the Carbon Market

This chapter discusses two financial markets — the carbon and weather markets — and their potential role in helping stakeholders address climate change more effectively. While this chapter focuses on how these markets can benefit the poor in developing countries, it also examines the major constraints that must be addressed before the poor can gain access to carbon and weather markets. It also suggests how governments and donors might effectively facilitate sustainable carbon and weather market activity in developing countries.