Natural Disasters and Economic Growth: The Mitigating Role of Microfinance Institutions

Abstract

In this study, we explore whether microfinance institutions (MFIs) can mitigate the adverse macroeconomic consequences of natural disasters. The provision of capital immediately following a natural event is recognized as one of the necessary conditions for a fast economic recovery. However, one concern is that a large majority of natural disasters occur in developing countries where households and the private sector have only limited access to the formal banking system. As an alternative, MFIs may fill up this gap in providing liquidity in the form of microcredit. The existing evidence on how MFIs respond to disaster effects is foremost based on case and micro-level evidence. In turn, the focus of this study is more on the macro impact of MFI activities after a natural disaster. Based on the finding obtained from an OLS-FE model using an unbalanced panel considering more than 80 developing countries and emerging economies, we can conclude that natural disasters harm macroeconomic performance primarily through their effect on the agricultural sector. However, access to lending facilities from MFIs mitigates a large part of this negative effect. Moreover, the extent to which MFIs are able to mitigate these effects depends to a great extent on their nature, i.e., their organizational structure, profitability, legal status, age, and the number of clients they serve.