Microfinance in Conflict Zones

Date Published: 
Oct 2014

A conversation with Michaël Knaute on the conflicts confronting many MFIs around the world

Class conflicts, national or territorial conflicts, and religious conflicts are some of the human disasters confronting many microfinance institutions (MFIs) around the world. A great number of MFIs today operate in countries hard hit by these phenomena and must come to terms with the constraints that such phenomena entail. This topic, with its many ramifications, will be under the spotlight at the upcoming European Microfinance Week in Luxembourg in November, where several sessions will explore microfinance in conflict zones. In advance of this event, we spoke with Michaël Knaute, Chief Executive Officer of OXUS Development Network, a microfinance organization active in such contexts. 


A portrait of Michael Knaute

Uncertain sociopolitical circumstances and a lack of security generally make people reluctant to borrow money, thus changing the nature of credit and savings supply and demand. This finding holds true in particular in cases where free external financial aid exists. What types of financial products and services are people in conflict areas looking for?

Overall, we can say that demand for SME financing is more fragile in countries where insecurity is greatest. There is nevertheless a permanent element of small-scale economic activity to be found even in contexts such as these. In addition, there is a dearth, if not total absence, of local financial operators who fail to serve the market in an effective way. So OXUS, which is specifically involved in country contexts of chronic conflict, will target the small economy, the bottom of the pyramid, mainly through productive credit, since demand for consumer goods is weaker than in intermediate or emerging economies. Parallel to this, even if it applies more to Africa than to Asia, one finds strong demand for savings, since the banking system is largely undeveloped in this type of country.
What kinds of adaptation do MFIs envision in terms of human resources, flexibility of credit policies, and supervision of recipients?

Even though microfinance is generally resilient in the face of low-intensity conflicts, the accessibility and stable security of an agency is an important element to consider in developing our network. Training and capacity building for employees and managers also constitute an important task. These are countries where, in general, academic courses and career opportunities in the financial sector are relatively limited. So we hire young professionals with little exposure to or experience in microfinance occupations. The issue of capacity building also arises in relation to the clientele, which has fairly limited knowledge of financial products and services. Courses are therefore set up to provide support and financial education to clients. As for credit policy, adaptation to the local context takes precedence over adaptation to a conflict context. 

One would imagine that the main risk lies in outstanding payments, owing to borrowers’ tight situations. How can MFIs help their borrowers deal with and guard against such a risk?

Generally speaking, we see more operational risks than credit risks. At OXUS, the quality of our portfolio remains comparable to those of more stable countries. It turns out that the issue of outstanding payments is tied more to the risks of fraud and weak internal oversight in an environment where the accessibility of agencies is not always certain.

What synergies need to be developed with the other stakeholders in the field, such as emergency relief operators, who operate in a grants-based context, which can disrupt lending activities and negatively impact loan reimbursement?

OXUS, which is part of the ACTED humanitarian group, has clearly had to deal with this risk of confusion between the humanitarian and commercial approaches. Our response is to strictly separate the structures and activities of the two organizations and to maintain rigorous client selection and oversight.  We strongly believe in the capacity of recipients to distinguish between grants and loans.

What role do donors and investors play in such situations?

Donors play an important role in the financing of new institutions, which often must face up to rather heavy investments because of a lack of accessibility, major needs in terms of training and technical assistance, logistical expenses, and wage costs that are, paradoxically, quite high. They can also play an important role in solid market infrastructure development and as guarantors in inevitably volatile environments. Nonetheless, we are persuaded that, if the necessary investments are made at the outset, microfinance institutions and banks can achieve financial and operational autonomy quite quickly, and serve an ultimately resilient and dynamic market, even in immediate post-conflict situations. We even go a little further by saying that donors should not play too important a role, at the risk of maintaining operators and the market in a situation of dependency on outside subsidization.

You work for OXUS, which is active in conflict zones such as Afghanistan or DRC, and sit on the board of the European Microfinance Platform.  How does a network such as the European Microfinance Platform help strengthen the microfinance sector in difficult environments?

The primary mission of the European Microfinance Platform is “Networking with the South.” So it has an important role in bringing European actors – whether they be investors, donors, operators, or support agencies – in contact with these markets which, despite their potential, remain poorly understood or even negatively perceived.

On a national scale, what is the role of microfinance associations during and after a conflict?

Semaine Européenne de la Microfinance (crédit: e-MFP)

We find that microfinance associations still play a limited role in these contexts – limited specifically by the small number of members, which then limits their financial resources and therefore their capacity for action. As mentioned before, donors thus have an important role in supporting these associations, which are essential for the dissemination of good practices, the emergence of an adapted regulatory framework, sector transparency, and the country’s attractiveness to foreign investors.

European Microfinance Week is now an established meeting in the microfinance sector. As a regular participant, what do you think makes this an important event?

European Microfinance Week is a unique gathering in Europe, where once a year all continental actors have the opportunity to meet and network with others over a sector that is constantly evolving. For OXUS, it is an opportunity to identify new partners from the North and the South.