19 July 2021
By Jeanette Moling, Policy Specialist, AFI
Tropical Cyclone Eloise made a landfall in central Mozambique at the end of January this year, leaving widespread flooding and heavy damages including in the neighboring countries of Eswatini, South Africa and Zimbabwe. It affected more than 250,000 people in Mozambique, most of whom were still recovering from the impacts of 2019 Cyclones Idai and Kenneth. At the same time, Tropical Cyclone Ana pummeled Fiji and other neighboring island states with torrential rains and strong winds causing massive flooding, damaged infrastructures and affected the lives of more than 480,000 people. This event happened just over a month after the deadly Cyclone Yasa hit the country and other Pacific Island states in December 2020. Natural hazards are not necessarily disasters, but a disaster may happen when the hazard event is combined with exposed and vulnerable populations or communities with limited coping capacities.
Disaster resilience building requires a coordinated approach among all stakeholders from the government and the private sector to the affected populations and communities. Financial regulators play an important role in supporting governments and economies in preparedness, response and recovery by safeguarding the financial system from the impacts of widespread disasters. Moreover, by enabling access to finance, financial regulators contribute significantly to building back better from the aftermath of disasters.
The improvement of the socioeconomic conditions of the most vulnerable populations and economies can become hampered as more frequent and more intense occurrences of widespread disasters are slowing down recoveries and increasing social inequalities.
While countries around the world were gearing up for economic recovery from the impacts of the COVID-19 global pandemic, countries exposed to natural hazards bear the additional burden of coping with widespread disasters from natural disasters on top of the global pandemic. These hazard events are exacerbated by climate change and environmental degradation and have been the central concern of financial regulators working on inclusive green finance.
AFI’s Disaster Resilience through Financial Inclusion report examines the role of financial inclusion and financial regulation in disaster risk reduction by highlighting policy examples and good practices from the network. These examples demonstrate the important role of financial regulators, especially in developing economies, in helping governments adapt and strengthen social safety nets to the impacts of the changing environment.
In countries that have experienced disasters associated with natural hazard events, financial regulators have put in place measures to strengthen financial stability amid such risks. In Paraguay, for example, a drought in 2007 heavily impacted the country’s agricultural sector resulting into negative growth in Gross Domestic Product (GDP). This prompted the inclusion of droughts as an economic stressor by Banco Central del Paraguay. This also resulted in the establishment of the country’s financial stability council in 2019.
Financial regulators have also been working on preparing for disasters through financial mechanisms and systems that will make emergency resources accessible for the most vulnerable populations. In the Philippines, the Bangko Sentral ng Pilipinas (BSP) integrated disasters associated with natural hazards and pandemics in its business continuity management guideline. This helped banks and other BSP-regulated institutions better prepare for disasters. Risk transfer and risk sharing mechanisms are also being explored in many countries, some of which are initiated by central banks.
Meanwhile, digital financial services not only enable financial inclusion but also provides channel for cash transfers in humanitarian response. For instance, Fiji used e-money to distribute social payments following disasters. The use of e-money was also seen in Paraguay as part of its response to the COVID-19 global pandemic.
In the Philippines, temporary relaxation of Know-Your-Customer (KYC) policies or easing the requirement rules for valid IDs for customer onboarding and transactions allowed displaced workers and intended beneficiaries of welfare programs who do not have an account to open one and enable access to basic government and financial services. In addition, temporary adjustments on maintaining balance requirements and withdrawal limits have also been utilized in the Philippines to allow affected populations to continuously access financial services.
The report also discussed how in post disaster recovery, financial regulators are in a good position to steer rapid economic recovery and support building back better through its facilities. While financial regulators are not always involved in disaster risk reduction, they play a huge role in redirecting resources towards resilience building and sustainable recoveries. For instance, the Reserve Bank of Fiji’s Disaster Rehabilitation and Containment Facility has been instrumental in the country’s post disaster recovery efforts by providing access to loans to help affected populations rebuild their homes.
With the changing environment, the approach to disaster risk reduction needs to be inclusive and sustainable to lessen impacts of future hazard events, prevent future disasters from happening and build back after a disaster without leaving anyone behind. While financial inclusion is not a panacea to resilience building, it enables vulnerable populations to access resources in the form of savings, credit and insurance that can help them better prepare and easily recover from the onslaught of natural hazard events.
The inclusive green finance workstream is part of the International Climate Initiative (IKI), supported by the German Federal Ministry of the Environment, Nature Conservation and Nuclear Safety (BMU), based on a decision by the German Bundestag.