Bank Strategies in Catastrophe Settings: Empirical Evidence and Policy Suggestions

41 Pages Posted: 9 Oct 2012

See all articles by Leonardo Becchetti

Leonardo Becchetti

University of Rome Tor Vergata - Faculty of Economics

Stefano Castriota

University of Perugia

Pierluigi Conzo

University of Turin - Department of Economics and Statistics; Collegio Carlo Alberto

Date Written: October 8, 2012

Abstract

The poor in developing countries are the most exposed to natural catastrophes and microfinance organizations may potentially ease their economic recovery. Yet, no evidence on MFIs strategies after natural disasters exists. We aim to fill this gap with a database which merges bank records of loans, issued before and after the 2004 Tsunami by a Sri Lankan MFI recapitalized by Western donors, with detailed survey data on the corresponding borrowers. Evidence of effective post-calamity intervention is supported since the defaults in the post-Tsunami years (2004-2006) do not imply smaller loans in the period following the recovery (2007-2011) while Tsunami damages increase their size. Furthermore, a cross-subsidization mechanism is in place: clients with a long successful credit history (and also those not damaged by the calamity) pay higher interest rates. All these features helped damaged people to recover and repay both new and previous loans. However, we also document an abnormal and significant increase in default rates of non victims suggesting the existence of contagion and/or strategic default problems. For this reason we suggest reconversion of donor aid into financial support to compulsory microinsurance schemes for borrowers.

Keywords: tsunami, disaster recovery, microfinance, strategic default, contagion, microinsurance

JEL Classification: G21, G32, G33

Suggested Citation

Becchetti, Leonardo and Castriota, Stefano and Conzo, Pierluigi, Bank Strategies in Catastrophe Settings: Empirical Evidence and Policy Suggestions (October 8, 2012). CEIS Working Paper No. 254, Available at SSRN: https://ssrn.com/abstract=2158641 or http://dx.doi.org/10.2139/ssrn.2158641

Leonardo Becchetti (Contact Author)

University of Rome Tor Vergata - Faculty of Economics ( email )

Via Columbia, 2
I-00133 Rome
Italy

Stefano Castriota

University of Perugia ( email )

Via Pascoli 22
Perigoa, 06121
Italy

Pierluigi Conzo

University of Turin - Department of Economics and Statistics ( email )

Campus Luigi Einaudi
Lungo Dora Siena 100 A
Torino, Torino 10153
Italy
011/6703892 (Phone)
011/6703895 (Fax)

HOME PAGE: http://www.pieroconzo.altervista.org/wordpress/

Collegio Carlo Alberto ( email )

Piazza Arbarello, 8
Torino, 10122
Italy

HOME PAGE: http://www.carloalberto.org/people/faculty/affiliates/pierluigi-conzo/

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