Vulnerability of Microfinance to Natural Disasters: Evidence from the 2005 Pakistan Earthquake

This paper attempts to quantify the ill-effects of covariate shocks such as natural disasters on the sustainability of microfinance. The vulnerability of microfinance to covariate shocks is wellknown theoretically and in anecdotes, but very few quantitative evidence exists. For our attempt, we use a unique dataset of about 3,000 micro-borrower households covering over a period of 1994-2006 including the event of a disastrous earthquake in Pakistan. Based on the differencein-difference approach, contrasting regions that were hit by the earthquake and regions that were not, we found that the delay in repayment in the affected areas was 52% higher than that in the unaffected areas. The observed difference in the repayment delay was decomposed into changes in borrowers' composition and borrowers' behavior. The decomposition result shows that the changes in borrowers' behavior accounted for a large portion of the difference, suggesting a serious difficulty faced by borrowers and microfinance institutions in the earthquake-hit regions.