Do microfinance institutes help slum-dwellers in coping with frequent disasters? An agent-based modelling study

The vulnerability of slum-dwellers to disasters requires particular attention due to the increasing frequency of disasters in slums combined with dilapidated housing conditions and lack of infrastructure. The absence of appropriate institutional and governmental aid has made slum-dwellers to rely upon their coping capacity. Having own financial capital can strengthen the coping capacity of an individual during disasters. Microfinance Institutes (MFIs) provide loans or microcredits to slum-dwellers to start a business individually or as a group, which eventually helps in increasing their financial capital. MFIs can also facilitate smooth repayment of loans by providing relief funds during disasters. However, frequent disasters might negatively influence the functioning of these mechanisms. Therefore, in this paper, we explore whether MFIs can increase the coping capacity of slum-dwellers by increasing their financial capital while facing disasters. Due to lack of empirical data on the impact of MFIs, we developed a stylised Agent-Based Model (ABM). The model includes interactions between slum-dwellers and an MFI as well as moneylenders. Slum-dwellers are facing disasters of varying frequency and intensity and can form ROtating Savings and Credit Associations (ROSCAs). Overall, the model results supported the claim that providing microcredits through MFIs has the potential to increase slum-dwellers’ coping capacity while facing frequent disasters. However, the study also indicates that MFIs need to be carefully tailored to the local context in order to support slum-dwellers’ coping capacity, for instance by adapting the repayment period.