In face of climate change, adapt…
by Asif Dowla: Wednesday, December 16, 2009
As the events at the Copenhagen summit on climate change continue to unfold this week, I think it is important that we look at the relationship between climate change and microfinance.
The microfinance industry has been almost silent about climate change. Even in Bangladesh, where microfinance institutions (MFIs) provide services to more than 30 million households, the industry did not actively participate in the National Adaptation Program of Action (NAPA), which helps less developed countries identify priority activities for responding to climate change.
Scientific consensus is that poor countries in Asia, Latin America, and Africa will bear the brunt of the consequences of climate change. Since MFIs and their clients mostly live in poor parts of the world, they will be adversely affected by climate change. And so the silence of the industry about climate change is surprising. Interestingly, the clients of these institutions are already noticing the change in the climate and adapting to such changes. In a white paper commissioned for Grameen Foundation and Oxfam America, I examined the consequences of climate change for the microfinance industry.
The clients of MFIs will feel the immediate effects of climate change. It will affect their livelihood adversely by decreasing crop production, increasing the disease burden and incidence of malnutrition and bad health outcome. More importantly, it will cause deaths through disease, flood and droughts, and other natural disasters whose frequency and intensity will increase due to global warming. In other words, climate change will reverse the progress that poor people have made using financial services provided by the MFIs.
The changes in the physical environment caused by the climate change will affect MFIs in a number of ways. They are likely to see an increase in default rates, and many MFIs will face repayment crises. They probably will also face a run on savings and increased claims on insurance products. Climate change will decrease the productivity of agriculture and will make investments by MFIs in this sector less profitable. Investments in livestock, a significant part of the portfolios of MFIs, will be directly affected by climate change because of increased droughts, floods, and disease outbreak.
My take-away message for the industry: adapt. Microfinance institutions have to ‘climate proof’ their current products by reconfiguring them. For example, they have to allow flexibility in the repayment schedule of the loan by letting clients pay more during better times and less when conditions deteriorate. They have to allow open access to savings accounts so that the clients can draw down on them during hard times. In addition, MFIs have to scale up their offering of health and livestock insurance. To their credit, some MFIs such as Grameen and ASA in Bangladesh have already instituted these changes. However, to effectively deal with global warming, the whole industry must take up these changes.
Climate change will also create opportunities for microfinance institutions. They will be able to develop projects that can generate additional sources of revenue by selling carbon offsets through the UN clean development mechanism and in the voluntary carbon offset markets.
One hopes that rich countries will fund R & D for new financial services to deal with the consequences of climate change. In the meantime, MFIs have to do their part: introduce flexibility in their products and develop new products and a disaster plan.
Note from the editor: You can also read more about microfinance and climate change in CGAP’s Focus Note Microfinance and Climate Change: Threats and Opportunities.
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January 5th, 2010 at 10:39 am, David Levai ()
In the face of climate change, adapt… and mitigate!
Asif Dowla, a microfinance expert and professor of economics at St Mary’s college of Maryland, has a great idea: engage the microfinance industry to adapt to climate change. This post is a call to action following the release of a report he wrote for Grameen Foundation and Oxfam America and an interview with Paul Rippey, another microfinance and climate change specialist. His piece is a reminder to us all that microfinance has not been paying close enough attention to the threat of climate change, despite the fact that it will affect the world’s poor first—the very ones whom MF aims to help.
In recent years, the microfinance industry, maybe more than the rest of the development community, has failed to provide scalable and replicable solutions to address the rising climate threats. No surprise here, as in the last decade, microfinance institutions have proven reluctant to disrupt a highly successful credit-based business model growing at exponential rates.
Asif Dowla calls for a “climate proofing” of microfinance products and institutions in order to adapt to the new environmental conditions that have already started to impact the poor (recurrent droughts, rising water levels, diseases and pests expansion). He recommends institutionalizing a change of model allowing flexibility of repayment schedules and installments for clients struck by natural disasters. His argument: MFIs need to incorporate these climate-related threats in their strategic plan for fear of being hurt.
But I believe that adapting to these unknown conditions is not the only answer to protect our clients when it comes to climate change. At the Center for Financial Inclusion at ACCION, we believe that MFIs have an important role to play in mitigating the effects of climate change by changing their clients’ behavior and offering clean energy solutions. Through our Energy Links program, we empower MFIs to become agents of change by providing environmental and energy literacy, a market for clean energy products, and financing solutions—three conditions that allow a massive uptake of pro-poor energy solutions. MFIs are particularly well-positioned through their relationships with low-income families across the globe to become not only a platform to support adaptation but also to promote mitigation of climate change.
Another incentive for MFIs to be innovative around the climate crisis is a financial one: carbon finance. Despite the numerous conversations going on today, carbon credits traded on the voluntary market are not a true and reliable source of income yet, but will most certainly become one in the near future. It is hard for an MFI today to access carbon finance mechanisms and revenue since they are supposed to broker structurally complicated deals due to a high dispersion of sources and costly monitoring requirements. Moreover the volumes of carbon savings sought after by western corporations, the main actors on the voluntary market, are massive. Large energy savings schemes or clean power plants are therefore more attractive to carbon investors. But, as the frequency of these deals happen and as the price of a ton of carbon increases, this could become a steady source of finance for MFIs to support mitigating and adapting to new climate conditions.
A solution might just be to simplify trading platform and requirements for carbon trading on the voluntary market, offering an easy way for concerned individuals to offset their emissions by funding green MFIs. It’s time to launch a green Kiva! But it does exist already thanks to the approach of a new company: Yurtcozy. And they have a carbon footprint calculator. Isn’t the end of the year the perfect time to reflect on our personal carbon footprint and ask ourselves the tough question: how much will I offset this year?
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