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Role of microfinance in climate change adaptation

Apr 28, 2010

Assessing the Role of Microfinance in Fostering Adaptation to Climate Change, an OECD publication analyses the lending activities of 22 microfinance institutions in Bangladesh and Nepal to assess the extent to which microfinancing can help the poor adapt to climate change.

Assessing the Role of Microfinance in Fostering Adaptation to Climate Change

Publisher: Organisation for Economic Co-operation and Development, February 2010

Much of the current policy debate on adaptation to climate change has focused on estimation of adaptation costs, ways to raise and to scale-up funding for adaptation, and the design of the international institutional architecture for adaptation financing.

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There is however little or no emphasis so far on actual delivery mechanisms to channel these resources at the sub-national level, particularly to target the poor who are also often the most vulnerable to the impacts of climate change. It is in this context that microfinance merits a closer look.

This paper offers the first empirical assessment of the linkages between microfinance supported activities and adaptation to climate change.

Specifically, the lending portfolios of the 22 leading microfinance institutions in two climate vulnerable countries – Bangladesh and Nepal - are analysed to assess the synergies and potential conflicts between microfinance and adaptation. The two countries had also been previously examined as part of an earlier OECD report on the links between macro-level Official Development Assistance and adaptation.

This analysis provides a complementary “bottom-up” perspective on financing for adaptation. Insights from this analysis also have implications for OECD countries. This is because microfinance is also being increasingly tapped to reduce the vulnerability of the poor in domestic OECD contexts as well and may therefore have the potential to contribute to adaptation.

Microfinance provides access to basic financial services to the poor. Through small loans with compulsory, frequent repayments to groups or individuals, microfinance helps the poor build up their assets, establish or develop a business, and protect against risks. Microfinance institutions (MFIs) are now spread all over the world (including in developed countries), and count over 100 million of the world’s poor among their clients.

Almost 90% of the clients of MFIs are women. The scope of microfinance services, meanwhile, not only includes the provision of credit for income generation, but also savings, insurance, money transfer, and educational and health loans. Many MFI’s also provide “credit plus” complementary services such as skills education and training, health and nutrition workshops, and advice on agricultural practices.

These elements of microfinance make it an attractive vehicle for facilitating adaptation. MFI’s already has pre-existing networks of access to the poor – especially women – who are also particularly vulnerable to climate change. Meanwhile, the nature of microfinance lending, consisting of high volume, limited value loans, is also consistent with the fundamental nature of a majority of adaptation actions that will ultimately consist of thousands of decentralised actions by individuals, households and communities, as they continuously seek to internalise climate risks in their activities.

The paper identifies areas of opportunity where microfinance could be harnessed to play a greater role in fostering adaptation, as well as its limitations in this context. It also explores the linkage between the top-down macro-financing for adaptation through international financial mechanisms and the bottom up activities that can be implemented through microfinance.

The rest of the report is organised as follows. Section 2 provides an overview of microfinance and its key elements. Next, Sections 3 and 4 examine the specific experiences to date with microfinance in Bangladesh and Nepal and the relationship between these activities and adaptation to climate change. These case studies provide the basis for a more nuanced and concrete discussion of the full range of linkages between microfinance and adaptation in Section 5.

These include: whether the success of some currently funded microfinanced projects might be at risk from climate change, the extent to which existing microfinance funded activities already contribute to adaptation, and some of the limitations of microfinance in the context of adaptation.

Source : SciDev Net
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