By Shardul Agrawala and Maëlis Carraro, published by Organization for Economic Co-operation and Development (OECD), February 2010, 38 pages, available at: http://www.microfinancegateway.org/gm/document-1.1.4705/02.pdf
This paper examines 22 microfinance institutions (MFIs) in Bangladesh and Nepal to determine areas in which microfinance may be able to facilitate adaptation to climate change.
The paper first examines the relationship between microfinance and climate change adaptation in Bangladesh, a country threatened by increased flooding and increased monsoon and cyclone severity due to climate change. The Organization for Economic Co-operation and Development (OECD) has identified the top three priorities with regards to climate change adaptation in Bangladesh as the protection of water resources, which are threatened by flooding; the protection of human health, which is threatened by faster spreading of diseases due to flooding; and the protection of agricultural production, which the OECD projects to be moderately to severely harmed by climate change.
The authors argue that Bangladeshi MFIs are already promoting adaptation by decreasing the vulnerability of poor people by: (1) allowing them to accumulate and manage assets and (2) financing activities that are specifically aim to protect against the risks of climate change outlined by the OECD. One example of MFIs’ contribution in the latter area is the programs implemented by various MFIs to encourage the construction of homes and commercial buildings that are more resistant to floods and storms. Another example is the promotion of hybrid crops that are more tolerant of salt and other water-related stresses that could be exacerbated by floods.
The authors then discuss Nepal, which has already begun to experience the effects of climate change through the melting of its glaciers, some of which are expected to disappear completely within a few decades. The melting of glaciers increases the risk of flooding in lakes and rivers fed by glacial melts. The top four adaptation priorities identified by the OECD in Nepal are water resources, agriculture, human health and biodiversity.
Unlike MFIs in Bangladesh, Nepalese MFIs generally do not support activities that directly protect against the water-related effects of climate change. However, Nepalese MFIs are beginning to offer microinsurance products, such as life insurance and livestock insurance, which Nepalese residents can use to protect themselves against risks associated with climate change. The article notes that the effectiveness and ubiquity of microinsurance is questionable, because it is generally only available to relatively well-off clients and has not yet been tested by a major disaster.
However, Nepalese MFIs indirectly support adaptation through programs that provide irrigation infrastructure, healthcare, sanitation and the purchase of agricultural inputs. The article notes that healthcare and sanitation loans offered by MFIs are usually only available to customers who have a good history of repaying loans and are offered at discounted interest rates because they help the MFIs by reducing the risk of default due to death or illness.
The authors point out several opportunities for MFIs to increase their support for climate change adaptation. For example, the paper argues that Bangladeshi MFIs can increase their clients’ flood-readiness by encouraging clients to take out loans to purchase equipment for raising fish. This would allow their clients to utilize any body of water, such as flooded fields, to grow fish to generate income. The authors encourage Nepalese MFIs to offer more loans for the purchase of flood-resistant building materials for the construction of new buildings and the renovation of existing ones. Moreover, the authors support increased flexibility in repayment schedules to allow longer-term, more flexible repayment schedules during rainy seasons to accommodate clients whose income is subjected to risks such as flooding and storms.
By Eric McKay, Research Assistant
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