MICROFINANCE PAPER WRAP-UP: Climate Change and Microfinance by Asif Dowla

Written by Asif Dowla, published by Grameen Foundation and Oxfam America in November 2009, 39 pages, available at: http://www.oxfamamerica.org/press/pressreleases/grameen-foundation-and-oxfam-america-release-new-report-on-climate-change-and-microfinance

This report discusses the potential impacts of climate change on microfinance institutions (MFIs) and how MFIs will need to adapt to the changing environment. It begins with a brief overview of climate change and its regional impacts. The author argues that developing countries in Africa, Asia and Latin America, in particular, will be the hardest hit. People who live in these regions are among the poorest, and therefore the most vulnerable. Climate change will further increase their vulnerability by having an adverse effect on crop growth and exacerbating flooding and the spread of disease.

With anecdotal evidence alleging that crop production is highly correlated with borrowers’ repayment rates, the author claims that climate change, manifested in the form of natural disasters such as extreme droughts and floods, will have significant “indirect consequences for these institutions [MFIs].” As climate change increases the frequency of disasters, defaults on micro-loans will increase. Furthermore, relief funds that were once used to mitigate isolated disasters will become far less accessible. The author predicts that in the future, MFIs will be pressured to forgive debt, which will “have the potential to destroy the cherished culture of repayment that [they] have painstakingly built over time” (p.15).

Since the potential impacts of climate change are dire, “the top priority for MFIs should be to climate-proof their existing products: credit, savings and insurance” (p.18). To “climate-proof” loan products, the author suggests that MFIs must be more flexible with repayment terms, allowing members to reschedule installments during or after natural disasters. He also suggests that MFIs build certain regulations into loan contracts. When providing a housing loan, for example, MFIs could require borrowers to plant trees around their houses, thereby limiting the effect of high winds and receding floodwaters.

To climate-proof savings products, the author advocates the Grameen Bank model of using voluntary savings accounts instead of compulsory savings accounts. While compulsory savings accounts act as a cushion for MFIs to provide further on-lending, borrowers are not allowed to use these funds during a crisis. As a result, they are more likely to become dependent on usurious loans from moneylenders to pay for essential items. The author suggests that MFIs should provide voluntary savings in addition to developing “a line of credit they can access to meet the increased demand for withdrawals during disasters,” decreasing the risk of a liquidity crisis (p.24).

With regards to insurance products, the author addresses the need for an expansion of index-based risk transfer products (IBRTP). These product works by providing policies that pay a fixed amount in the event of a measurable occurrence of a natural disaster, e.g. an earthquake registering a certain magnitude, cumulative rainfall or a drought that has lasted for a certain number of days. “Once weather-based indices are well developed, they can be used to trigger funding to MFIs to deal with climate-related disasters when the value of the indices falls below the threshold level. For example, a consortium of donors could take out a contract to insure the portfolios of MFIs in Bangladesh against the risk of floods” (p.39).

In addition to insuring borrowers, MFIs should be able to insure their own portfolios against natural disasters. This would require partnerships between MFIs and insurance companies. The author also advises MFIs to create partnerships with multilateral institutions to develop concessional funding facilities. As an additional precaution, MFIs should develop flexible disaster plans to deal with a range of natural disasters and diseases.

Lastly, the author suggests that MFIs should take advantage of the market for carbon trading and solar energy. This has numerous potential advantages, including job creation and a decrease in common hazardous practices such as the use of kerosene lamps, cow dung and wood as fuel for cooking, which causes indoor and outdoor pollution. “The most important benefit is that…clean energy will allow the poor to become agents of change-reducing greenhouse gas emissions even though the poor have the lowest carbon footprint” (p.36).

Dr Asif Dowla is an economics professor at St. Mary’s College of Maryland. In 1997 he received a fellowship to spend a year on sabbatical at Grameen Bank. In 2006 he published a book titled, “The Poor Always Pay Back: The Grameen II Story.” He received a BA in Economics (Honors) and an MA in Economics from Chittagong University, an MA in Economics at the University of Western Ontario and a PhD in Economics from Southern Methodist University.

By: Stefanie Rubin, Research Assistant

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