Microfinance: Climate change connections

Print
 
Apr 2008
Washington D.C., United States, April, 11 2008 - In 2001, the IPCC concluded that “the impacts of climate change will fall disproportionately upon developing countries and the poor persons within all countries.” The poor are least able to cope on their own with the threats to their homes, communities, livelihoods and health. What role might microfinance - the delivery of financial services, including credit, savings, and insurance to the poor- play in reducing our greenhouse gas emissions and helping vulnerable low-income populations adapt to the impacts of climate change?

Just a few years ago, most people working in microfinance viewed environmental concerns as a luxury. While such worries were undoubtedly important for society as a whole, expecting their low-income clients to adapt their enterprises and lifestyles towards “greener” practices were not only unrealistic, but tantamount to levying a tax on those least able to afford it. Innovation in the microfinance field focused on products that would help poor people increase their incomes and reduce vulnerability in the short term.

The past year has brought a sea change in this perception. The notion is gaining acceptance that incorporating a climate change lens to microfinance is essential and urgent. A growing circle of microfinance institutions (MFIs), networks and funders has launched new products and partnerships aimed at the microfinance-environment connections. For example, a pilot program—funded by the Citigroup Foundation and the US Agency for International Development and managed by the Small Enterprise Education and Promotion (SEEP) Network—teamed up six MFIs in Asia and Africa with renewable energy companies and organizations to explore potential collaborations and business models (SEEP 2007). A number of respected MFIs and networks—including ACCION, BASIX in India and Equity Bank in Kenya—are exploring products to respond to climate change challenges and opportunities.

Current practices and lessons learned

Most of the experiments so far have focused on financing options to help low-income households acquire cleaner/renewable energy technologies such as liquefied petroleum gas (LPG), improved stoves and bio-digesters.

Other initiatives, such as the partnership between SEWA Bank and SELCO-India, seek to meet the energy needs of self-employed individuals and microenterprises for processing, agriculture and other livelihoods. In one case, the SEWA-SELCO partnership finances the acquisition of the technology package especially designed by the solar energy company to help low-income women who own solar battery chargers and rent out solar lanterns to vendors in evening markets.

Very recently, the World Bank’s Carbon Finance Unit has signed agreements to buy the carbon credits associated with greenhouse gas reductions through installations of solar systems in homes in Bangladesh by the Grameen Bank’s clean energy affiliate—Grameen Shakti (970,000 homes)—and its Infrastructure and Development Company Limited (227,000 homes). These agreements will help provide solar electricity to households that are not connected to the electricity grid and ordinarily use kerosene and diesel, thus reducing greenhouse gas emissions (Reuters 2007).

Several of the experiments appear promising and scaleable, and have commercial potential with little or no long-term subsidy. Others are less successful but provide important lessons for future work: demand from clients may have fallen far short of expectations, arrears have spiked, or partnerships have been costly and problematic relative to the benefits for clients, MFIs and energy companies. A substantial and systematic exploration of lessons from the pioneer initiatives, and the broader question of how the rapidly growing microfinance sector might assist its low-income clients, while contributing to climate change mitigation and adaptation, is both important and urgent.

Challenges and opportunities

The first fundamental challenge is demand. Will the various client segments—such as households, communities, microenterprises, farmers and energy entrepreneurs—want improved technologies and practices and be willing to use finance for them? For typical microfinance clients, affordability of many of the household-level renewable energy technologies is certainly an issue, whether financing is available or not. Other factors, such as perceived reliability and safety, access to installation and maintenance services, and cultural acceptability may be just as significant in limiting effective demand. In addition, low-income families may find it hard to justify investment in a household solar electricity system, at a cost of hundreds of dollars, when the savings are realized only over a number of years.

Supply-side issues also need attention if we are to design and deliver financing to meet these needs on a sustainable basis and on a large scale. What types of financial products are most suitable for clients, while fitting the capacity and business models of different types of MFIs? While many MFIs provide very short-term loans to groups of individuals with minimal credit analysis, this method would not work well in underwriting larger-scale, more complex and longer-term financing needs, particularly in the enterprise and community market segments. And, if MFIs adapt their financial products accordingly, will they be able to get the additional financing they need to grow their climate change-related portfolios?

Innovative partnerships could offer one solution to both demand- and supply-side constraints. There are promising alliances being formed between financial institutions and providers of energy and environmental services; in some cases, these involve cooperatives and others with the capacity to aggregate demand and organize low-income consumers and communities, including NGOs, to manage more complex initiatives. In most cases, the jury is out on whether partnership models will be scaleable and sustainable for all relevant stakeholders.

There may also be potential for microfinance to support community-based enterprise and infrastructure models, such as processing facilities or bio-gasifiers run on renewable energy, pico-hydro facilities (hydroelectric power generation under 5kW), or community-scale solar plants. However, these financing needs are likely to be larger and longer-term and present a different set of challenges, especially as these relate to longer term financing from MFIs. Additional challenges come from the need to create new microfinance products and partnerships to help clients adapt to threats to agriculture, fisheries and forest-based livelihoods that are adversely affected by climate extremes and change.

“Smart subsidies” (i.e., short-term grants and concessional loans that build nascent markets while not undermining incentives for clients or commercial firms to do what they can) in both the financial and energy/environment spheres of developing countries will have an important role to play in making microfinance relevant and significant. Several leading social investors, such as Triodos Bank of the Netherlands, are keenly interested in the potential links between their microfinance and environment portfolios. A large number of mainstream funders—such as the World Bank Group and some of the big international banks—are now committed to financing clean energy and other adaptation-related interventions, and are interested in the potential role of microfinance providers. A key wild card is whether the carbon credit markets will evolve in ways that could support climate change-related initiatives of MFIs and their clients. Currently, these trading mechanisms are unwieldy, costly to use, and oriented towards large and very specific types of transactions. However, the carbon markets are evolving quickly, and could become more user-friendly, to the extent they offer sources of credit enhancement for MFIs or even bulk subsidies to clients. The World Bank-Grameen agreement is a promising start.

The awareness of climate change amongst those involved in microfinance—finance providers, donors, investors, policy makers and even clients—is growing at an astonishing pace. Once viewed as a distraction or even hurdle to mainstream microfinance, more and more key players now see environment-friendly financing products and practices as critical to the future of the sector and, much more importantly, to the low-income and vulnerable clients microfinance was created to serve. But awareness will not mean much if it cannot be translated into smart, scaleable financing that is tailored to meet strong effective demand from low-income households, communities, microentrepreneurs, and small-scale energy and environmental businesses. Developing, testing and bringing these products and business models to scale is one of the biggest challenges facing the microfinance sector in the coming years.

Katharine McKee is Senior Advisor, Consultative Group to Assist the Poor (CGAP), The World Bank

References

IPCC, 2001: Climate Change 2001: Synthesis Report. A Contribution of Working Groups I, II and III to the Third Assessment Report of the Intergovernmental Panel on Climate Change [Watson, R.T. and the Core Writing Team (eds.)]. Cambridge University Press, Cambridge, United Kingdom, and New York, NY, USA, 398 pp. Also at www.ipcc.ch/pdf/climate-changes-2001/synthesis-spm/

synthesis-spm-en.pdfReuters, 2007: World Bank helps Bangladesh set up solar power.

http://www.alertnet.org/thenews/newsdesk/DHA44742.htm

 

Research Analysis Tools

The fund indexes, institution benchmarks and other market information displayed here are all Symbiotics designed analysis tools, created in-house by our analysts and experts. Symbiotics has one of the oldest track records in microfinance investment analysis dating back to the late 1990s; its indexes and benchmarks have been regularly used as markers by investors, asset managers, financial institutions and practitioners. These, as well as several other research products, are available through the Research Account. Click on the link below to find out more.

Learn More