Assessing microfinance in response to climate change

Eric McKay at MicroCapital.org discusses an interesting paper: ….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 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…..

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. … 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….

Rainy season in Bangladesh, shot by Shahnoor Habib Munmun, Wikimedia Commons, under the Creative Commons Attribution 3.0 Unported license