Mi­cro­fi­nanc­ing cli­mate re­silience

Financial Mirror (Cyprus) - - FRONT PAGE -

Vul­ner­a­ble com­mu­ni­ties face the brunt of cli­mate change – from ris­ing sea lev­els and ex­treme weather events to pro­longed se­vere droughts and flood­ing. Ac­cord­ing to the World Bank, with­out ef­fec­tive mit­i­ga­tion mea­sures, cli­mate change could push more than 100 mil­lion peo­ple into poverty by 2030. To help the most vul­ner­a­ble com­mu­ni­ties be­come more re­silient to the ef­fects of cli­mate change, fi­nan­cial in­sti­tu­tions should sup­port small and medium-size en­ter­prises. In emerg­ing economies, SMEs ac­count for as much as 45% of em­ploy­ment and up to 33% of GDP – and these num­bers are sig­nif­i­cantly higher when in­for­mal SMEs are in­cluded. When an SME builds up its own cli­mate re­silience, it can have cas­cad­ing ef­fects in the com­mu­nity around it.

Un­for­tu­nately, SME own­ers gen­er­ally have trou­ble se­cur­ing bank loans, and in­stead must turn to in­for­mal lend­ing and al­ter­na­tive fund­ing sources to sup­port their busi­nesses. Ac­cord­ing to the World Bank, 50% of for­mal SMEs lack ac­cess to for­mal credit, and the to­tal credit gap for both for­mal and in­for­mal SMEs is as high as $2.6 tril­lion world­wide. While the gap con­sid­er­ably among re­gions, par­tic­u­larly wide in Africa and Asia.

Mi­cro­fi­nance can close this gap by pro­vid­ing the small loans that SMEs need to get off the ground and thrive. Ac­cord­ing to the OECD, mi­cro­fi­nance in­sti­tu­tions, in­clud­ing na­tional for­eign-aid agencies, banks, credit unions, and non-profit or­gan­i­sa­tions, al­ready pro­vide ba­sic fi­nan­cial ser­vices to more than 100 mil­lion of the world’s en­ter­pris­ing poor, 90% of them women.

The role of mi­cro­fi­nance in boost­ing SMEs’ cli­mate-change re­silience needs to be more fully de­fined. In Africa, Asia, and Latin Amer­ica, mi­cro­fi­nance has en­abled SMEs to in­vest in drought-re­sis­tant crops, build bet­ter ir­ri­ga­tion systems, and pur­chase cli­mate in­sur­ance to pro­tect in­comes when crops fail be­cause of too much – or too lit­tle – rain­fall.

These projects al­ready have a proven track record. Ac­cord­ing to a re­view by the OECD, 43% of mi­cro­fi­nance ac­tiv­i­ties in Bangladesh in 2010 had strength­ened the re­silience of com­mu­ni­ties. These projects in­clude lend­ing pro­grams for weath­er­re­sis­tant hous­ing and drought- and salt­tol­er­ant seeds, and they en­hanced cli­mat­e­change re­silience. In Nepal, mi­cro­fi­nance is sup­port­ing dis­as­ter re­lief and pre­pared­ness, crop di­ver­si­fi­ca­tion, and im­proved ac­cess to varies it is ir­ri­ga­tion. Mi­cro­fi­nance can also help SMEs tran­si­tion to low-car­bon busi­ness mod­els, by fi­nanc­ing their ef­forts to adopt re­new­able en­ergy sources and shift to sus­tain­able pro­duc­tion and sup­ply chains.

Mi­cro­fi­nance is not the only so­lu­tion, and it cer­tainly has its crit­ics. To al­lay con­cerns about money be­ing poorly spent, mi­cro­fi­nance in­sti­tu­tions should re­ward SME own­ers who use loans to fi­nance cli­mate-change re­silience and re­new­ableen­ergy projects. This need not be an act of cor­po­rate so­cial re­spon­si­bil­ity. In fact, ac­cord­ing to the Busi­ness and Sus­tain­able De­vel­op­ment Com­mis­sion, which I chair, such an ap­proach is in mi­cro­fi­nance in­sti­tu­tions’ own self-in­ter­est.

The pri­vate sec­tor should un­der­stand that the cli­mate cri­sis is also an op­por­tu­nity, es­pe­cially with re­gard to SMEs. In fact, some in the pri­vate sec­tor al­ready recog­nise this.

GSMA – a trade group that rep­re­sents hun­dreds of tele­coms op­er­a­tors, and whose di­rec­tor gen­eral, Mats Gran­ryd, is a mem­ber of the Busi­ness Com­mis­sion – and its mem­bers are fa­cil­i­tat­ing mi­cro­fi­nance in ru­ral ar­eas. With mo­bile phones, farm­ers can quickly find in­for­ma­tion rang­ing from seed prices to weather pat­terns, and have im­me­di­ate ac­cess to the funds they need to com­plete trans­ac­tions. This mo­bile-en­abled in­for­ma­tion leads to bet­ter de­ci­sion-mak­ing, sav­ing the farm­ers money and boost­ing their re­silience to ex­treme-weather pat­terns and droughts. And of course mo­bile providers ben­e­fit as well from op­er­at­ing in an ex­panded ru­ral mar­ket.

There are also op­por­tu­ni­ties in peer-topeer lend­ing net­works, whereby on­line ser­vices match lenders di­rectly with bor­row­ers. P2P mi­cro-lend­ing plat­forms such as lend­with­care.org, Len­dico, and RainFin have proved pop­u­lar, and could reen­er­gize the mi­cro­fi­nance com­mu­nity and pro­vide wider ac­cess to loans for SMEs in de­vel­op­ing coun­tries. Fi­nan­cial prod­ucts like weather de­riv­a­tives – which in­sure the har­vests and en­ter­prises of SMEs and some of the world’s poor­est peo­ple – also have po­ten­tial.

If the world is se­ri­ous about mit­i­gat­ing the worst ef­fects of cli­mate change, es­pe­cially its dis­pro­por­tion­ate im­pact on vul­ner­a­ble com­mu­ni­ties, both the public and pri­vate sec­tors should sup­port ef­forts to ex­tend mi­cro­fi­nanc­ing to SMEs. Those on the front line of pro­tect­ing lives and liveli­hoods can’t go it alone.

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