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PDF_logo The Role of Microfinance and Microfinance Institutions in Climate Change Adaptation: Learning from Experiences in Bangladesh

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The Role of Microfinance and Microfinance Institutions in Climate Change Adaptation: Learning from Experiences in Bangladesh


Paper No:39

Author:Henry Scheyvens

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Pages:54

This report aims to (i) conceptualise and analyse the relationships between microfinance and adaptation, (ii) map out what could be considered good microfinance practice for adaptation, or “adaptation-oriented microfinance,” and (iii) identify types of adaptation projects and activities that microfinance institutions (MFIs) could be involved in to take full advantage of their service delivery infrastructure. The study focuses on one country, Bangladesh, a country that is highly vulnerable to climate change and one that has four decades of experience with delivering microfinance services to the poor.

Microfinance can contribute to adaptation by filling what is commonly referred to as the “adaptation deficit,” i.e. the shortage of adaptive capacity that a household has because of its lack of capital in its various forms. A review of the literature suggests that while it is not clear whether households are able to use microfinance to increase their income to the extent that they cross over the poverty line, they are able to use microfinance to better cope with and recover from shocks and drawn-out periods of hardship, which makes microfinance particularly relevant to adaptation. Therefore, just as the adaptation literature highlights the need for “climate proofing” infrastructure, such as bridges and roads, so too should efforts be made to ensure microfinance services are “climate proof,” i.e. that they continue to be available to poor households as climate change progresses. This report develops the concept of “adaptation-oriented microfinance” to describe microfinance that retains its focus on poverty reduction, but is engineered to maximise its adaptation benefits. Key elements of adaptation-oriented microfinance include: flexibility and customisation to enable members to select from products and product options to best manage their finances and prepare for, cope with and recover from climate shocks; sufficient access to liquidity for MFIs to support their members through extreme weather events; using loans to make adaptation technologies (particularly for agriculture) accessible to households through extension and other forms of outreach, with the aim of building climate-resilient livelihoods; loans for the construction of hazard-resistant housing; micro-insurance products with acceptable premiums that cover real risks faced by households and that incentivise risk mitigation; and a focus on outreach to the most climate-vulnerable groups, especially those in remote, ecologically fragile areas.

In Bangladesh, the MFI sector is well-positioned to support adaptation as it has a delivery infrastructure across the country that reaches household level and a good reputation for reliable service delivery. Some MFIs are already implementing adaptation projects. In most cases these are very practical interventions to support adaptation and disaster risk reduction at the household level, such as raising the plinth of houses to reduce the likelihood of floodwaters entering them. While these interventions are clearly important, MFIs could also consider how they can contribute to transformed resilience, or resilience at scale, by working towards the development of higher level institutions, organisations, policies and legislation that create an enabling environment for household-level and community-based adaptation.

 
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