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Microfinance Institutions Begin to Incorporate Climate Change in Development Strategies

Apr 14, 2009 - Robert Kropp - SocialFunds.com

Report from CGAP finds that MFIs are well-positioned to contribute to energy efficiency in developing countries, but recommends shift in priorities from loans to financial services that include savings.

SocialFunds.com -- Microfinance institutions (MFIs), which provide small loans to very poor people for self-employment projects that generate income, have begun to address the issue of climate change, and have the potential to become key players in forestry and clean energy projects. But according to Paul Rippey, the author of a report entitled Microfinance and Climate Change: Threats and Opportunities, efforts by MFIs in this area are only beginning, and other financial models may emerge to better serve the causes of safe and energy-efficient lighting and cooking practices in the developing world.

The report was commissioned by the Consultative Group to Assist the Poor (CGAP), an independent policy and research center dedicated to advancing financial access for the world's poor. CGAP is supported by development agencies and private foundations who share a mission to alleviate poverty.

MFIs have existed since the 1970s, when Dr. Muhammad Yunus established the Grameen Bank in Bangladesh to provide microloans to poor people to start up small businesses in villages and cities in developing countries. Since then, the bank has made over $983 million in loans to over seven million borrowers. Dr. Yunus and the Grameen Bank shared the Nobel Prize in 2006 for their efforts to create economic and social development from below.

The Microfinance Summit Campaign estimates that there are more than 3,500 microfinance institutions, serving more than 150 million poor people in developing countries. Of the MFIs reporting to the Microfinance Summit Campaign, 935 are in Sub-Saharan Africa, 1,727 are in Asia and the Pacific and 613 are in Latin America and the Caribbean. The amount of microloans in the hands of the poor is estimated to be $15 billion.

The CGAP report argues that climate change and poverty reduction are intricately linked and mutually reinforcing. "Poor countries have a right to develop, and to do so will require energy; rich countries can help them use energy wisely, but should not try to stop their legitimate aspirations of offering a better life to their citizens," according to the report.

The report identifies three areas where MFIs can engage in climate change strategies. At the customer level, clean energy lighting and cooking products are especially important, along with forestation. At the institutional level, MFIs can address their own carbon footprints as well as involve themselves in carbon finance and aggregation schemes. At the systemic level, MFIs can use climate change information and advocate in the policy debate on issues relating to climate change.

Paul Rippey believes that MFIs are well-positioned to contribute to the distribution of safe and energy-efficient lighting and cooking products in developing countries. "Over the years, MFIs have done a great job of bringing the idea of financial services to poor people to the level of expectation," he told SocialFunds.com. "In the process, they have grown to be well-audited and credible in the international community. Whether the issue is tree planting or cookstoves, you get record keeping from MFIs that cannot be matched."

Rippey is well-versed in the activities of MFIs, having been involved in the start-ups of two such institutions in Guinea and Morocco. He has since become a consultant, working with the Center for Financial Inclusion, an organization that seeks to bring high-quality financial services to low-income people through commercial models that incorporate social purpose.

While Rippey finds that attention to climate change by MFIs is in the beginning stages, he notes that more significant progress has been made in Asia, for which he gives credit to Grameen Shakti, whose social objective is to popularize inexpensive solar home systems and other renewable energy technologies for rural villagers in developing countries.

The CGAP report mentions initiatives whose missions are to bring energy efficiencies to the poor. Lighting Africa is an initiative of the World Bank that supports the private sector in the development of a market for off-grid lighting technologies for African consumers. The Biogas Support Program has constructed 150,000 household biogas plants in Nepal, and sees the potential there for the construction of 1.9 million household biogas plants.

A social entrepreneurial business engaged in the development and manufacturing of affordable entry-level LED lamp products is Barefoot Power, whose least expensive products cost under $20.

Rippey observed, "If the cost of the lamp is under twenty dollars, then often a loan isn't even necessary."

The CGAP report emphasized that the use of savings whenever possible is preferable to taking out a loan. As Rippey told SocialFunds.com, "One lesson of the current economic crisis is, if you can't afford something then you still can't afford it if you have to get a loan to buy it."

The report states, "Whatever the merits or drawbacks of credit, the product becomes riskier the more borrowers undergo economic stresses." It calls on MFIs to diversify the financial services they offer and to stop relying exclusively on loan products.

Rippey wondered if new models may converge with the traditional mission of MFIs to provide a full range of financial services that includes local savings groups. These village-based groups, Rippey believes, are perfect vehicles for distributing clean energy information and resources.

One example of a financial institution that has grown to encompass a full range of financial services is the Equity Bank of Kenya, which has evolved from an MFI to become a publicly listed commercial bank. With more than 2.8 million accounts, Equity is home to over 48% of all bank accounts in Kenya.

Whether MFIs or more inclusive financial models bring products and services that mitigate climate change to the developing world, the CGAP report finds a number of avenues for involvement by investors. Equity investment to help strengthen systems and management, help in developing new products or adapting existing ones, and support to look beyond traditional models to create linkages with suppliers of clean energy devices, are some of the areas in which investor involvement could prove to be mutually beneficial.

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