Take a walk on the global south side with me. We’re in rural Kenya. You’re working hard, alone, to farm spinach for your family’s sole income. Poor quality seeds and no spare cash for fertilisers or pesticides – your low yields are perpetuating your poverty.
Increasingly heavy rainfall drowns your nascent crops. Your children’s school fees fall behind as you attempt to harvest what’s left. Sandals of dirt wrap your feet as you hail to the closest market you can carry your crop to. You’re both beginning to wilt. As you and your spouse go hungry once again, you know this situation will become worse, season after season, lifetime after lifetime.*
(*based upon stories from the Grameen Foundation)
Our “Stories from the Frontline” series reports that the effects of the climate and ecological crisis do not affect the global population equally. Due to their geographic position in low-latitude regions, developing nations struggle far more with instances of climate extremes, e.g., torrential rain and storms, monsoons, severe droughts; and, as temperatures rise, such events will occur more and more frequently. (Moser and Gonzalez, 2016)
But what’s this got to do with finance?
Without financial products and resources, such as savings and insurance schemes, the poorest of the poor (the ‘unbanked’) do not have the same adaptive ability to cope with these (mis)givings of climate change as those of us in more economically developed countries do. And with economies more reliant on agriculture in the global South, that’s both hands tied behind (developing) backs.
So, when an unpredictable season obliterates your spinach crop, there is no traditional insurance policy that would:
- cover your business without conventional collateral
- be structured for affordable payments.
Likewise, what commercial bank would offer you a loan to hire staff, supplies, equipment, or transportation to help your business back on its feet?
Established by economist and social entrepreneur Mohammed Yunus in 1983, Grameen Bank was fueled by the belief that access to credit (and other personal financial products) is a fundamental human right.
You can use some of the terms in the sector interchangeably, but really, the clue’s in the name. Micro-credit is effectively start-up capital for tiny business’ entrepreneurs that the financial system has traditionally excluded.
This concept was the basis of the trial Yunus conducted in the seventies in Bangladesh. He visited villages near Chittagong and realised that even minimal loans could make a disproportionate difference to the poorest inhabitants. The village women weaving baskets were forced into the jaws of loan sharks to buy their bamboo supplies. They became trapped, effectively repaying their profits to the lenders through colossal interest rates. Traditional banks did not want to give tiny loans at reasonable interest rates to the poor due to the perceived high risk of default. But Yunus believed, and proved, that when given a chance (and a just rate of interest), the money would be returned – the women not only repaid their $27 loans, but they also made profits from their sales. And so, the microcredit business model was born.
Yunus and Grameen Bank were subsequently awarded the Nobel Peace Prize in 2006 for their work, and replicas of its model now operate in more than 100 countries worldwide.
Microinsurance followed, offering those with low-incomes tailored insurance plans, particularly pivotal in developing countries where traditional insurance markets can be inefficient or non-existent. Because the value of the cover bought is so much lower than conventional insurance policies, the policyholders pay substantially less for their cover.
“Micro-credit is both a human right and an effective means of emerging from poverty: lend the poor money in amounts which suit them, teach them a few basic financial principles, and they’ll manage on their own”Mohammed Yunus
But how does this help in our fight for a greener, healthier world?
Experts acknowledge that “climate change seemed a luxury that the microfinance industry could not afford or dream of.” Still, in more recent years, the symbiotic forces of financial exclusion and climate change against poverty alleviation have been increasingly recognised (AFI Global). Applying a climate change lens to microfinance evolution can now be viewed as essential.
When we think about how microfinance initiatives can make a difference to our planet, it’s helpful to think of them in the following buckets:
1) protect the people (i.e. our spinach grower) from the consequences of climate change;
2) encourage more sustainable business practices;
3) incentivise businesses and small industries to fight proactively against the climate crises.
1. Protecting the poorest from the consequences of climate change
Savings facilities with decent interest rates and more widespread microinsurance policies are key financial levers needing a pull to protect beneficiaries. Both provide our spinach farmer with contingency funds should a drought, flood, typhoon [insert other terrifyingly increasing frequent natural disaster here] hit their crop, or customer base.
Examples in action:
- The Gates Foundation granted microfinance group Opportunity International nearly $25 million to beef (/Quorn) up its insurance programs. One of the ways it has spent that money is by developing policies that protect against such events.Yet, as we know, prevention is better than cure – and so, microfinance institutions (MFIs) promoting specific loans for hybrid or more weather-resistant crops can also protect the poor. Likewise, if a widespread disaster event is foreseen, flexibility from MFIs on loan repayment dates and amounts can prevent the holder from racking up formerly unavoidable high levels of interest.
- FarmerLink from Grameen is a digital farming platform given to its credit recipients to provide early warning systems, geo-targeted farm development plans to help improve crop yields, and market pricing to empower sellers to achieve the best possible prices. This isn’t’ just any micro-loan; this is a Grameen micro-loan….
- Further evolution in the microfinance product suite is the development of remittance services (that is, money being sent as gifts without a traditional bank account) MFI clients can also use remittance services as a safety net during shocks built up ahead of time. (World Bank data indicates that developing countries received over US$410 billion in remittances in 2013.) These distribution channels can also be used for charities and donors to deliver directly to millions of poor worldwide – something previously impossible for the unbanked.
2. Encouraging more sustainable business practices
Developed industries are having to un-learn the environmentally damaging practices upon which they built their businesses. Yet, the opportunity to intertwine eco-conscious processes with poverty reduction with these new workforces is vast. Creating a generation of ecologically sound workers, able to teach the next, gives great hope to MFIs and communities alike.
Examples in action:
- EcoMicro is working with MFIs in Mexico and Peru to mobilise $5.9 million to provide 5000 micro businesses access to clean energy, increase their energy efficiency and adapt to climate change, aiming to cut their greenhouse gas emissions by up to 20%.
- Other MFIs promote greater environmental responsibility of their beneficiaries by providing financial incentives and education on sustainable farming production, organic fertilisers, and methods to prevent soil degradation. Such practices are shared with consumers in the supply chain, encouraging not just an environmentally responsible supply but demand from customers for eco-consciously produced goods.
- These practices can then be extended into the home – there are 200 million households in Africa alone who could switch from kerosene to solar power for home lighting and cooking.
“Clean energy products present an opportunity for developing countries to leapfrog over some of the intermediate technologies that the developed world has passed through. Just as millions of people in developing countries are using mobile phones and may never see a wired telephone, perhaps in some cases, they will never use electricity from coal or oil, but can jump directly to clean sources like solar and wind.”Source: Core
3. Incentivising small industries to fight for a greener future
MFIs are increasingly connecting with partners and suppliers who can provide their recipients with green infrastructure to aid production. Many promote biofuels and solar energy, while others engage in carbon credit markets to finance site-specific mitigation projects.
Examples in action:
- Subsidised credit lines for businesses proactively creating C02 sinks.
- Improved terms for smallholding farmers to invest in water storage and silviculture.
- Technology partnerships with suppliers of Hydrofluorocarbons (HFCs) Perfluorocarbons (PFCs) optimisation methods.
- Additional benefits and supported education for growing biofuel crops instead of food.
MFIs themselves, now seen as legitimate agents for diversifying political thought, use their extensive networks for advocacy and policy debate. At the lower levels, MFI agents (who regularly visit the communities, collect payments, and provide education) are increasingly using their influence to encourage a more ecologically minded civil society.
Awareness campaigns and events all stand to consolidate the above efforts into approachable and actionable within these communities. As ever, the power of the collective voice cannot be underestimated, especially when its campaigning muscle has been strengthened by spinach.
- Hit up CDKN’s Finance for Resilience podcast.
- Read Mohammed Yunus’ book “Banking the Poor” – part memoir, part business manual, a great insight into the challenges of economic development at the ground level. 10/10.
- Sign up to updates on inclusive finance from the AFI.