Microfinance and Adaptation

In the past few years, there have been numerous reports and articles published on the possible use of microinsurance as a CC adaptation mechanism, but I recently ran across an interesting report on the possible role of microfinancing in this context, Hammill, et al., Microfinance and Climate Change Adaptation, 39 IDS Bulletin 113-123 (2008).

The report is valuable not only for its focus on microfinancing, but also for its discussion of some of the overarching considerations of any effective adaptation program. Among the takeaways from the report:

  • Reducing the vulnerability of the poor in developing countries to climate change is closely linked to the poverty reduction agenda, with many for the world’s poor already vulnerable to climate change due to factors such as settlement on marginal lands, high dependence on climate-sensitive livelihoods (e.g. agriculture), limited access to resources to respond to shocks; any successful adaptation program must begin with a focus on poverty reduction and development strategies
  • The world’s more than 3300 micr0finance institutions could help vulnerable individuals and communities by both ex ante risk management (efforts to minize and spread risk, e.g. fostering accumulation of assets, diversity of income sources) and ex post coping (maintaining consumption during and after a crisis);
  • The report also outlines some fo the limitations to microfinancing as a adaptation mechanism, soe of which are pertinent to other adaptation strategies:
    • Microfinance services usually don’t reach the poorest of the poor;
    • Microfinance is underdeveloped in Africa, the continent most vulnerable to many of the potential manifestations of climate change;
    • Microfinance could increase vulnerability by by increasing debt that must be serviced; if the loans don’t translate into long-term stabilization or increases in income levels. It may engender a cycle of debgt that results in reduction of vital consumption and assume more risk;
    • States build legitimacy by providing essential services to its citizenry; if some of these things are done by third parties, “the state misses opportunities to develop [and] remains weak and ineffective”
    • To date, microfinancing efforts have focused more on coping than for development.

Among the questions that might be relevant to ask the students include:

  1. Is the fundamental tenet of the report correct, i.e. that microfinancing is an effective method for either coping or development strategies. For example, see: http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6860170.ece;
  2. Is there any evidence that the amount of financing usually provided in microfinancing schemes can contribute meaningfully to reducing vulnerability?
  3. Are bottom-up strategies of this nature a more effective adaptation mechanism than top-down strategies that emphasize large-scale infrastructure and programs? Should we integrate both approaches, and if yes, how?

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