April 14, 2009
Microfinance Institutions Begin to Incorporate Climate Change in Development Strategies
by Robert Kropp
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
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
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
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 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."
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
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
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.