Green and inclusive microfinance is an emerging lending category with the potential to boost climate resilience, encourage sustainable practices, and improve livelihoods in vulnerable communities globally, civil society organizations shared in consultations convened by the Global Environment Facility ahead of its 62nd Council meeting.
The June 17 virtual event ‘Inclusive Microfinance: Expanding access to microfinancing in support of local actors and actions for the environment and climate action in GEF-8 and beyond’ was co-hosted with the GEF CSO Network and Indigenous Peoples Advisory Group and included more than 150 participants from around the world.
Akhteruzzaman Sano, Chair of the GEF CSO Network and Management Advisor to Save The Earth Cambodia, kicked off the session by stressing that green inclusive microfinance was a very important subject to explore as a tool that can add momentum to international environmental efforts.
“Expanding access to microfinance will support environmental and climate action at the community level, and have a positive impact on local livelihoods,” he said. “Connecting local people with inclusive capital is very important. Innovative, community-oriented lending mechanisms such as revolving funds can be especially helpful to ensure financial and technical needs are met over time.”
Microfinance is a specialized category of lending designed to help households and micro and small enterprises with limited access to formal banking services. Its objective is to help vulnerable communities withstand the impact of accelerating climate change and adopt more sustainable environmental practices.
GEF Director for Strategy and Operations Françoise Clottes told attendees that the Global Environment Facility will seek ways to support small businesses and farmers in partnership with green microfinance institutions in its upcoming eighth funding period, which will be critical to global efforts to meet 2030 environmental targets.
“We know that micro, small, and medium-sized enterprises – MSMEs as we call them – are often not well-equipped to absorb the impact of environmental degradation or to deal with the losses that are caused by climate change,” Clottes said. “In GEF-8, we will be launching an MSME pilot as part of our Small Grants Programme, to explore opportunities to partner with microfinancing entities to support MSMEs led by women, by youth, by Indigenous Peoples and local communities.”
Yoko Watanabe, Global Manager of the Small Grants Programme, which is implemented by UNDP on behalf of the GEF partnership, shared a new publication highlighting case studies of recent efforts to support small enterprises through microfinance, and described potential to increase this work in the GEF-8 period spanning July 2022 to June 2026. “The private sector is a key partner in achieving the Sustainable Development Goals and they are well-placed to develop and promote innovative solutions for development and environmental challenges,” she said.
MSMEs play an outsized role in the global economy. According to World Bank data, they account for 90 percent of the world’s businesses and employ more than half of its workforce – a number that rises to 70 percent in emerging markets. And yet this important sector often has a tough time raising the funds necessary to grow.
Natalia Realpe Carrillo, CEO of HEDERA Sustainable Solutions and co-head of the Green Inclusive and Climate Smart Action Group of the European Microfinance Platform, said financial inclusion needs to be prioritized in climate-vulnerable countries, many of which are among the world’s poorest.
“How can we talk about climate justice when those most affected are left behind? These are the clients of the microfinance sector,” she said. “It is urgent to protect them. We cannot afford to stand still.”
Not only can formalized microfinance boost economic inclusion, but it can also keep borrowers from falling into the hands of informal “shark” lenders who charge punishingly high interest rates. But microfinance institutions, which are often small, need support to strengthen their focus on environmental and climate impacts, and to lower costs to clients.
The consultations approached these needs from two vantage points – from the point of view of civil society organizations, and from that of microfinance institutions.
A panel moderated by GEF Senior Financial Specialist Avril Benchimol spotlighted three success stories where she said grant funding had underpinned the creation of “financial mechanisms that are inclusive, nature-positive, and climate-friendly.”
Jorge Martinez, Community Credit Officer of the Integrated Rural Development Foundation of the Central Pacific (FIDERPAC), said community ownership was a key ingredient for microfinance success. A program run by FIDERPAC, which has worked in Costa Rica’s Central Pacific region for 35 years, has grown from a pilot to a web of more than 100 communal credit bodies in 50 communities. Once a community has identified its needs, Martinez said, FIDERPAC helps them set up a community credit committee, which then takes responsibility for choosing who will receive loans for “small productive projects.”
Samuel Nsiah, Bio Project Lead for the non-profit Sustainable Agroforestry Initiative in rural Ghana, said the top priority for his team was promoting responsible resource management. Before the initiative began, residents in the target communities acquired fuel for cooking by chopping down forest trees and burning them in earth mounds.
“The result has been massive landscape degradation,” Nsiah said. “Our goal is to work with the rural communities to solve the energy issue while also creating an economic benefit for them.” To break the cycle, the initiative created an innovative financial mechanism and helped communities learn new ways to manage energy needs.
“Instead of cutting trees from the landscape, we are encouraging the communities to grow their own nurseries and set up their own plantations that will be grown and used for charcoal production,” Nsiah said. The introduction of modern kiln technology boosted efficiency and reduced wildfires. These technologies helped create savings accounts that are used to expand the number of beneficiaries. “We started with about 100 farmers, now we’ve expanded to 1800,” he said. Income produced has helped fund new initiatives such as contract farming and beekeeping.
Former investment banker Gaurav Mehta, who left his previous life to move back to India and launch the Dharma Life foundation, which has built a network of 17,000 women entrepreneurs in rural villages in partnership with microfinance institutions.
“They create awareness around climate issues, sell social impact products for households as well as for microbusinesses,” Mehta said. In cases where an entrepreneur cannot obtain financing or afford interest costs, the foundation raises money from financial institutions and provides the loan itself. All the money the foundation generates is reinvested.
Benchimol said these experiences underlined the fact that innovative financial mechanisms can deliver benefits beyond their original intent, and that there are needs for financial services in rural communities that go beyond loans.
Leaders from the microfinance sector shared their strategy for bringing what GEF Senior Climate Change Specialist Jason Spensley called “local points of light” to scale, to enable real environmental change.
Aracely Castillo Gutierrez is Executive Director for the Central American and Caribbean Microfinance Network (REDCAMIF), a partner in the GEF Special Climate Change Fund-supported CC-Blend project which aims to strengthen accessible microlending to smallholder farmers in Central America transitioning to more climate-resilient coffee and cacao value chains.
About 25 percent of the institutions that REDCAMIF works with have green financing products in their portfolios, which amount to roughly 6 percent of the total portfolio value in the network.
“According to a study we conducted last year about the challenges and opportunities for microfinance institutions in developing these kinds of portfolios, the main factor is to have adequate funding,” she said. “Fifty percent of institutions that provide this type of product are doing this with their own funds.”
Castillo Gutierrez stressed that microfinance can be expensive to provide, in part because borrowers often work in the informal sector. If institutions are to assess risk, they must make an extra – and often costly – effort to get to know clients. There are also needs to expand training in support of environmentally friendly financial products, and to raise awareness about green financing success stories, she said.
Philippe Guichandut, Head of Inclusive Finance Development at Grameen Crédit Agricole Foundation, agreed that the microfinance sector has potential to enable real environmental change and cited a recent survey in which 88 percent of the foundation’s partners believed it was part of their responsibility to help clients deal with climate and environmental issues.
Grameen Crédit Agricole Foundation, established in 2008 by the European bank Crédit Agricole and Grameen Bank’s Mohammad Yunus, invests in more than 80 microfinance institutions and social enterprises in 34 countries. The foundation’s proposal ‘Indicators Framework for Climate Adaptation and Biodiversity Conservation Finance for Smallholders To Leverage Private and Public Finance’ was one of 10 winners of the 2021 GEF Challenge Program for Adaptation Innovation.
Jose Miguel Mendez is Agriculture Value Chain Coordinator at ADOPEM Credit and Savings Bank, an institution known in the Dominican Republic as “the bank of women” because of its history of supporting women-run small businesses and farming enterprises. As far back as 2008, the bank began to extend agriculture credits, which Mendez said differ from commercial credits in both risk levels and repayment rhythms. The bank has also created green financing lines that institutionalize climate information in its lending practices, which help farmers reduce their exposure to the local effects of climate change.
These technologies helped create savings accounts that are used to expand the beneficiaries.
A common strand in these perspectives is the need to incorporate financial inclusion and education in climate change resilience support and impact monitoring, said HEDERA’s Realpe Carrillo. She also stressed the potential upside of raising the visibility of green-inclusive financial products and services, for small enterprises and financial institutions alike.
The knowledge shared in the session will inform future efforts by the GEF and its partners to connect microfinance with those working on climate and environmental initiatives, said Paola Ridolfi, the GEF’s Manager of Policy, Partnership and Operations, thanking participants for their candor and openness to learning from one another.
The GEF holds CSO consultations before each meeting of its governing Council, which occur twice per year. Each civil society gathering has a distinct thematic focus, with past sessions examining opportunities to work more closely together on youth engagement, traditional knowledge, and other areas.