Climate change adaptation funds should adopt microfinance practices to reach most vulnerable

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EU member states must look to microfinance institutions (MFIs) as successful channels for reaching the most vulnerable or they risk marginalising those most in need, writes Christoph Pausch, executive secretary of the European Microfinance Platform, in an exclusive commentary for EURACTIV. 

The following contribution was sent exclusively to EURACTIV by Christoph Pausch, executive secretary of the European Microfinance Platform.

"We saw last week that the EU is largely on track to deliver its part of the Copenhagen Accord's $30bn pledged for fast start finance in developing countries. Debate around this facility, intended for climate change mitigation, adaptation, technology transfer and capacity building, has focused largely on raising enough funds and the institutional architecture that will be used for delivery.

There has been little emphasis on how to help the most vulnerable people to adapt and how to effectively deliver resources at a local level.

The principle of microfinance – providing financial services to the 'bottom of the pyramid' – is very relevant to this dilemma. Access to credit can help the poor to build up their assets, establish business activities and improve their protection against risk in general.

Moreover, microfinance projects that target water management, sustainable agriculture and disaster preparedness present direct 'win-win' adaptation opportunities. Classic examples include the provision of loans for flood-proof housing, crop diversification and irrigation.

A recent OECD review found that some 43% of current microfinance activities in Bangladesh were also enhancing resilience to climate change. Furthermore, some microfinance institutions (MFIs) have started to develop a more specific focus on financing activities to reduce long-term vulnerability to climate risk, especially with respect to disaster preparedness.

Thus MFIs have the potential to enact adaptation projects at the local level and provide a valuable network of institutions working with communities across the globe. How can policymakers learn from this experience and channel resources to scale-up adaptation centred microfinance?  

Start-up funding is critical for MFIs which often rely on initial donor support. Supplying predictable finance to start-up or scale-up adaptation focused MFIs could provide a valuable mechanism by which international adaptation funds could support local-level adaptation. Where public money would start, private investment would follow – supporting adaptation focused MFIs that establish a valid model for financing sustainable development.

Of course, microfinance is not relevant to all adaptation needs. Large-scale infrastructure projects such as sea walls, dams and the draining of glacial lakes need to be established through large-scale financing mechanisms. Funding through microfinance should be considered as a complement, supporting the many decentralised actions that will be required of individuals and communities to internalise the risks associated with changing weather patterns and increasing disaster frequency.

The European Microfinance Platform recommends that EU member states be mindful of this dimension of adaptation and look to MFIs as successful channels for reaching the most vulnerable or they risk marginalising those most in need."

The European Microfinance Week will take place between 30 November and 1 December, bringing together European microfinance actors working in developing countries and specialist speakers in the field. The event is a chance to learn from other microfinance actors and make new contacts. For more information please visit: http://www.e-mfp.eu/microfinance-week

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