European Microfinance Week 2014

PRESENTATIONS

Frédéric HUYBRECHS introduced the topic of the session, mentioning that not only energy products have a local and global impact on access to natural resources, biodiversity and climate change; all loan undertakers in microfinance have to adapt or mitigate these risks. This could result in exclusion lists, working on the internal footprint, or other incentives to change agricultural practices. He then continued to introduce the various entry points and interventions to face these issues, each connected to a panellist.

Davide CASTELLANI focused his presentation on two of his studies related to the demand for drought insurance and the management of drought-related risks in microfinance. He considers drought relevant for MFIs if their clients are affected by the issue. He suggested that designing proper risk-transfer mechanisms is crucial in order to reduce risks for both parties. Index-based insurance is an innovative and promising risk-transfer instrument. However, the take-up ratio is still very low and, according to the literature, the determinants are several and interrelated. He focused on the role of basis risk. In particular, when the farmers' perceived frequency of drought is dispersed, it is hard to standardise the insurance product. He argued that this issue might be addressed by tailoring drought insurance to risk aggregators, i.e. groups and institutions that can diversify the idiosyncratic risks such as MFIs. However, are MFIs interested in index-based insurance? To find an answer to this issue, Castellani had to find out what their exposure was to drought. He analysed the impact of drought on a sample of African MFIs and come to two main results. Firstly, the credit risk of African MFIs is influenced by the interaction of drought shocks with its retarded performance. Secondly, the liquidity risk of African MFIs is affected by drought shocks through the retarded level of both credit risk and liquidity risk, the asset-liability characteristics and the diversification of the loan portfolio. It follows that geographical diversification, greater capital reserves and good quality of loans portfolio are key strategies to deal with drought-related risks. The results suggest also that risk transfer mechanisms should not only be designed for credit risk but also for liquidity risk.

Davide LIBRALESSO presented a case study of a potential action in response to climate change threats. Etimos Foundation is involved in the Life Fund in the Philippines, a country where 74% of the population is prone to natural hazards. This is increasing due to climate change, as is noted by the number of extreme events such as rainfalls and tropical cyclones. Studies suggest the cyclones' activities in the Pacific are likely to intensify, leading to higher wind speed and more intense rainfall, thus storms will be hitting communities with little experience of tropical storms, and longer droughts causing implications for agricultural production. Etimos partnered with APPEND, a strong network of eight NGOs to support the Philippines. Together they developed The Life Fund Intervention, a livelihood intervention through financing and entrepreneurship. The fund comprises capitalization of MFIs, a rotating fund to restore their operation capacity as well as technical assistance. Next to rebuilding MFIs, the fund also focuses on skill trainings to final beneficiaries and community socio-economic development projects.

As most of APPEND's clients were insured, they received a contribution to repair their houses after typhoon Haiyan. According to the clients, this was not enough to cover all financial expenses of the typhoon's aftermath, but it has been very helpful to them. Libralesso concluded that micro-insurance products can be a great contributor to support communities in case of eventualities resulting from climate change.

Carola MENZEL provided her view on the risks and opportunities of climate change based on three interventions in which the Frankfurt School participates. These interventions have similar objectives, as all interventions target mainly rural populations. The interventions aim to reduce risks and limit future loan losses by stabilizing the repayment capacity. They also explore opportunities of growth for MFIs and promote MFIs to adapt to clean energy solutions, improving the sustainability of MFIs.

Menzel continued her presentation by explaining Microfinance for Ecosystem-based Adaptation (MEbA), which is aimed to reduce disaster risks and increase the resilience of farming activities by focusing on adaptation. Small landholders' yields are expected to be more stable in the long run. MEbA measures can differ from underlying agri-business in terms of high capital intensity and influence on cash flow generation. By clustering options for adaptations, the project was able find the ´low hanging fruit´, i.e. activities that have a short payback period and immediately increased household cash flow. She gave the example of intercropping as a solution to reduce risks and generate income in a short period. She concluded with some requirements to apply MEbA, including data access (e.g. climate conditions, client characteristics), management tools to deal with data volumes and complexity, strategic alliances between MFIs and technical services providers, capacity building to improve understanding of these products by loan officers and clients, possible adjustment of loan terms to agricultural seasons, and enabling framework conditions (e.g. policy measures or regulations).

Davide Forcella introduced Proyecto CAMBio, which ran between 2007 and 2013 in Guatemala, Honduras, El Salvador, Nicaragua and Costa Rica. Proyecto CAMBio focused on income generation, biodiversity conservation and rural development. Five MFIs participating in the project finance activities related to agroforestry, silvopasture, organic farming, ecotourism, forestry protection and water sources. The MFIs provide credit, technical assistance, payment for environmental services and partial guarantees. Forcella provided the example of cocoa farmers, who have to plant other trees next to their cocoa trees in order to be eligible for credits from one of the MFIs. As a result, the project contributes to reforestation and the prevention of soil depletion, thus leading to higher and more sustainable income generation. Proyecto CAMBio resulted in 25 thousand credits totalling USD $52 million. Research shows that the project has good potentialities for green microfinance and ecosystems management, but the complex human-environment system has to be taken into account: development pathways, culture, socio-economic inequalities, and power structures. Forcella also indicated that he was doubtful about the side effects, but saw this project as a proactive-transformative approach; a learning process that still needs to be fine-tuned.

DISCUSSION

The audience raised the question on whether Proyecto CAMBio will be open for investors and how we can interpret the results made in the first phase of the project. Forcella responded that this will be possible in the new project. Concerning the first phase of the project, Forcella indicated that the programme was probably not well designed, making it hard to show clear results. This needs to be fine-tuned in the new program.

Another issue raised by the audience concerned the mitigation instruments in Menzel's presentation, questioning the extent to which MFIs finance and execute these mitigation instruments as they often have a positive effect. Menzel responded that this is indeed a challenge, providing the example of diesel irrigation pumps, which are preferred over solar irrigation pumps. This shows that you have to educate farmers on the long-term benefits. The final remark from the audience raised the question on whether there are some short-term results from collecting data. Menzel replied that the collected data by MFIs helps to raise knowledge about their clients. According to Menzel, yearly effects are better understood by MFIs. Furthermore, the data also helps national databases.