European Microfinance Week 2015

PRESENTATIONS

As an introduction to the session, Davide FORCELLA provided a general framework of green microfinance, which revolves around three main dimensions: 1) strategy; 2) risk management; and 3) opportunities in product development. However, Forcella pointed out that it is very difficult to have a complete overview of this segment, since clear reporting is missing. To address this issue, Forcella and Enclude partnered up and engaged in a data-collection mission across different projects dealing with green microfinance. 

Forcella revealed that in 2014, among the MFIs reporting to the MIX Market about their environmental management (620), around 31 percent declare to have green loans. This is a trend which is increasing in all regions of the world. Preliminary results from another study done for the Inter-American Development Bank in Latin America and Caribbean (LAC) revealed that the uptake of green microfinance is quite high in the region where around one third of the MFIs analysed (over 200) had activities related to green microfinance between 2012 and 2015. He revealed that the Caribbean region manifested particular demand for further development of green products, while still having limited outreach compared to other regions in LAC. Forcella concluded that the interest and activity in green microfinance is increasing significantly among microfinance institutions (MFIs). However, he also clarified there has been a clear gap between the potential and the actual utilisation of green products.

Arantza LOZA reminded the audience that the poorest are also the most vulnerable to the effects of climate change, and that access to technology through microfinance is a means to remediate their situation. On this note, she introduced EcoMicro, a programme financed by the Inter-American Development Bank (IADB) and aimed at building the capacities of Latin American MFIs so that they can provide their clients with the financial means to acquire the necessary technologies. Loza explained that EcoMicro relies on a holistic approach which looks at the entirety of the institution, a process divided into three steps: 1) helping the MFI’s management to understand and buy into the idea; 2) working with the risk management structure of the MFI, helping the staff understand that climate change is a risk which should be considered; and 3) developing the products together with the MFI. In terms of lessons learned stemming from the various projects, Loza summarised that adopting green microfinance products in the context of a MFI requires: 1) a high level of acceptance at the management level; 2) a risk-free proposition aimed at helping the client; and 3) wide partnerships, which might require knowledge outside the MFI. In addition, she pointed out that the work of EcoMicro requires a high level of adaptation, because the different countries in Latin American are vulnerable to climate change in different ways. 

Irene LODER, replacing Carola Menzel, presented another experience with green microfinance in Latin America called Microfinance for Ecosystem-based Adaptation (MEbA). She explained that, as a point of departure, MEbA acknowledges that MFIs deal with very complex ecosystems within their areas of activity, which can vary widely across different branches. According to Loder, this is why MEbA engages with in-country experts to collect and interpret data before starting the product development stage, which is tailored to the region. She explained that, once the region-specific instrument is developed, MEbA looks at the procedures of the MFI to support risk management. Loder revealed that in general, Latin America is a mature microfinance market with mature MFIs, and the intake of green and climate-smart microfinance products has benefited from the existing infrastructure and capacities. In other contexts such as Ethiopia and Nepal, where institutions are struggling with more basic issues, products must be simplified and other forms of institutional capacity building may be needed. In her concluding remarks, Loder reminded the audience that MEbA’s objectives lie on balancing benefits and opportunities with new challenges and risks, which she divided into the fields of profit, people and planet. Loder noted that economic incentives to MFIs can be created through investments in resilience and adaptation clean energy projects, but they require real-time due diligence, a strategic approach integrating the triple bottom line institutionally and provide clients with suitable finance products to enable them to invest and manage risks.

Lukas KAHLEN started his presentation by showing ‘before and after’ photos to the audience. The ‘before’ photo showed a traditional cooking stove, whereas the ‘after’ photo showed an improved cooking stove financed through a green loan offered by the Colombian MFI CONTACTAR. According to Kahlen, the improved cooking stove had a direct impact on improving the lives of rural communities in terms of health, social and economic benefits. The photos subsequently served as a basis for Kahlen to introduce the work of MicroEnergy International (MEI). He explained that MFIs supported by MEI have implemented a similar two-hand business model consisting of three main actors: 1) the MFI itself; 2) a local technical supplier;and 3) the beneficiaries. In this model, the MFI first identifies –with support of entities such as MEI- the demand for energy products and services among their current and future clients in order to identify potential renewable and/or efficient technology options that most benefit their clients. Once the techno­logies are identified respective local suppliers are evaluated and selected. 

When there is a match between these two entities, they establish a commercial agreement. This usually entails that the supplier promotes, markets, installs and maintains the product whereas the MFI provides the financing for the technology upfront to the supplier, which the beneficiaries repay in the form of a loan. Among the technologies financed through green loans, Kahlen highlighted a few: efficient fridges, solar water heaters, improved cooking stoves and solar crop dryers. Kahlen concluded his presentations with four major lessons learned: 1) ownership by the MFI’s management is key for successful implementation, green loans should be seen as part of the portfolio and must be profitable; 2) knowledge transfer to the MFI is paramount, which will require an energy champion at the MFI level; 3) demand and supply must be matched, making it crucial to define a clear partner profile; and 4) the product must be customised to local conditions, thus requiring an in-depth needs assessment with local entities, such as universities and NGOs. Kahlen also noted that this is the right time to engage in green microfinance in Latin America, since there have been a number of successful pilots in the last few years. Moreover, the supplier market becomes more mature and thus more reliable as partners to microfinance institutions. The latter also attracted competition from other MFIs in the region. To take advantage of the momentum for green microfinance in LATA he mentioned three interesting vehicles: 1) Foster the so-called network approach, i.e. implement such green loan programs through local MFI networks; 2) increase the range of technologies by certifying an entire catalogue of products for interested MFIs; and 3) foster the so-called one hand model in which one entity offers both the financial services as well as the technology. With the correct use of these vehicles, green microfinance has the potential to increase first its outreach significantly and thus also to achieve the SDGs. 

DISCUSSION

The round of discussions started up with a heated debate among the panellists on the issue of outreach and scale of green microfinance products. Whereas Loza claimed that the industry must be cautious about how large the green microfinance opportunity really is, Loder defended that such products might actually be a way for an MFI to diversify its portfolio. Nonetheless, she emphasized that awareness needs to be raised at the institutional level prior to upscaling the green microfinance projects. Forcella stressed the huge potential in the light of climate change, but that we need the right mechanism to reach people. Kahlen highlighted that there is a large market from the end-user perspective, since a lot of people can benefit from green products. He confirmed the point that caution is needed in terms of implementation. Upscaling will only be possible after lessons learned from different pilot projects will create more and more standardised processes.

A further discussion point dealt with the real business case of green microfinance products to MFIs and to their end-clients. Loza clarified that EcoMicro only provides grants in terms of capacity building to MFIs, but it does not have a say on how the institutions will incentivize their end-clients. She further elaborated that MFIs are piloting green loans with their own balancing sheets. Loder also explained that green loans should be income-generating loans, and this should be the motivation for MFIs to engage in those products. Nonetheless, she noted that technical assistance is still provided in the framework of projects. Kahlen agreed that, without technical assistance, it is not possible to implement green microfinance projects. The industry should call for ways to integrate this process into the framework of the MFI.