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“Microfinance Can Help Rural Communities Adapt to Climate Change”

Kristin Palitza

CAPE TOWN, Jun 27 2011 (IPS) - Projects to fight climate change are being designed all around the world. But only five percent of them can be financed with the current international funds available, which means resources have to be used more wisely. Microfinance could be one solution.

Some aid agencies use microfinance to "kickstart new markets" for renewable energy products among poor people. Credit: Kristin Palitza/IPS

Some aid agencies use microfinance to "kickstart new markets" for renewable energy products among poor people. Credit: Kristin Palitza/IPS

Climate change is one of the greatest challenges to development that the world has ever faced.

According to the World Bank, mitigation of its effects in developing countries could cost 140 to 175 billion dollars per year by 2030, while adaptation costs are expected to reach between 75 and 100 billion dollars per year between 2010 and 2050.

“The low-income masses will be most affected by climate change in their daily lives. We need solutions for mainstreaming adaptation projects to also include these people,” said African Development Bank director for energy, environment and climate change development Hela Cheikhrouhou.

She spoke at the Climate Investment Funds (CIF) 2011 Partnership Forum, held from Jun. 24-25 in Cape Town, South Africa.

The CIF, established by the World Bank and regional multilateral development banks, provide funding to support developing countries’ climate change mitigation and adaptation efforts.

Even though more than a third of CIF money have so far gone to 15 African countries, few people in rural and poverty-stricken areas – who struggle most to access financing – have been able to benefit from the schemes, largely due to administrative barriers.

“We need to make sure that funds can be accessed by rural populations because there is urgency in making climate change projects happen on the ground,” said Victor Kabengele, project coordinator at the ministry of environment of the Democratic Republic of Congo (DRC).

He demanded less red tape and fewer conditions — otherwise including the poor in climate change projects would remain an empty promise. Without money, the best ideas are worth little, Kabengele pointed out: “Money is the name of the game. Access to microcredit is therefore crucial.”

But only a few microfinance projects have been launched to date that help Africa’s poor to invest in climate change projects. One of them is a results-based financing scheme run by the Global Partnership on Output-Based Aid (GPOBA).

This partnership among six agencies include the Australian government’s aid agency AusAID, the World Bank and its International Finance Corporation, the Swedish government’s development agency SIDA, Britain’s Department for International Development and the Netherlands’ Directorate-General of Development Cooperation.

GPOBA backs private financial institutions in communities where poor people are excluded from basic services because they cannot afford to pay the full cost of user fees, for example connection fees to energy-efficient electricity schemes.

A local bank would, in this case, receive a subsidy to make available microcredit to communities to help them purchase renewable energy systems for their homes.

“We want to increase access to basic services for the poor, such as infrastructure, technology, healthcare and education, that will help them deal with climate change,” explained GPOBA senior specialist Mustafa Hussain.

“At the same time, we hope to kick-start new markets in rural areas, especially for renewable technologies,” he added.

In 2010, GPOBA helped to start 131 output-based aid projects with 3.5 billion dollars in World Bank funding and 2.8 billion dollars from governments. Almost a third of the money was invested on the African continent.

In Uganda, for instance, a subsidy facilitated finance for a private company that operates water supply systems. This enabled the company to provide access to clean piped water to more than 8,000 additional households in rural areas that previously didn’t have running water.

“Through the subsidy, microcredit agencies feel confident to give credit (to the poor) because they know they will be re-financed by us based on pre-agreed results. This leads to more and more growth and investments in rural communities,” Hussain explained.

Another successful way of giving the rural residents access to financial services is a mobile money transfer system developed by Kenyan mobile phone operator Safaricom.

As almost 70 percent of Kenyans live in rural areas where they struggle to get to banks or ATMs, only 40 percent of the country’s 39 million people have a bank account.

But 83 percent of Kenyans own a mobile phone. That gave the directors of Safaricom an idea: the company started to make financial services available over the phone through a service called M-PESA, which is Swahili for mobile money.

Customers can now pay their bills and transfer money using their phones while also accessing numerous financial services, such as micro-saving, microcredit and even micro-insurance.

“Rural people save an average of three hours per transaction because they don’t need to travel long distances to financial institutions and stand in queues anymore,” says M-PESA head of product development Japhet Aritho.

“Saving on transport also saves about three dollars per transaction, money that people can now spend on food or other investments.”

M-PESA already has 700,000 customers who conduct 90 million transactions per month.

The project also offers services specifically tailored for fighting climate change: There is a crop insurance programme where premiums and claims can be paid via mobile phone and farmers receive weather information via sms.

Another programme allows rural residents to access solar-powered water pumps via a smartcard that they can load credit onto via their mobile phones.

At the CIF forum, experts agreed that such microfinance initiatives are key to mitigating and adapting to climate change. Said Kabengele: “Access to credit is crucial. So far, rural financing is relatively limited. We need more of it.”

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