Climate Change in Microcredit Portfolios: Evidence on Vulnerability, Adaptation and Implications for Inclusive Finance

Abstract

Climate change poses new challenges to the social mission and financial viability of microfinance institutions (MFIs). These include the vulnerability of borrowers, increased credit risks and the need to adapt to the changing climate. Using a novel microcredit data set, we first study the prevalence of climatic hazards and vulnerabilities in the portfolios of MFIs across Latin America and the Caribbean as well as sub‐Saharan Africa. We find evidence of microborrower vulnerability to climatic hazards and associated heightened credit risk. We then explore ecosystem‐based adaptation (EbA) as a potential strategic complement to inclusive finance in aiding adaptation. Our analysis finds widespread autonomous implementation of EbA by agricultural microborrowers. While EbA measures appear to negatively moderate the association between climatic hazards and microborrower vulnerabilities, we do not find them to be directly associated with lower vulnerabilities. Furthermore, lenders do not appear to increase financing of adaptation in portfolios with greater exposure to climatic hazards. The findings suggest a need to enhance the effectiveness of adaptive actions and further potential to expand the financing of EbA by MFIs.