Why climate finance matters
In this blog, we would like to present the new investment strategy of the Oxfam Novib Fund and explain how Oxfam Novib aims to support microfinance institutions (MFIs) to help reduce the negative impacts of climate change-related disasters on women, rural households and small-scale producers.
Since its establishment in 1998, the Oxfam Novib Fund has invested in microfinance institutions (MFIs) in over 40 countries. Through these investments, small and emerging MFIs were enabled to deliver important financial services to people living in vulnerable situations, particularly women, as a means to ultimately alleviate poverty.
In the last two decades, global investments in MFIs have surged and the total global loan portfolio is currently estimated to be about USD 160 billion, reaching 140 million borrowers (source: "Microfinance Barometer 2021"). As a result, the microfinance sector has matured. Oxfam Novib Impact Investments has therefore decided to revisit its investment strategy and tailor it more towards climate finance, because we believe climate resilience deserves a greater emphasis in the microfinance sector.
Countries in the Global South are the most affected by climate change-related disasters
The UN estimates in their report "The Human Cost of Disasters 2000-2019" that, over the past twenty years, 4.2 billion people have been affected by climate change-related disasters. While sudden disasters like floods and hurricanes strike rapidly with little warning, taking lives, separating families, and devastating communities, the slow-onset disasters, such as droughts and sea level rise unfold slowly. Slow-onset disasters are in many cases overlooked and therefore there is little advance planning of adaptation strategies, resilience building or relief aid.
In terms of number of people affected, losses as a percentage of GDP and number of internally displaced climate migrants, climate change disproportionately affects countries in the Global South. Certain groups in these countries are especially vulnerable, such as women, rural households and small-scale producers. Climate change-related disasters affect both client’s repayment capacity and the stability of MFIs. Microfinance Institutions serving clients in disaster prone areas are likely to experience a deterioration in their portfolio quality, a run-on savings, and increased claims on existing insurance products. At the same time, disasters might also impact MFIs more directly by damaging physical assets like buildings, equipment, information systems, and customer records and by harming staff and their families.
Lenders are reluctant to fund MFIs who experience a deterioration of portfolio quality indicators as a result of climate related shocks. They prefer to wait until the situation stabilizes. However, access to finance is even more needed during emergencies. After a significant disaster, affected households’ income-generating capacities are severely impaired due to the damage to farmland, livestock, and other productive assets. Affected households need immediate access to finance to maintain their livelihoods. That is why we have developed a new investment strategy to fill this gap.
Oxfam Novib believes that MFIs can help reduce the adverse effects of climate change-related disasters on their customers. MFIs are well-positioned to build costumer’s resilience to disaster and support their recovery because of their close association with rural communities and their commitment and mandate to serve the poor. Together with our partner Triple Jump, we have therefore, co-created a new investment strategy.
With the new investment strategy, the Oxfam Novib Fund aims to direct a large part of its investments to 19 countries that have been seriously affected by climate-change disasters: Kenya, Burkina Faso, Ethiopia, Mali, Niger, Nigeria, Senegal, Uganda, Myanmar, Philippines, Vietnam, Indonesia, Laos, India, Colombia, Honduras, Ecuador, Guatemala and Peru. We have also introduced two new credit lines that are dedicated to financial support after disasters and the piloting of new climate resilient products. This will be combined with targeted technical support to MFIs.
Our disaster finance credit line will finance MFIs that operate in an area that has been recently been affected by a climate-change disaster. The new credit will help to finance the re-construction of damaged assets of their client's portfolio, combined with a restructuring of existing credit, so that households can rebuild their lives and re-establish their income.
Our innovation credit line will support MFIs in the development of new products that will increase the capacity of households to cope with climate change-related disasters. Examples of climate resilient products are insurance products whereby the pay-out is based on actual rainfall patterns, saving products that are labelled to create a buffer and credit products that finance agricultural inputs, such as seeds, that are more resistant to changing climate conditions.