Vulnerability of microfinance institutions to climate risk in the Satkhira District, Southwest Bangladesh

Produced as part of the Adaptation to climate change and human development CCCEP research programme theme

This paper explores how microfinance institutions are affected by and are responding to flooding, by examining a case study of Satkhira District in Southwest Bangladesh.

The authors develop a framework for understanding how microfinance institutions can reduce their vulnerability to climate risks and use the framework to empirically assess local-level practices, drawing from interviews with households and local branch managers as well as household survey data.

While microfinance institutions are directly vulnerable to flooding, their main exposure arises from the exposure and sensitivity of client livelihoods and their lack of adaptive capacity. Branch managers are unable to screen clients for climate risk for ethical, practical and financial sustainability reasons. Branch managers also have limited capacity to manage aggregated risk.

The authors argue that efforts should instead focus on reducing client vulnerability, tackling the problem at its source. While much potential exists for microfinance institutions to do this, it is not actively and explicitly being achieved. Loan product innovation could facilitate clients’ adaptation to relevant climate hazards. This requires empirical understanding of autonomous household adaptation to incorporate client knowledge of adaptation needs, options, and associated barriers.

The results indicate that homestead loans, disaster management loans, and loans for alternative income-generating activities would help reduce client vulnerability. Integrating non-financial services could also contribute to addressing non-financial barriers to adaptation.