Green Inclusive Finance: Necessity and Opportunity for MFIs in Middle East and North Africa

Climate change poses a major risk to our economies, with large implications on business resilience and livelihoods. In the Middle East and North Africa (MENA) region especially, climate-induced events are becoming more frequent and severe. The World Bank estimates that MENA will experience the greatest economic losses from climate-related water scarcity in the world, at 6 to 14 percent of GDP by 2050. The people most impacted by these changes are those living on low incomes and with small businesses, whose livelihoods can be precarious with few options to mitigate and adapt.

Fortunately, the region’s microfinance sector understands the needs of these populations well and is in a prime position to harness its expertise and provide financial services to tackle these challenges. With the right actions, and a green inclusive finance approach, microfinance institutions (MFIs) can protect both their clients and the sector as a whole from large-scale climatic risk  as well as deteriorating localized environmental conditions.

What is green inclusive finance?

Green inclusive finance recognizes that inclusive financial service providers (FSPs) such as MFIs have a key role to play in responding to the risks and impacts of climate change.  It aims to increase FSP customers’ climate resilience and, at the same time, protect the environment. The spectrum of possible actions includes:

• Implementing an environmental strategy.
• Identifying and managing environmental risks, opportunities and vulnerabilities.
• Offering sustainable financial and non-financial services.

These actions reflect the frameworks used by the Green Index 3.0 (from the e-MFP GICSF-AG) and the Dimension 7 of the USSEPM (Cerise+SPTF), tools which can help institutions to measure and monitor their environmental performance over time. More detailed approaches to taxonomies and frameworks for product offerings, such as those available from CFI or from CGAP, can help institutions understand how can they better shape their financial products to respond to their clients’ needs.

How developed is green inclusive finance in the MENA region?

Last year, we conducted primary research on the state of sustainable microfinance in the MENA region and found a wide range of level of understanding and development on the topic of green inclusive finance. The study, supported by the SANAD Technical Assistance Facility and conducted by HEDERA Sustainable Solutions, involved key stakeholder interviews and a survey of 42 microfinance institutions, representing all the major microfinance players in the region. Among the findings were:

• Strategy: 40 percent of institutions have introduced the concept of environmental protection into their institutional strategy, have dedicated a team to accomplish the objectives and report their yearly results internally.
• Climate risk management: Most MFIs are aware of climate risks but are looking to develop internal capacities to track and manage these risks and to raise awareness of these issues among their clients. 
• Product offering: Half of the surveyed institutions already offer green financial products, mostly related to green technologies and sustainable agriculture practices. However, there remain clear gaps in assisting institutions in better tracking these products and accessing standardized taxonomies.
• Enabling environment: While in countries like Yemen, Morocco and Tunisia, there is awareness on sector and governmental initiatives, in others there is a perceived lack of clear guidance from regulators. However, on further research we learned that there are initiatives under development, such as central bank programs to more actively to support local institutions on green product development in Egypt and Jordan.

Interestingly, we found that many institutions adopted sustainable practices and a green inclusive finance approach out of business necessity, rather than a strategy to differentiate or innovate. Some MFIs used sustainable practices to contend with sociopolitical upheaval and external threats to business continuity.

For example, in Yemen, developing green products has allowed Al Amal Bank (AMB) to continue operations and ensure business continuity for their clients. They shared with us that, “Due to the shortage of fuel and the fluctuation of the fuel rate, a large number of farmers and households moved towards solar energy loans and solutions. AMB provided green financial services free of interest to individuals and SMEs, where the interest will be collected from suppliers.”

In Lebanon, green financial and non-financial services are also being explored as opportunities to rebuild business resilience shaken by the economic crisis. For example, financing for solar generators and water pumps could help businesses to avoid hyperinflated fuel costs. Trainings on sustainable agricultural practices could enable participants to build new livelihoods.

In a time of increasing geopolitical uncertainty and climatic risk, these experiences can show us how sustainability builds business resilience. 

How can MFIs get started?

1. Develop a sustainability strategy: To make sure management and field staff all get on board with the sustainability agenda, it is crucial to first define objectives and strategy. This process involves allocating resources, enhancing reporting standards internally and externally and aligning with international implementing standards and certifications.

2. Provide capacity-building to staff and clients: Training sessions, materials and informative events will contribute to promoting green finance and at the same time develop the demand for these products.

3. Integrate Climate Risk Management into operations: MFIs need the right Environmental and Social Management System (ESMS) to set clear goals and improve institutional performance, including decision-making processes and the design and delivery of green financial and non-financial services. Ongoing digitization processes can be harnessed to integrate managing climate risks and tracking green loan performance.

4. Conduct market research and pilot new products: To establish a viable business model for green financial and non-financial products, MFIs must first assess the market to understand the current practices, needs and overall access to basic services. Then, through pilots and partnerships, institutions can evaluate the viability of their offer, better negotiate conditions and responsibilities with partners, and further develop local demand for green services.

Recommendations for Ecosystem Enablers

Investors, policymakers, microfinance networks and technical assistance providers must be proactive in creating an enabling environment for green inclusive finance and supporting MFIs  as they implement the actions outlined above. For ecosystem enablers, we recommend the following key actions as part of a KAP approach - Know-How, Advocacy, and Partnerships:

Know-how

1. Support market studies to generate accurate data.
2. Develop capacity-building programs in partnership with local and regional microfinance networks.
3. Provide specialized technical assistance to MFIs.

Advocacy

4. Disseminate digital data management tools for environmental risk evaluation, sustainable product demand assessment and impact monitoring.
5. Develop internal capacity for environmental risk management.
6. Encourage exchange between FSPs of lessons learned and success stories.

Partnerships

7. Convene ecosystem stakeholders.
8. Define standardized taxonomies useful for multiple parties.
9. Raise targeted funding for green portfolio development.

An active commitment

The microfinance sector in the MENA region has a lot at stake. Actively committing to protect the environment, manage climate risks, increase resiliency and encourage a sustainable transition is essential to the future of the sector  and the livelihoods of the many individuals and businesses who have thrived thanks to inclusive financial services.

For more information on green inclusive finance in the MENA region and potentials for partnership, please reach out to Natalia Realpe Carrillo and Alexander Reviakin.