Growing Climate Risk in Africa: How Can Financial Inclusion Help?

Meet Dorothy*, a retail and wholesale grocery store owner in Accra, Ghana.

“I was hit by a very big flood last May. I didn’t see it coming, I’ve had floods a few times before but not this big. The water went up to 1.5 meters and lasted a whole day. It destroyed all my stocks, including the tinned goods. I had to shut the shop for a week, and lost some of my capital. I’m struggling now with money. And I know this kind of flood will happen again.”

How can we, as financial inclusion institutions, support people like Dorothy? At Advans Ghana, we have been working to answer this question as our clients increasingly experience climate-related risks. Here are three key steps we have learned that all financial service providers (FSPs) need to take:

Step One: Gather information.

The first step to helping clients manage climate risks is to learn: 1) which climate risks are prevalent where; 2) how these risks impact our clients and 3) how prepared our clients are. 

To start, we need to map out different climate risks to understand which risks impact which locations and to what degree. For example, Advans’s work with Horus Development Finance estimates that around 25% of our borrowers in Ghana are already strongly or extremely exposed to flash floods, and that this percentage will rise by 4% by 2040. While Dorothy’s shop is in an area prone to flooding, other small businesses and farmers in Ghana are impacted by landslides or episodes of extreme heat.

Once we have mapped out the different climate risks, we need to understand the effects they have on different business sectors. Our work in Ghana, Tunisia and Cote d’Ivoire has shown that agricultural sectors tend to be the most vulnerable. For example, an Advans client in Tamale who has a poultry farm suffers when periods of extreme heat affect chickens’ egg-laying capacity, resulting in lower revenues.

Certain urban sectors are also exposed to climate risks, including services and stores with significant assets or stocks, and those that rely on resources such as water and electricity. Dorothy’s grocery store has a lot of stock which is vulnerable to water damage, so any type of flooding can have disastrous consequences if these stocks are not protected.

Finally, we need to determine individual customers’ level of climate resilience. Some clients will already be aware of a risk and have made changes to mitigate it, such as placing stock on high shelves, putting chickens in better ventilated areas and giving them cooler water, or even moving out of a climate risk zone. However, others, like Dorothy, will not have the means or the awareness to do so. At Advans, we initially evaluated client resilience through surveys, and now we are planning to integrate it into our loan appraisal methodology.

Armed with this information - on the mapping of different climate risks, how they impact our clients’ businesses and how aware clients are of these risks – we can then move on to Step Two.

Step Two: Raise awareness.

Populations in Africa will be hit by extreme climate events with increasing frequency in the years to come. Financial inclusion players therefore have a duty to actively raise awareness of climate risks among their staff and clients. Staff at all levels need to be trained on the consequences of climate change, and how it can affect clients and everyday operations.  Staff can then help customers understand how climate risks may impact their businesses and support them to prepare for the future. For example, Dorothy could benefit from:

• Conversations with her loan officer on possible flood mitigation strategies.
• Group awareness sessions on flooding in her market.
• Flyers with key images on how to prepare businesses against floods.
• Mobile and social media messages to alert her at the start of the rainy season or provide weather warnings before a period of heavy rain.
• Hearing stories from other business owners on how they have been impacted by floods and what they have done to protect themselves.

At Advans, we have launched some pilot awareness campaigns to start talking to clients about the potential impacts of flooding on their business and what they can do to adapt.

Step Three: Adapt products and services.

FSPs will need to be more flexible and innovative to continue to support clients like Dorothy and ensure they don’t become financially excluded due to their climate vulnerability. To help clients cope in emergencies and prepare for the future, product design processes should incorporate climate risks and their potential impact. FSPs need to be able to react quickly to climate events to support clients getting back on their feet.

For example, Dorothy might need the following if she is hit by a flood:

• A grace period on her loan, or the option to skip at least one payment.  
• A quick cash loan to pay for basic supplies.
• A top-up loan to restart her business.
• A savings account that is immediately accessible in a climate emergency.
• A payout from a tailored business insurance.

To protect herself in the future Dorothy may also want to invest in raising the floor of her shop, securing her stock in waterproof containers, getting a sturdier roof or even relocating to another premises.

Financial institutions need to design products that will give small businesses the time and means to invest in longer-term solutions that address climate risks.  That way, they can continue to fuel business growth and economic development as well as ensure customer well-being going forward. At Advans, we are currently working to build capacity around climate adaptation finance and integrate these aspects into our long-term product design strategy.

Take steps starting now

If financial inclusion players don’t take these steps, there is a risk that the most vulnerable clients will drop out of the formal financial systems that we have worked so hard to expand. The time to start is now.

Advans Ghana distributes parasols and pallets to clients in the market at a recent client awareness raising event around flooding.

*Dorothy’s name and some details have been modified.