The inclusive and environmentally rural development has been an issue of concern over the last decade. This issue, combined with the sustainable issue has also been raised in microfinance sector as underline by (Allet, 2011). Microfinance has emerged as a tool to offer financial services to poor customers (Armendáriz and Jonathan, 2010; Hudon, 2014). This type of clients is considered to depend more on natural resources. Indeed, the depletion of resources over time reduces the sustainability of poor’s business and their ability to save or to repay a loan, thereby increasing the risk to the MFI. This and other reasons highlight the reason why microfinance should be involved in promoting inclusive and sustainable rural development.
Historically, the business’ literature considers that social responsibility encompassed both social and environmental performance (Willums, 1999). The concept of green microfinance is a relatively new and developing field within the emergence of microfinance, underlying the environmental responsibility. Sustainable development is a matter of all actors involving in the business environment. Microfinance sector should, as well as all sectors, get involved in promoting inclusive and environmentally sustainable rural development. To achieve this objective, the microfinance sector should take actions internally (reducing the environmental footprint of their operational activities, for instance) and externally.
The environment can be affected either negatively or positively by people and microenterprises. In their study, (Hall and Lal, 2006) affirmed that poor people’s livelihoods affect the environment, and vice versa; this is due to the fact that poor people are more dependent on natural resources. Besides, microenterprises have a negative impact on the environment because of the nature of their inputs (inorganic fertilizer, pesticides), the type of production methods (burning or mining), the inefficiency of their production technologies (leading to overutilization of natural inputs), the enterprise’s waste (littler, diesel smoke) and even by the enterprise’s outputs (lumber, sale of endangered species).
Research findings have shown that access to financial resources or a lack thereof plays not only a decisive role in the social problem but also in the environmental ‘ones. (Bermúdez et al., 2015) highlighted the fact that the provision of credits allows some farmers to buy more cattle and land while others are not able to make necessary investments due to the lack of credit.
These have been mentioned, I consider that the microfinance industry should be involved in promoting inclusive and environmentally sustainable rural development. Through this paper, I will present, based on my personal argument and on what I have learnt from the class, key building blocks of a strategy in view of this objective.
In developing countries, rural areas are still dominated by smallholder farmers within an agriculture system which lacks access to resources, technology, inputs, finance, knowledge, markets etc. Therefore, to address the rural areas’ needs, policies from governments, local, regional and global development practitioners should be implemented. The key role of this strategy should be played by governments, development agencies and other stakeholders seeking to design and implement rural development strategies that promote sustainable rural development. Notwithstanding, microfinance industry should, as well as other actors, be involved in promoting sustainable rural development. In fact, this should be feasible by implementing the following strategies within a microfinance institution.
1.1. Conditional (Subsidized) provision loan
Microfinance sector is mainly known as the provision of loan to poor customers without collateral and who are not eligible for commercial banks’ services. Poor peoples are mostly engaged in activities which depend on natural resources. For instance, research conducted by (USAID, 2006) revealed that “about three in four poor people live in rural areas, where they depend on natural resources for their livelihoods, and about 90 percent of them depend on forests for at least some part of their income”. For this reason, microfinance industry should be playing a crucial role in financing activities which do not harm the environment side. Therefore, the microfinance institution should design their loan regarding the environmental aspect such that the provision loan’ criteria should lead the customers to invest in environment-friendly activities.
Indeed, conditional provision loan is considered to be a key factor to increase the capacity of households/ enterprises to invest in environmentally sound productive adjustment and can also be used to create additional economic incentives to transform activities in the desired direction in respect of the environment.
In this case, a configuration of microfinance plus is needed which combined microfinance with several other services and incentives such as awareness raising, technical assistance, payments for the ecosystem, etc.
1.2. Investing in research
To involve in sustainable and rural development, microfinance should invest in research to better understand the capitalization trajectories and livelihoods of producers who make use of productive intensification on their farms.
Microfinance clients are mainly illiterate, without any ability to assess the environmental impact of their activities; therefore they are not able to invest in activities which are financially sustainable and environmentally responsible. Hence, to involve in promoting sustainable rural development, microfinance should be embedded with a research agenda in its activities in order to assess the environmental impact of their clients’ activities and to guide them investing in financially sustainable activities with respect of the environment. As a result, the research agenda should be an instrument for the microfinance institution to innovate new approaches to better exploit natural resources. This and other research results from the microfinance institution will enable farmers to exploit natural resources responsibly.
1.3. Including environmental policy in portfolio and internal activities
Microfinance institution should embed the environmental policy either in their portfolio or internal activities. The portfolio side screens the environmental risk at the client level monitoring the loans regarding the clients’ activities which harm the environment. The implementation of this strategy will allow the institution to avoid financing activities which depend on natural resources and without mitigation plan. Activities like production or trade of woods, hazardous chemical, etc can be listed among critical activities. Besides, to get involved in promoting inclusive and environmentally sustainable rural development, a microfinance institution can use some existing tools1to assess the environmental risks of their clients’ activities. Therefore, the results of the assessment will allow the institution to support or not the clients’ activities or to raise clients’ awareness of environmental risks and possible mitigation actions.
On the internal side, the institution can define the best way of conducting its activity in respect of the environment. The implementation of this strategy will take into consideration the use and monitoring of energy and water consumption, carbon emissions, paper use, etc.
1.4. Providing green financial and non-financial products
To promote inclusive and environmentally sustainable development, the microfinance institution should support organization involving in the environment protection such as ecotourism activities, agroforestry, waste management, etc. In such instances, the microfinance institution should embed strategies to incentivize investor to go for such activities by implementing advantages like low-interest rate, low installment, a loan with a long duration, etc. Notwithstanding, the advantages provided by the institution must align with its financial goal to ensure the financial sustainability. Besides, in this strategy, microfinance should embed in its portfolio the provision of loans that support the accessibility, for their clients, to environmental technologies. The financing of access to renewable energy technology (solar home system, solar lamps, biogas digesters, etc), would make this strategy effective.
The second aspect of this strategy underpins the provision of non-financial product aligns in the environment. Following this strategy microfinance institution should invest in environmental awareness- raising campaigns by implementing a kind of code of conduct to be signed by their clients in which, for instance, they commit to plant trees and take care of them, stop using plastic bags, keep their house and surroundings clean, raise their relatives’ awareness of environmental issue, etc. On the other hand, this strategy would include pieces of training for farmers and micro-entrepreneurs of the institution. The pieces of training contents would tackle a subject like sustainable agriculture technique for the farms and would allow microentrepreneurs exchanging their experiences and good practices.
1.5. Redesign the joint liability lending model
In rural areas, farmers are mostly poor. Given the fact that they don’t have collateral, microfinance institutions had resorted to group lending to secure their lending. According to (de Aghion and Morduch, 2000), “Group lending refers to the practice of working with clients in small groups (typically comprised of three to seven neighbors). Loans are made to individuals, but the group as a whole is held jointly liable should repay difficulties arise.” In fact, the group lending model can be used to secure the loans and to increase environmentally sustainable practices, from the clients’ perspective. Poor people are more affected by environmental risks, shocks and, stresses; therefore they have lower resilience capacity. In shortage period, poor people are exposed to harm the environment, by using woods for their cooking, etc. The lack of saving and insurance is commonly known as the driver of a lower resilience capacity for farmers, thus microfinance institutions can use the group lending to help their clients getting wider opportunities by embracing the diversity of actors in rural areas and, building on rural-urban interdependencies and synergies. This approach enables farms to be more resilience, linking producers and consumers from urban and rural areas to markets and contributing to more sustainable as farmers can be less dependent on natural resources.
In this paper, we investigate the strategy to implement within the microfinance sector in order to get them involved in promoting inclusive and environmentally sustainable rural development. Based on the lectures we had in class, and some other papers belonging to the topic, I thereby build a block of a strategy to implement in microfinance industry in order to fulfill this objective. On the whole, I am convinced, as shown in the previous paragraphs, that microfinance industry should be involved in promoting sustainable rural development and has a key role to play in view of this objective. The strategy presented underpins the importance of product design and the internal ecological footprint within the microfinance industry.
As the bulk of my argument should come from lectures and my own arguments, I present in the following section, some important papers that have been used in fulfilling this assignment.
1 Tools in terms of questionnaire have been implemented to assess whether microfinance’ clients respect their environment. Some microfinance institutions use fact sheets8. On the institution level, there are many tools to assess the environmental performance such as: Green Index, MIX’s green performance indicator, Green performance agenda, Progress out of energy poverty index, etc.