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Microfinancing Climate Resilience

Too many small businesses in the areas most vulnerable to the effects of climate change lack access to credit, preventing them from taking steps to build resilience through renewable energy, sustainable production, and other measures. Microfinance has its critics, but it has a crucial role to play in closing this credit gap.

LONDON – Vulnerable communities face the brunt of climate change – from rising sea levels and extreme weather events to prolonged severe droughts and flooding. According to the World Bank, without effective mitigation measures, climate change could push more than 100 million people into poverty by 2030.

To help the most vulnerable communities become more resilient to the effects of climate change, financial institutions should support small and medium-size enterprises. In emerging economies, SMEs account for as much as 45% of employment and up to 33% of GDP – and these numbers are significantly higher when informal SMEs are included. When an SME builds up its own climate resilience, it can have cascading effects in the community around it.

Unfortunately, SME owners generally have trouble securing bank loans, and instead must turn to informal lending and alternative funding sources to support their businesses. According to the World Bank, 50% of formal SMEs lack access to formal credit, and the total credit gap for both formal and informal SMEs is as high as $2.6 trillion worldwide. While the gap varies considerably among regions, it is particularly wide in Africa and Asia.

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