Microfinance and climate change adaptation: insights from Bangladesh

Climate change is one of the biggest environmental problems facing humanity, particularly for developing countries which are highly vulnerable to environmental and climate hazards. If citizens of these countries are to adapt there must be sufficient incentives, knowledge, resources, skills, and an absence of market failures and barriers that discourage adaptation. Growing interest exists in how microfinance can facilitate adaptation. However, much of the existing literature remains conjectural, positively biased, and insufficiently uses adaptation concepts. Additional studies of microfinance-adaptation linkages adopting an adaptation lens are needed to address knowledge gaps. The aim of this thesis has been to contribute to microfinance-adaptation literature by examining conceptual arguments and exploring empirical data. To achieve this, a pragmatic philosophy, mixed-methods approach, and an abductive strategy were adopted. The research location was Noapara Village, Bangladesh, providing a representative case-study of the local area. The unit of analysis was the household, facilitating understanding of relationships between microfinance, livelihoods, autonomous adaptation, and environmental and climate hazards. Methods included a household survey, semi-structured interviews, and focus group discussions. The fieldwork was iterative and sequenced to facilitate subsequent research and triangulation. Analytical categorisation was undertaken iteratively, building on initial descriptive coding and drawing on literature themes to interpret the material. The first thesis objective was to explore features and patterns of autonomous household livelihood adaptation to better understand responses to environmental and climate hazards. Most households were found to have implemented reactive measures reducing livelihood risk. Two forms of transformational adaptation linked to socioeconomic status emerged: low-cost involuntary measures which reduce income, and high-cost voluntary measures taking advantage of emerging opportunities. The second objective was to explore the influence microfinance had on household efforts to reduce vulnerability to environmental and climate hazards. Households used credit to cope and adapt but credit limits prevented many households from adopting transformative opportunities. Often credit usage sacrificed longer term prospects for livelihood improvement for short-term security and at times led to over-indebtedness. The third objective was to explore how local-level microfinance institution representatives have responded to environmental and climate hazards and their ability to foster adaptation. Branch managers have done little in response to the problems posed by flooding, and are unable to screen clients or effectively manage aggregated risk. Reducing vulnerability by encouraging adaptation among clients holds promise but climate proofing products and partnering with other institutions is required. The thesis demonstrates that the existing literature relies on an overly simplistic view of potential microfinance-adaptation linkages, arguably due to insufficient consideration of adaptation concepts. However, the microfinance-adaptation literature is in its early stages. This thesis has contributed by providing a more nuanced study, producing different types of data, employing different data collection and interpretation approaches, and exploring both positive and negative linkages. This thesis arguably represents the first in-depth empirical study using an adaptation lens. Several important research findings were uncovered which show both signs of promise and concern. Future research can build upon this thesis, deepening understanding of how and under what conditions microfinance can reduce vulnerability. In summary, this thesis found that microfinance currently does not provide the necessary ingredients households require to transformationally adapt. Considering that future projections estimate non-marginal change to be ever more necessary, adaptation planners cannot rely upon the microfinance system to facilitate sufficient adaptation levels. The microfinance system can arguably benefit as much from adaptation planning as adaptation planning can benefit from microfinance. However, microfinance offers a potential conduit to support vulnerable communities. Microfinance programmes need climate proofing, so that investment patterns incentivised are ‘climate-compatible’. Additionally, microfinance institutions need to partner with other development actors to ensure households receive the holistic support required to adapt and thus reduce institutional vulnerability.