Financial Services for Climate Resilience

A review done on financial products in sub-Saharan Africa (including Ethiopia), Latin America, and South East Asia discovered a limited amount of climate-responsive financial products available in the regions. As a result, people vulnerable to climate crisis use products that are not explicitly designed for climate purposes.

Significant economic and financial risks from an expanding variety of catastrophic climate change-related events are undermining sustainable development and causing loss and damage. Thus, necessitating the need to devise climate-risk financing solutions.

The need for climate risk financing solutions is particularly pressing in developing countries due to the increased risks associated with climate change.

An analysis done by Dalberg, a global consulting firm, indicates there is much to be done by financial service providers in building climate resilience.

A review done on financial products in sub-Saharan Africa (including Ethiopia), Latin America, and South East Asia discovered a limited amount of climate-responsive financial products available in the regions. As a result, people vulnerable to climate crisis use products that are not explicitly designed for climate purposes (climate-supportive financial products).

Climate-responsive products are specifically designed for the purpose of addressing the financial needs of vulnerable people. These products could be savings, credit, or insurance platforms. Climate-supportive financial products are not designed for general financial use and can accommodate general savings and credit needs.

Climate-supportive products used in Ethiopia include informal savings groups, mobile payments, and risk-sharing networks. Village saving and loan association (VSLA) members use savings and loans to diversify their incomes by engaging in small businesses during periods of drought. There are also digital financial service providers that partner with non-governmental and governmental organizations to disburse payments in case of climate-related adversities.

In Ethiopia, risk-sharing networks provide vulnerable people with emergency funds to cope with climatic shocks. Pastoralist households lend livestock to one another in a risk-sharing network for a reciprocal exchange in adverse shocks like drought. People also access cash and loans from Edir, community-based groups where members contribute a fixed monthly fee to cope with different accidents.

The following trends were observed with climate-responsive financial products:

  • Insurance products are the most prevalent type of climate-responsive financial product, followed by credit products.
  • Insurance companies and MFIs are the most prevalent financial Institution providing climate-responsive products.
  • Well above half of the identified products are designed to address multiple climate risks rather than being tailored for a single climate risk.
  • Only a quarter of climate-responsive financial products specifically consider or target female users, who often have distinct livelihood or financial climate-specific needs.
  • The most significant number of climate-responsive products are in Sub-Saharan Africa.

Read the full report here.

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