Eco-Friendly Microfinance: It's Time To Clean Up The Bandwagon

Green microfinance is the link between good intentions and real results.

Microfinance is a business model focused on providing small loans to low-income clients, enabling them to develop small businesses. The model has become a hot topic in recent years, thanks in large part to Muhammad Yunus and the Grameen Bank, joint winners of the 2006 Nobel Peace Prize. Yunus recently released a documentary, “To Catch A Dollar,” further raising awareness of microcredit loans.

While microfinance has lifted many people out of poverty, a job focused on environmentally damaging practices can actually worsen a loan recipient’s situation.

A report by GreenMicrofinance and Inter-American Development Bank, “The Missing Bottom Line: Microfinance and the Environment,” stated that the sheer number of microenterprises can create a significant impact on the environment:

There are three main areas in which microenterprise activities impact the environment: unsustainable use of natural resources, pollution (air, water, and solid waste), and occupational health and safety. 

The specific environmental impacts of microenterprise activity depends on a number of factors, such as the production method (e.g., burning or mining), productive inputs (e.g., inorganic fertilizer, pesticides), inefficient production technologies (leading to overutilization of natural inputs), waste (e.g., litter, diesel smoke), or outputs (lumber, endangered species), or the local political structure (e.g., uncertainty of land tenure).

The report went on to state that while microentrepreneurs may contribute to environmental degradation, they are also victims of it.

According to the report “Microfinance and Climate Change: Threats and Opportunities,” available through CGAP (Consultative Group to Assist the Poor), climate change disproportionately and directly threatens poor countries, prohibiting the economic development of impoverished people.

There is an upsetting irony to all of this. Microfinance is intended to help the poor. The poor are often the most affected by climate change. Yet, some microfinance programs actually further contribute to climate change… which, again, may disproportionately affect impoverished populations.

It should be made clear that in no way are these findings meant to deter supporters of microfinance. Countless people have been empowered and had their lives positively changed through microfinance. Rather, microfinance organizations must embrace green jobs as the opportunities of the future. Green microfinance is now emerging as a chance to both empower people and protect the environment at the same time.

“Microfinance and Climate Change” reports that for microfinance customers around the world, cooking and lighting use up the greatest amount of energy. By switching from kerosene to LED lights, developing countries could leapfrog intermediate technologies to clean energy sources. 

An article in The Economist showed how some companies are getting creative in offering energy efficient opportunities to the poor. For example, Selco Solar encourages customers to use a solar-powered sewing machine as a tool for generating new income. Their lab is currently testing a hybrid banana dryer.

Grameen Shakti, a Grameen Bank subsidiary, was created to share renewable energy opportunities in remote Bangladesh. According to Climate Change Corp, the organization offers affordable solar home systems to rural populations through a soft credit approach, while encouraging each customer to plant five trees.  In 2008, they had reportedly powered over 135,000 homes and planted three million trees.

How does the program empower the local population? In the same report, Climate Change Corp wrote:

It is training local youth – 1,000 so far – who are then employed as technicians for the installation, operation and maintenance of solar systems. Female engineers trained by Grameen are subcontracted to produce solar system components and run repair shops.

The availability of light is enabling rural artisans and traders to stretch working hours, creating extra income. The solar technology has opened up new business opportunities in villages such as mobile phone charging shops, TV Halls, computer training centers and pay phone services, according to Grameen Shakti’s CEO, Barua.

Whether it’s a hybrid banana dryer or a solar repair shop, green microfinance offers opportunities to empower people while fighting climate change at the same time. It is time for those riding the microfinance bandwagon to make sure the ride is a climate-friendly one.

Photo credit: Remy Steinegger, World Economic Forum


Great article. However, I want to add a few things. Microfinance is inherently a consumption smoothing and consumption stimulus (I hate to paint it that broad but so it is for discussion purposes). Many times there is no control over how money is spent.

Because of this, there is a clash between economic growth and environmental sustainability. One main goal of microfinance should be how to help small farmers/entrepreneurs/consumers remove costs and consumption from their lives. These costs can be firewood purchase or collection, rainwater catchment, or kerosene purchase. Nearly all of those types of costs are not only huge to the consumer/entrepreneur at the BoP, they degrade the environment.

A key strategy for an MFI needs to be to address these issues through a directed microfinance program. For example, matching the avoided costs of firewood use exactly with the monthly loan payment for a solid waste digester (to replace wood with methane) gives the farmers a zero sum monthly number and allows them to forever reduce their firewood costs; thus transferring the money into savings once the loan is paid.

Large microfinance funds in the U.S. along with groups like Kiva have either been ignorant or arrogant in their approach as they have largely ignored this segment.

I dealt with it in my thesis last year and we are implementing it in Mexico.

These large groups, including Kiva, have to get over their good press and do something more useful. They have almost zero knowledge regarding development and how these loans impact the environment. People are slowly getting it in the development space, but Kiva and others are not.

I believe that microfinance is the key to develop more entrepreneurs and to eliminate the recession that happened in the past. Small businesses are the foundation of Multi-million corporations.