Building up debt traps: Risk, climate adaptation and microfinance

How to adapt to a changing climate is one of the foremost questions of our era. In the last decade, microfinance has shot to prominence as a highly-promoted tool of adaptation to climate and environmental change. In an abridged version of a 2009 report commissioned by the Grameen Foundation and Oxfam US, Dowla argues that ‘within the populations that will be most affected by global warming, the plight of many individuals is linked to the ability of microfinance institutions to adapt to the consequences of climate change’.

With access to already-existing as well as newly-adapted financial products and ser­vices, the argument goes that people and communities will be better placed to reduce risk, diversify their livelihoods, and build assets. ‘Green microfinance’ would facilitate adaptation in two key ways: ‘by improving ex-post [after the event] risk recovery’ via coping capacity enhancement, and ‘by improving ex-ante [before the event] risk reduction’ via adaptive capacity enhancement. Recommended strategies include improving access to microcredit for climate change responses as well as promoting insurance schemes to reduce the burden of climate risk on society.

In contrast to these emerging discourses and practices that frame microfinance as a key tool of climate adaptation, our recent research with rice farmers in rural Cambodia finds that microfinance loans are leading to an over-indebtedness emergency that significantly undermines borrowers’ long-term coping and adaptive capacity in a changing climate. Such loans often push households to borrow more, work more, sacrifice food quality and quantity, quit farming, and erode and sell their assets, including land. The cost of financialised coping strategies can trap rural populaces in financial obligations which they struggle to service and which manifests ultimately as over-indebtedness. Microfinance ends up promoting a particular form of climate adaptation: one that is individualised, incremental, and geared towards the further integration of populations into processes of capital accumulation.

This form of adaptation is highly profitable. Indeed, as Dowla argues in that same paper, each new climate-linked shock ‘opens up opportunities for the microfinance institutions and their clients’. Yet the corollary to this profitability is that the costs of such an adaptation tend to be borne by the poor, who find themselves exposed not only to the rigours of the environment but now the global market too.

Let’s now delve into these arguments in a little bit more empirical detail.

Rice farming has become more expensive, notably due to decades-long withdrawal of state support in the agricultural sector as well as processes of intensification and commodification. It has also become more unpredictable and increasingly vulnerable to floods, droughts, and rising temperatures. These recent changes in the political economy landscape of farming in Cambodia have turned formal borrowing, and microfinance borrowing in particular, into an inescapable aspect of farming in a changing climate. In fact, Cambodia is one of the most microfinanced indebted countries in the world. The number of microfinance borrowers in the country has increased from 175,000 to just over 3 million people between 2000 and 2021. The average size of a microfinance loan reached US$4,280 in 2021, roughly twice the country’s annual GDP per person. And this breakneck growth is far from over. In 2020, it was reported that credit was still growing at a rate of 40% per year.

Our research shows how these debts are, once taken, difficult to repay in the long term, Rather than resolving a short-term shock, therefore, microfinance loans are the catalyst for other often harmful coping strategies to ensure repayment. We have identified five such strategies.

First, struggles to repay loans due to poor or failed harvests led farmers to take out new loans to repay existing ones. 12.5% of indebted participants surveyed said the last time they borrowed from a microfinance institution was partly to repay another loan. Others turned to informal money lenders – at extremely high-interest rates – to repay microfinance loans.

Second, we found that many household members, including urban migrants, had to work longer hours, taking on multiple physically demanding jobs, and sometimes against medical advice, to ensure debt repayments.

Third, many farmers we spoke to said they had to be very careful regarding food expenses in order to be able to repay their debts, especially following a bad harvest. For some, this meant reducing the diversity of the food they ate or eating food they didn’t necessarily like. For others, this meant reducing their food consumption altogether.

Fourth, many farming households resorted to selling assets to repay loans in the event of a bad or failed harvest. Key among these were jewellery, livestock, and, importantly, land. 15% of surveyed households reported selling at least one plot of agricultural land over the past 10 years. 31% reported the reason they did so was to repay loans. Overall, 5.2% of indebted households have had to sell at least one plot of agricultural land to repay loans over the last 10 years, with farming households being twice as likely to sell land specifically to repay a loan compared to non-farming households. In a similar vein, a recent quantitative study funded by the German Federal Ministry for Economic Cooperation and Development – a large industry investor – has detailed the extent of land sales in Cambodia caused by microfinance institutions. The study estimates 6.3% of households sold land to repay loans (167,400 households if extrapolated to all of Cambodia) over the past five years.

Fifth and finally, the risk associated with rice farming in a changing climate – the debts accrued to farm and those necessary to cope with a poor or failed harvest – led some households to quit farming. Migration to brick kilns and to Thailand have been typical migration paths taken alternatively.

The burdens of environmental precarity, adap­tation, and household debt are currently being placed on poor borrowers in the Global South. To address this, policymakers and development practitioners’ attention should turn to another type of debt: the climate debt the Global North owes the Global South for its historical and on-going appropriation of the planet’s capacity to absorb greenhouse gases and its disproportionate contribution to the effects of climate change. Not only should climate debt be acknowledged by industrialised countries, international development and financial organisations, and transnational corporations, but it should also be repaid. With this in mind, a set of foundational principles can be offered in relation to microfinance as a form of climate finance.

First, farming but also non-farming households experiencing the consequences of climate change in countries of the Global South should not have to get into unsustainable debt to mitigate or adapt to changing conditions. For those already struggling with debt repayments, we join calls of local Human Rights Organisations such as LICADHO for the establishment of relief and debt forgiveness programs. Second, in place of microfinance loans geared towards the further integration of populations into processes of capital accumulation, unconditional cash transfers – that is, simply giving people money directly – should be prioritised. This echoes current demands that climate finance should not be distributed as debt – as is the case for 80% of the climate finance that donor countries mobilised in 2018 – but in the form of grants. Finally, and related to the above, unconditional cash transfers to individuals are by no means sufficient on their own and should be complemented by the maintenance and expansion of a strong system of social provisions and democratic mediating units that represent and implement the collective needs for adaptation and a just ecological transition. These would be financed by the transfer of resources from the global North (back) to the global South at a much bigger magnitude than the current, insufficient, and unfulfilled pledges of US$100 billion a year.

Ultimately, if the risks of climate and environmental change that are faced by vulnerable global South populations are to be mean­ingfully reduced, these principles must underpin a new direction in the financing of adaptation. Rather than extending and individualising the impact of shocks into a hidden burden on health and livelihoods, adaptation must instead be reimagined as a responsibil­ity borne by those who have benefitted most from the emissions of atmospheric carbon. Unless climate change adaptation at the household level is rooted in these principles of redistributive climate justice, then those people and populations most vulnerable to environmental pressures will continue to be trapped, rather than freed, by adaptation.

Vincent Guermond is a Leverhulme Early Career Research Fellow in the Department of Geography at Royal Holloway, University of London. He tweets at @vincentguermond.

Photo by Thomas Cristofoletti; copyright Royal Holloway University of London.

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