Research confirms effectiveness of small loans model to climate-hit Rwandan farmers

Providing small loans to farmers in developing countries who are already struggling with the impact of climate change can significantly improve their livelihoods but also increase the wealth gap with those who do not receive them, according to new research by Glasgow Caledonian University (GCU).

Microfinance and climate change are two key areas of expertise at GCU and a research project led by Dr Karin Helwig, and co-funded by Opportunity International UK (OI UK) and GCU, focused on the clients of Urwego Bank, OI UK’s partner in Rwanda. The bank provides small loans to farming cooperatives and village savings and loan groups.

Many farmers in the study reported they had been severely impacted by floods and droughts, often losing up to half of their harvest. They said the loans, which were received in kind as fertilisers or seed, ensured they had at least some harvest, and therefore access to food, even in adverse weather. The researchers found that small loans were an effective way for farmers to boost their crops and generate an income for themselves and their families. But there were potential unintended negative consequences.

Dr Helwig said: “Urwego Bank allows the loans it provides to be repaid at harvest time and applies flexibility in the case of failed harvests. It appears that farmers working as part of a cooperative who receive loans report clear benefits. However, interviews with both members and non-members of cooperatives suggest that there is a risk of increased wealth disparity, as farmers outside the cooperatives cannot access the loans. A question also remains on the financial sustainability of the Urwego Bank model if the frequency and intensity of climate events increases in the future.”

Researchers Michael Mikulewicz, from GCU’s Centre for Climate Justice, and Clementine Hill-O’Connor, then from GCU’s Yunus Centre for Social Business and Healthand now University of Strathclyde, travelled to Rwanda to interview farmers. The research team also included PhD student Emanuella Christensen.

The research team recommended further support should be made available to farmers outside cooperatives, that the needs of young people should to be addressed specifically, and additional support to smallholders including loans for wider purposes, crop insurance and more agricultural training is needed. The team also found that further research is required on the longer term social and environmental sustainability of the impacts of the loans. 

The researchers also noted that microfinance alone will not be sufficient to address the huge challenges for rural communities in Rwanda posed by climate change. Adequate social protection systems for those at the bottom of the socio-economic ladder are important and large scale, sustained public investments, for example in accessible climate and weather information systems, are required to ensure that climate adaptations are sustainable in the long term.

You can view the full report here.