The federal government has established the Climate Risk Fund I (CRF-I) under the World Bank’s Resilient and Accessible Microfinance (RAM) Project, with financing of $125 million. The initiative aims to promote climate-resilient farming and provide liquidity support to small farmers affected by floods.
The State Bank of Pakistan will manage the fund under a trust created by the federal government to enhance the resilience of microfinance providers (MFPs) and their clients in the agriculture sector against flood-related shocks.
Pakistan, being one of the most climate-vulnerable countries in the world, has witnessed severe climate-related disasters over the past several years. The agriculture sector, particularly small, subsistence, and landless farmers, mostly served by the microfinance sector, remains the most vulnerable. This was evident during the 2022 floods, which not only devastated livelihoods but also raised loan delinquency risks, created liquidity shortages in microfinance institutions, and hindered the sector’s growth.
The CRF-I is designed to support climate resilience, adaptation, and recovery while enhancing access to finance. It will provide liquidity and financing to MFPs for on-lending to eligible micro-borrowers.
The fund is expected to achieve several objectives, including:
- Reversing disintermediation from high-risk flood-prone areas through a contingent liquidity facility, to be deployed after a qualifying flood event.
- Preserving MFPs’ balance sheets by mitigating the impact of floods on their asset quality.
- Supporting the resilience of borrowers and potential borrowers in flood-impacted areas.
- Enhancing capital adaptation, resilience, and productivity in agriculture through the “business-as-usual” Innovative Agricultural Liquidity (IAL) product.
- Potentially transferring the economic cost of extreme flood events outside Pakistan via risk-based deployment of international reinsurance.
Facilities for Microfinance Providers Under CRF-I
The CRF-I will provide financing to eligible MFPs through two facilities:
- Innovative Agriculture Liquidity (IAL) Facility
- Contingent Liquidity Facility (CLF)
The IAL facility will provide financing to MFPs to pilot agricultural loans bundled with agri-tech services for their borrowers. This will enable farmers to adopt climate-resilient crops and techniques, increasing productivity and resilience against climate shocks.
The CLF will provide financing to MFPs after a flooding event for onward lending to affected borrowers. This will allow borrowers to continue income-generating activities, gradually repay their loans, and help MFPs preserve asset quality and maintain operations during climate-related disruptions. Under this facility, MFPs will be able to restructure and top up existing loans or issue new loans to flood-affected clients.
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