As climate shocks intensify across Asia, access to finance alone is no longer enough. SEI Asia’s Architesh Panda reflects on how a new generation of microfinance institutions could help build the region’s adaptation market – and why climate resilience must become central to development finance.
Over the past two decades, a financial inclusion revolution brought formal finance within reach of hundreds of millions of people in Asia’s emerging economies long excluded from conventional banking. The digital revolution that followed made payments, savings and credit faster, cheaper and vastly easier to access.
But the next financial revolution must respond to a harder reality: finance cannot deliver lasting development if the livelihoods, enterprises and assets it supports are increasingly disrupted by heat, floods, droughts and cascading climate shocks. Climate resilience is no longer simply one desirable outcome of development finance. It is becoming a precondition for development finance to work.
Beginning in the 1970s and 1980s, the modern microfinance movement challenged the assumption that people with low incomes were “unbankable.” Group lending, joint liability, relationship-based assessment and small working-capital loans enabled financial institutions to serve customers without conventional collateral. Women, who had often been excluded from formal finance, became central to the model.
Over time, the sector evolved beyond microcredit towards a broader financial-inclusion agenda that encompassed savings, insurance, payments and remittances. Digital technology created another wave of change. Global account ownership has increased steadily, rising from 51% in 2011 to 62% in 2014, 69% in 2017, 74% in 2021 and 79% in 2024. This represents a 28-percentage-point increase, or approximately 55% growth, since 2011.
These revolutions achieved extraordinary reach, but access did not automatically create resilience. The development effects of microcredit have varied, and poorly designed lending has sometimes increased indebtedness rather than strengthened livelihoods. Digital accounts can move money efficiently, but they cannot protect a farmer’s income from drought or keep a microenterprise operating through extreme heat.
The separation between climate finance and development finance is becoming untenable. An agricultural loan may increase production, but drought can destroy the income expected to repay it. A housing loan may help a household build an asset, but flooding can make that asset unsafe or uninsurable. Credit may help a woman expand her enterprise, while extreme heat, water scarcity and supply-chain disruption undermine its viability.
These risks are interconnected. Heat affects health and labour productivity. Drought damages harvests, raises food prices and adds to household debt. Flooding disrupts businesses, infrastructure and payment networks. Repeated shocks can leave households struggling to recover before the next one arrives. As the world approaches critical climate thresholds, and facing the possibility of temperatures overshooting long-term targets, the historical conditions on which lending decisions rely may no longer hold.
The financial consequences also extend beyond individual borrowers. A regional flood or drought can weaken thousands of customers at once, while damaging branches, agents and communications infrastructure. Climate risk therefore enters both sides of the relationship: the customer’s capacity to recover and the financial institution’s capacity to remain viable.
There is no scarcity of climate changer adaptation solutions in the Asia and the Pacific region. However, many of them are not bankable, do not serve the most vulnerable smallholder farmers and are often unattractive to private investors.
Adaptation initiatives are commonly described in terms of the hazards they address, the technologies they use, and the benefits they bring to the communities. Financial institutions require different information: who will pay, how much an investment costs, when its benefits will materialize, whether those benefits generate income or measurable savings, and how climate and credit risks will be shared. In many cases, these basic unit economics were missing.
Asia therefore has an adaptation pipeline in environmental and social terms, but not yet in financial terms. Building a market means translating solutions such as water storage, resilient housing, solar irrigation, cooling, livelihood diversification and climate information into affordable products. It also means aggregating thousands of small transactions through cooperatives, suppliers, offtakers, digital platforms and local financial institutions.
Climate MFI/FSP 2.0 describes a proposed evolution of microfinance institutions (MFIs) and other financial service providers (FSPs) serving low-income households and small enterprises. In this model, climate resilience becomes central to institutional strategy, lending decisions, product design and customer protection. It builds on existing approaches to inclusive climate finance.
Climate MFI/FSP 2.0 is not conventional microfinance with a green label. It is a new generation of financial institutions that integrates climate resilience into every part of the business. These institutions would identify the climate constraints their customers face and assess whether the livelihoods and assets they finance can remain viable as conditions change.
They would combine credit with savings, insurance, technical support, market linkages and emergency liquidity. Repayment schedules would reflect agricultural seasons, variable cash flows and climate shocks, rather than assume a stable monthly income. Institutions would also examine their own resilience including geographic concentration, correlated defaults, liquidity needs, operational continuity and access to contingent funding after disasters. Customer protection and institutional resilience must advance together.
Most importantly, Climate MFI/FSP 2.0 would help build the adaptation market. It would turn local demand into financial products, combine small investments into portfolios and generate evidence on affordability, repayment and adaptation performance.
This transition will require support from governments, development finance institutions and climate funds. Public and concessional capital should provide local-currency funding, product-development support, portfolio guarantees and contingent liquidity, not merely subsidize isolated pilot projects.
An adaptation market must not require vulnerable households to borrow their way out of climate change. Commercial finance may be appropriate when an investment creates reliable income or savings. Guarantees or concessional capital may be needed when benefits take time to emerge or risks are difficult to price. Public goods, catastrophic-risk protection and support for highly vulnerable communities will continue to require grants, public expenditure and social protection.
The purpose is not to make every solution bankable. It is to match each solution with the right customer, institution and financing pathway, and to place risks with actors best able to bear them.
As climate impacts intensify, the more practical question is how to build the institutions, products and risk-sharing architecture needed to close it.
The first financial revolution expanded access. The next must make that access resilient. Climate MFI/FSP 2.0 can become its institutional foundation: development finance redesigned for a world shaped by interconnected climate shocks where building climate resilience is mandatory.
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