How Islamic finance can build resilience to climate change

In arid and semi-arid lands (ASALs), extreme weather manifestations such as droughts caused by prolonged dry spells, among other climate stressors, put ASALs at risk and intensify conflicts.

Worsening climate change impacts such as extreme rainfall fluctuations and temperatures are having a negative impact on agricultural food production, livestock value chains and livelihoods.

To tackle Sustainable Development Goal number 13 (“take urgent action to combat climate change and its impacts”), financial inclusion can be used as a tool to provide much-needed access to financial services for ASALs. This in turn can help vulnerable communities break a vicious cycle to better prepare and cope with climate change shocks such as droughts or floods.

Given that a significant proportion of those in ASALs are Muslims, Islamic finance can be a stimulus for that financial inclusion. It creates the opportunity to include those with little to no access to financial services without compromising their religious beliefs.

The connection between financial services and climate adaptation and resilience is clear. A growing body of research suggests that greater access to financial services allows people to manage risks, plan and mitigate shocks – through savings, borrowing, remittances and digital payments.

Take the Kenyan county of Wajir, situated in an arid part of northern Kenya: 90% of its population is Muslim, who are financially underserved making it difficult to save for a rainy day – or lack of rain in this context. In its latest report, the National Drought Management Authority warned that in the current crop season Kenyan counties in arid and semi-arid lands will see a 50% decline in food production as a result of erratic rains.

In such instances, enhancing financial inclusion can help people prepare for environmental irregularities and provide a financial safety net in the face of climate change shocks.

A project set up by international humanitarian agency Mercy Corps aims to do just that: Crescent Takaful Sacco, a microfinance institution, established a Wajir branch in 2016 as the county’s first private cooperative to offer Islamic financial products. The initiative was led by Mercy Corps with a big proportion of the clientele being pastoralists (typically nomadic, livestock farmers).

Underbanked and financially underserved, there is a dearth of financial products and services that adhere to Islamic principles available to pastoralists. The aim of the initiative was to “try to fill a gap that banks and traditional institutions are not able or willing to fill” given that a significant number of the pastoralists and farmers are Muslim.

While the experiences of the north-Kenyan county are distinct, there are some lessons that can be learned by ASALs in member states of the Organisation of Islamic Cooperation (OIC).

Firstly, Islamic microfinance institutions can fill a vital gap not met by conventional microfinance institutions by targeting pastoralists – the majority of which are underbanked with enormous untapped potential.

Pastoralism is the backbone of Wajir county and a crucial source of income. Livestock production accounts for more than 12% of Kenya’s GDP, 60% of Kenya’s livestock herd are found in ASALs, and an estimated 13 million pastoralists rely on livestock.

Access to credit can help pastoralists mitigate the loss of livestock and cope with frequent droughts, as in times of drought, they are at risk of their livestock dying. Credit can provide this group with a financial safety net and give them the ability to feed their animals in dry periods.

The second lesson to learn is that trust is an important component that can be used as a guarantee for those with little to no collateral.

A social collateral approach is taken by Crescent Takaful Sacco. The microfinance institution lends money to groups instead of individuals and “the group’s cohesion and reputation acts as a guarantee”.

This group-based lending approach is similar to the concept of asabiyah, otherwise known as social solidarity, first coined by philosopher Ibn Khaldoun. A collateral substitute method can be a viable way to integrate financially underserved groups, such as pastoralists, into the formal financial system.

Financial inclusion will only become more essential in the face of growing climate change impacts such as prolonged droughts and erratic rainfall.

Given the principles of social justice and inclusion, Islamic finance can help boost resilience to climate shocks. It should be employed to enhance financial inclusion especially in arid and semi-arid lands where climate change is increasing instability and conflicts.