Green Microfinance for Ecosystem Services - An Empirical Quantitative Study of a Project's Results, the Variables Influencing Its Outcomes and the Effectiveness of the Related Conditional Payments

Abstract

Recently there has been growing interest in green microfinance, referring to the role of microfinance to support environmental management by micro-enterprises and poor households. Worldwide, the number of green microfinance projects increases, yet there seems to be little discussion on how green microfinance interacts with rural development, and how effective it is in achieving its environmental goals. This paper aims to position itself in this debate as it assesses the role, outcomes and limitations of a green microfinance programme in biodiversity conservation and rural development.For our case study, we look at the first large-scale green microfinance programme for biodiversity conservation: Proyecto CAMBio (Central-American Markets for Biodiversity). It was implemented in five Central American countries in the period 2007-2013 and consisted of a combination of credits for agroforestry, silvopastoral practices or other environmentally friendly rural activities; technical assistance to support the adoption of these practices; and conditional payments for environmental services (PES) linked to a number of environmental objectives. We focus on its implementation in Nicaragua by the Microfinance Institution (MFI) Fondo de Desarrollo Local (FDL) and the NGO Nitlapan. We perform an in-depth econometric analysis on a database from a survey we conducted on a sample of 128 rural producers. We thereby assess the clients’ characteristics that influenced the evolution of the environmental value of their farm – as defined by the indicators we used – on a span of five years, and we assess Proyecto CAMBio’s possible role in this evolution. Moreover, we further look into the effectiveness of PES in rewarding environmental betterment.Our results underline the importance of the local territorial dynamics and the complexity of the socio environmental system, challenging a simple response to individual green credits or environmental rewards. It appears that – although the project was carefully implemented in line with the guidelines, and performed well financially – green microfinance programmes specifically designed to foster environmentally sustainable and economically rewarding rural practices do not necessarily manage to influence the evolution of the environmental value of the clients’ farm. Other factors, related to livelihoods pathways – such as the decision to change the main economic activities, or clients’ strategies or opportunities in land accumulation – have instead a significant influence on the evolution of the environmental value of the farm. Moreover, the PES does not seem to be able to reward environmental improvement. Embedded in the credit logic, it rewards the more credit-worthy activities, and it appears that it mostly benefited producers that plant fewer trees per hectare and have more access to land and credit.On the basis of this analysis, we call for a more proactive role of green microfinance, which aims to reshape existing livelihood strategies toward more socially inclusive and environmental friendly pathways, through a necessary articulation with local actors and broader territorial dynamics. At the practical level, specific policies for green credits should be integrated as fundamental tool in the green credit provision and allocation. These should aim to balance the social and environmental outcomes, going beyond a sole focus on the financial profitability or credit risk of the product and its participants.