Developing a CDRFI Product to Overcome Barries of Climate Risk Financing
Introduction
Given the unpredictable environment and the rise in climate-related disasters affecting businesses, there is a big emphasis on how small and medium enterprises (SMEs) can safeguard themselves against these risks. In Sri Lanka, businesses face threats from climate disasters such as droughts, floods, and heavy rainfall, particularly during the monsoon season. Climate change presents a significant risk to SMEs across all sectors, leading to supply chain disruptions, damage to infrastructure, machinery and decreased productivity. These enterprises often lack the resources and financial resilience to recover swiftly, making them disproportionately affected by even moderate climate shocks. This underscores the urgent need for tailored Climate Change Disaster Risk Financing and Instruments (CDRFI) for SMEs. Through this project, Chrysalis has taken a pioneering step toward developing practical and context-appropriate CDRFI mechanisms—beginning with a scoping study and culminating in a revolving fund model designed in collaboration with local stakeholders.
Initiation of CDRFI product
A scoping study was carried out to assess awareness and accessibility of Climate and Disaster Risk Financing and Insurance (CDRFI) mechanisms. The findings revealed that only 10% of SMEs were familiar with any form of CDRFI products. For most, the concept was new to them. However, to bridge this gap, Chrysalis initiated a series of capacity-building efforts in collaboration with district-level SME consortia. As a result, SMEs began to recognize the significance of CDRFI products in preparing for and recovering from climate-induced disasters. Additionally, this initiative enhanced the understanding of sustainable risk financing among entrepreneurs. In addition, the study surfaced key challenges with existing insurance products such as that the majority of them were not satisfied with the existing insurance product due to the complexity of the terms of conditions, lack of trust and less compatibility with the business nature of SMEs.
Due to the necessity of identifying an effective strategy for launching a CDRFI product, series of discussions were facilitated with stakeholders through its emerging Multi-Actor Partnership (MAP), including the Ministry of Industries, the Central Bank of Sri Lanka, the Climate Change Secretariat and experts in the banking and insurance sectors. Ultimately, it was recommended to adopt the revolving fund approach as it is the most feasible and immediately implementable CDRFI prototype.
How we develop the MAP
Recognizing that no single actor can tackle the complexities of climate risk financing alone, the project adopted a collaborative approach through the establishment of a Multi-Actor Partnership (MAP) at the district level. MAP serves as the primary operational entity at the district level, tasked with overseeing the execution of the CDRFI. Initially, a stakeholder mapping exercise was conducted to identify key participants, including government entities, private sector representatives, financial institutions, and SMEs, along with their existing connections. Awareness sessions were organized for these stakeholders, during which their feedback was incorporated to develop the district's CDRFI roadmap in collaboration with the Industrial service bureau (ISB). MAP members communicated their concerns and updates regarding district activities through a virtual platform. To facilitate effective communication, an official WhatsApp group for the district MAP was established based on collective suggestions. Additionally, a District Secretary has been appointed to lead each district MAP. A quarterly meeting of the MAP is proposed to be held with the objective of sharing findings, identifying areas for improvement, and recommending practices to strengthen the current CDFRI mechanisms.
Involvement of MAP
At present, the MAP comprises of various government entities, including the District Secretariat, Disaster Management Center, Small Enterprise Development Division, Meteorology Department and National Enterprise Development Authority, as well as financial institutions such as private and government banks and insurance companies, along with district SME consortia. Their capacity regarding Climate Disaster Risk Financing and Insurance has been enhanced through training programs. MAP oversees the execution of the CDRFI product (revolving fund) and proposes developments and adjustments to create customized products. Furthermore, MAP aims to reinforce district-level frameworks that promote climate resilience and risk financing. This district-level MAP will connect with the national level to share data, information and feedback. Finally, the national MAP will assist in formulating policy recommendations integratet CDRFI strategies in the national context.
Launching the Revolving fund
MAP has determined that the Revolving Fund is currently the most suitable CDFRI product for the consortium. The introduction of a separate insurance product would be a lengthy process, and it may take time for SMEs to gain confidence in insurance products. The amount, guidelines, repayment terms and bylaws for the Revolving Fund were established based on the needs of consortia. For that, IDEA consultancy firm was engaged to assist in the development of the Revolving Fund. Key informant interviews, focus group discussions, and validation meetings with key stakeholders are happening at the district level to finalize the Revolving Fund for each district. Support from the central bank was obtained to ensure compliance with financial regulations in accordance with Sri Lanka's financial laws.
Consortium officials were aware of the concept and will be trained on the procedures and steps of utilizing the revolving fund. District MAP is the monitoring arm of the revolving fund. Moreover, consortia can seek advice and support at any time when they encounter issues or require technical assistance. Upon project completion, the consortia will achieve self-sustainability and have the potential to increase the capital of the revolving fund while providing benefits to SMEs through climate resilience initiatives.
Importance of having revolving fund
Revolving funds are essential for improving climate resilience as they offer sustainable financial assistance to SMEs within a consortium. This method fosters a continuous investment cycle by recycling capital, enabling other members to finance climate resilience projects. One of the other benefits of revolving loan fund programs is their ability to provide small businesses with access to much-needed capital. Traditional financing options, such as bank loans, can be challenging for small businesses to secure due to various factors like limited collateral or a lack of credit history. Looking ahead, the self-sustaining nature of revolving funds will diminish reliance on external financing and promote long-term financial independence.
"In an era of escalating climate risks, embracing comprehensive Climate and Disaster Risk Financing and Insurance (CDRFI) solutions is no longer an option but a necessity, empowering communities to safeguard their future. bussiness"
