Abdul Ghani

The State Bank of Pakistan (SBP) has created Climate Risk Fund-I to strengthen the resilience of Pakistan’s microfinance sector and small farmers against climate shocks. According to the Governor’s Annual Report 2024-25, the fund launched under the World Bank’s Resilient and Accessible Microfinance (RAM) initiative will support climate-smart farming, flood recovery, and liquidity management for microfinance institutions (MFIs).

The SBP said the new facility follows years of strain in the microfinance industry caused by the pandemic, macroeconomic tightening, and the 2022 floods. Despite these challenges, the sector showed clear improvement in FY25: total assets grew 13.9 percent to Rs 891 billion, loan-infection ratios fell, and provisions exceeded non-performing portfolios. Aggregate losses shrank from Rs 18 billion in FY24 to Rs 5.9 billion, marking a three-fold improvement in profitability.

Climate Risk Fund-I will provide refinancing and concessional credit lines to MFIs and microfinance banks (MFBs) to support farmers investing in resilient technologies such as drought-tolerant seeds, solar-powered irrigation, and crop-insurance schemes. The SBP noted that the fund also offers liquidity support to institutions servicing borrowers in disaster-affected districts, ensuring business continuity and depositor protection.

The report said microfinance remains a vital pillar of Pakistan’s inclusion architecture. MFBs serve low-income groups and small enterprises that conventional banks often overlook. In FY25, investments in government securities accounted for about half of MFB asset growth, helping them meet the enhanced Statutory Liquidity Requirement (SLR) of 12 percent introduced under revised prudential regulations. Advances rose 10 percent, reflecting gradual recovery in rural-credit demand.

The SBP underscored that climate finance is now integral to financial stability. With Pakistan ranked among the world’s most climate-vulnerable nations, extreme weather threatens livelihoods and loan portfolios alike. The new fund therefore links environmental sustainability with financial-sector soundness. It complements other measures, including enhanced supervision, stress-testing of MFBs, and guidance on disaster-risk management.

Under the RAM framework, the government and the SBP will continue collaboration with international partners to scale up the facility. Future phases will incorporate performance-based incentives to reward institutions demonstrating measurable progress in climate adaptation and community outreach.

The SBP said the fund also aligns with its broader development mandate to maintain financial inclusion and macro-economic resilience. By reducing default risk among climate-exposed borrowers, it indirectly supports credit quality across the banking system. The central bank reaffirmed that strengthening microfinance capacity remains essential to sustaining inclusive growth.

Credit: INP-WealthPk