• Authored By: Aida Kibirige Nattabi
23 Jun 2024

According to United Nations Environment Programme (UNEP), green financing is a fundamental component in the mitigation of environmental risks such as climate change, resulting in improved welfare and social benefits, economic resilience and importantly, climate goals. Green finance (GF) is described as any investment, loans, financial products or services that promote environmentally conscious activities. Essentially, GF is a key linkage between the financial sector and the environment, channelling finances from the private and public sectors to projects or development ventures with a positive impact on the environment.[i]  Currently, GF uptake remains low in Uganda due to knowledge gaps, limited funding and financial products, and a wanting penetration strategy among others.

Globally, GF measures are reported to have grown by 317 percent since the 2015 Paris Climate Agreement.[ii]  This includes a cumulative 784 green finance policy and regulatory measures at both the sub-national and national levels in 109 countries, targeting strategic investment mobilisation, sustainable financing and insurance as of 2022. At the continental level, Africa requires an estimated annual amount of USD 52.7 billion to meet its climate goals, which would require blended private and public investments.[iii] This estimate is currently unmet, due to low public expenditure on both climate change mitigation and adaption strategies.

At the national level, the Uganda Green Growth Development Strategy (UGGDS) 2017/18 – 2030/31, whose main target is to lower emissions and achieve green growth, will require an estimated 30 percent annual funding from the Environmental Fiscal Reforms and Government.[iv] Amongst the targets of the UGGDS is agriculture investment particularly supporting climate smart practises like irrigation for 60 percent of smallholder farmers by the end of the strategy period; climate change mitigation and natural resources management, to mention but a few.

EPRC study on the “Agriculture Linkages to the Oil and Gas Sector in Uganda” partly explores GF supply side constraints from a financial institutions’ perspective and suggests remedies. The research highlights the need for the adoption of climate smart agriculture (CSA) in the oil and pipeline regions to maintain crop yields as food demand in the region increases. Food demand is expected to increase due to population influx in the area resulting from the direct and indirect employment opportunities in the oil and gas sector.  Therefore, the need to fund climate change mitigation and adaption strategies, including but not limited to CSA is critical.

Climate change has impacted crop productivity. Funding mitigation and adaptation measures is a matter of urgency.

The aBi Finance Limited is facilitating the adoption of green finance among other financial institutions, by lending to them. These institutions then channel the funds to households and enterprises.  These are mainly Tier III and IV- micro-finance institutions[v] that operate closer to smallholder farmers. Nonetheless, while there is increasing demand for GF, the uptake of these loans remains low. The research attributes this to knowledge gaps in GF by the public but also other players in the financial sector. Indeed, the 2023 Finscope Uganda Survey report confirms that only 11 percent of the public are aware of GF.  The sampled financial institutions suggest there are limited green finance products. Specifically, most green loans target clean energy projects including cooking and solar power, and agriculture. This is further exacerbated by limited availability of green funds and operations frameworks. Moreover, creating new products is characterised by lengthy procedures.

According to the research, this poses a conflict of interest in the sense that banks normally issue traditional loans which unlike green loans, finance enterprises engaged in activities that might be detrimental to the environment such as charcoal burning or production activities that contribute to the increase of emissions. Additionally, incorporating green finance can results in the loss the traditional a customer base. The banking sector is also profit-driven, yet the cost of availing green loans is high. Banks may not have the capacity to lend, manage and monitor the impact of green loans which imposes extra administrative and overhead costs to serve at the grassroot level, but also requires training on specific skills and technical aspects of climate mitigation and adaption.

To mitigate the above-mentioned supply constraints, the research suggests that it is essential that lower tier banks are supported in developing, categorising and mainstreaming GF products. This entails capacity building and technical training for banks at all levels of management and operations.

Strategic targeting of entry points for GF particularly at the community level also requires further leveraging of micro-finance institutions’ structures, to cut operation and administration costs to expand the reach of smallholder farmers. For example, availing green loans at favourable interest rates will also increase uptake for smallholder farmers, as well as products customised towards women and youth.

It is also important to employ a multi-stakeholder approach (private and public sector, civil society, and development partners) to increase awareness and buy-in. Through public and private partnerships, financing modalities can be streamlined and more funding mobilised.

Lastly, the research finds that it is critical that the Government creates a conducive environment, by developing skills, invest in research to close knowledge gaps, improve existing legal frameworks and up budget allocations towards driving green growth.

[i] UNEP. (2024). Green Financing. https://www.unep.org/regions/asia-and-pacific/regional-initiatives/supporting-resource-efficiency/green-financing

[ii]Green Finance Platform. (2022). Green Finance Platform’s Database Shows Significant Rise in Global Green Finance Measures. https://www.greenfinanceplatform.org/news/green-finance-platforms-database-shows-significant-rise-global-green-finance-measures

[iii]Ncube, M. (2024). Green finance: The key to unlocking Africa’s vast potential and combating climate change. World Economic Forum. https://www.weforum.org/agenda/2024/02/green-finance-can-unlock-africas-vast-potential-and-aid-the-global-fight-against-climate-change/

[iv] NPA. (2017). Uganda Green Growth Development Strategy (UGGDS) 2017/18 – 2030/31. https://faolex.fao.org/docs/pdf/uga184391.pdf                                           

[v] Tier III Financial Institutions are mainly Microfinance Deposit Taking Institutions (MDIs) ; Tier IV Microfinance Institutions & Money Lenders consist of SACCOs,  Non-Deposit Taking Microfinance Institutions, Self Help Groups, Community Based Microfinance Institutions.

Share:

Leave a Reply

Your email address will not be published.