Weather constitutes a major source of risks facing households in rural areas, which are being amplified under climate change. In this context, two main rural financial services, weather index insurance and microcredit, have been increasingly adopted by farmers worldwide. However, the understanding of the socioeconomic and ecological impacts of these rural finance schemes, including potential maladaptive outcomes, remains ambiguous. We review the recent literature on weather index insurance and microcredit for farmers and find that both rural financial services have positive economic impacts, though benefits to the poorest populations remain controversial. Moreover, their impacts on the ecological systems are less studied and are found to be mainly negative. In addition, considering that both financial instruments have strengths and limitations, we argue that combination schemes (e.g. a hybrid product) may generate positive synergistic effects on building socioeconomic resilience to climate risks in agricultural regions. However, this may also add new economic risk to local financial institutions. This comprehensive review provides a reference for the potential benefits and risks of agricultural finance innovations. Further studies on the ecological impacts of rural financial services and the synergistic effects of the combination on socioeconomic and ecosystem resilience in rural contexts are needed to fill the current research gap.
The literature on microcredit programs has largely focused on positive socioeconomic outcomes and low accessibility issues in farming areas and has provided less insight into the effects of easily acquired microcredit in pastoral areas. Using a case study approach, and econometric models, this paper addresses this gap by examining why and how easily acquired microcredit loans in Inner Mongolian pastoral areas increase the risk to the financial security of households or livelihood risk. Results show that existing microcredit programs increase livelihood risk because loan and repayment requirements do not align with the husbandry production cycle of contemporary Inner Mongolian pastoralists. This misalignment forces pastoralists to borrow from usurers to repay bank loans. Furthermore, households that need to borrow from usurers typically own smaller numbers of livestock and are less likely to be able to repay the usurers by selling animals. Instead, they tend to increase their bank loans in the coming year to repay the previous year’s debt, trapping them in a vicious and ultimately impoverishing circle of annual loans they cannot fully pay back, and feeding increasing debt. We suggest that microcredit programs in semiarid areas should be in sync with the local production cycle and recognize environmental constraints that cause high variation in production seasonally and year to year. Our results supplement previous findings on microcredit applications and are particularly pertinent for other semiarid areas of the world.