Driving MSME Resilience to Climate Change: Designing Right-fit Tools and Solutions

In a new four-part article series, we share deep insights on the impacts of climate shocks on micro, small, and medium-sized enterprises (MSMEs) in two markets in Africa.

Innovators have driven rapid progress to serve micro-retailers in the last seven years. Now, we must leverage these digital platforms to right-fit solutions to the urgent and changing needs of micro-retailers to specific climate impacts. A key success factor for startups and other stakeholders will be how they incorporate a climate lens to MSME-focused interventions. This article provides recommendations for innovators and investors in designing and catalyzing right-fit tools and solutions.

This research series was conducted in partnership with Circle Innovation. Access the full methodology here. Written by Hetal Patel, Director, Investments at Mercy Corps Ventures.

Lydia Ndimu Mutua, 35, has been impacted by drought in rural Kenya. Photo courtesy of Mercy Corps.

“I like the idea of a loan product most. I would prefer a long-term loan that I could take out before something happens because it would allow me to plan early and get everything sorted out before a weather event.”

Julius, male shop owner selling consumer goods, rural area, Kenya

“A credit facility could help us, giving us goods that we can pay for a week later. A full shop attracts customers and I want to be prepared.”

Lola, middle-aged female shop owner selling consumer goods, urban area, Nigeria

A healthy MSME sector can be an incredible engine of growth, and there is an immense market opportunity to better support the 162 million small businesses globally.

At their best, micro-retailers offer employment opportunities, social continuity, and an entry point for community resilience and local economic activity.

But there’s a significant disruptor in their path: climate change.

In the previous articles of this series, we shared evidence that micro-retailers are aware of climate change and feel its impacts on their businesses and their communities. We’ve shed light on the impact of climate change on their ability to operate, serve their customers, and grow their businesses, focusing on the unique challenges brought on by flooding and drought.

Summary Table: Impacts of Flooding and Drought on MSMEs

The innovation ecosystem must leverage this research to get laser-focused on solutions that better serve the specific needs of small businesses in the face of climate change.

In this article, we make recommendations for better serving MSMEs with products that can increase their resilience to climate shocks and disruptions, along with an articulation of our hypothesis: that the most effective delivery channels for these products is through existing digital platforms already serving these MSMEs with stock and ordering services.

Current digital B2B (or ‘eB2B’) platforms serving micro-retailers have revolutionized connectivity, and access to information, inventory management, and financial services. Through these platforms, micro-retailers can get access to stock ordering and real-time information on product availability, pricing, and delivery times, supporting them to better plan for their businesses.

Suppliers are often the primary and most consistent touch point for these shops, as opposed to institutions like banks or microfinance institutions (MFIs). As micro-retailers make use of these digital B2B platforms, the platform in turn gets first-hand access to information on their ordering habits, cash flow, repayment habits, and revenue. Many platforms utilize this information to offer micro-retailers innovative products and services, such as supplier credit, data analytics for predictive ordering and stock planning, and cash flow planning.

Odo-Egiri runs a small business in Nigeria. Photo courtesy of Mercy Corps.

“I order stock from my supplier’s online platform. No one can interfere with the order process because unique codes are given for each order. We also have the option of paying for the order using M-Pesa, which is good because it is more secure than cash payments. It is only challenging when one does not own a smartphone, or is not very tech savvy. We help each other out around here. For instance, I place orders for other retailers who don’t have a smartphone.”
Peter, 31-year-old male shop owner selling consumer goods, urban area, Kenya

Much of the data that current platforms can access forms the basis of a micro-retailer's creditworthiness and many suppliers provide buy-now-pay-later (BNPL) as a key pillar of their offering. This allows micro-retailers to develop better financial management behaviors and increase their creditworthiness.

The micro-retailers we interviewed were customers of startups in our portfolio. As a result almost half of the micro-retailers surveyed said they had access to supplier credit and over one-quarter had access to digital credit products.

In earlier articles, we note that financing products can be important for preparing and recovering from climate shocks. In the case of flooding, financing products, such as credit, that enable micro-retailers to restock without cash reserves can allow them to quickly restore their income to pre-flood levels, draw less on their savings, and begin serving their community again. For droughts, financing products that enable micro-retailers to take preparatory action ahead of time, such as increasing or diversifying stock supply, can allow them to maintain income, and provide critical goods to the community during drought periods.

Though the need for financing after a shock was clear, and access to credit exists for many micro-retailers in our sample, we found that most were not utilizing financial products to recover after a climate shock as the current products are not right-fit to this context:

Buy-now-pay-later (BNPL)

BNPL is a product offered by suppliers that enables micro-retailers to access stock and pay the supplier when the stock is sold, this is what the micro-retailers in the study refer to as supplier credit. It is not a loan product and is designed to increase incomes and smooth cash flow. However, BNPL has limitations in the context of climate shocks including:

  • BNPL allows micro-retailers access to advance stock, but it is not provided as cash for investments in assets or other basic needs, or to purchase excess stock to pre-stock in advance of a shock

Digital Credit

Digital credit is often offered via mobile money as a cash loan, with a repayment period of 7 to 30 days on average. Only 26.3% of our sample had access to digital credit products, citing a number of barriers to accessing these loans including:

  • Requirements to provide income information and other credit-scoring information
  • Interest rates are prohibitive, from 15% to 100%+
  • Repayment periods are inflexible and short compared to average recovery from drought or flooding (7 to 30 day repayment period, while recovery takes from 1 month to 1 year)
  • Consequences of default are high, such as blocking of a micro-retailers mobile money account or airtime purchases, or harassment by loan collectors

Informal Banking

Accessed via local, legacy, informal community networks that are trusted and deploy credit rapidly. Barriers can include:

  • Interest rates are prohibitively high at 25%-100%+
  • Repayment periods can be flexible but collections can be aggressive, especially for women
  • Cultural power dynamics are unfavorable to female borrowers
Community in Nigeria. Photo courtesy of Mercy Corps.

Most micro-retailers described that they were hesitant — and in some cases unwilling — to take up these financing products in the event of a climate shock because current offerings are expensive and inflexible, with short repayment periods, and the micro-retailer was afraid of the consequences of defaulting, or in the case of BNPL the products aren’t designed to be used to pre-stock for a shock.

Although existing offerings may not be right-fit for the context of climate shocks, Mercy Corps Ventures’ working hypothesis is that digital B2B platforms can serve as the infrastructure, both physical and data, to provide micro-retailers and their communities with climate resilience solutions.

Climate change is already impacting 90% of the micro-retailers interviewed, and there is potential for a number of different products and services to be delivered through digital B2B platforms targeted at enabling climate resilience. The below graphic shows some of the tools we believe could be most impactful, along with what we see as the timeline for how quickly they could be implemented within existing digital B2B platforms.

Here, we outline the potential of these tools:

Reliable weather information with mitigating actions

Micro-retailers were often unable to prepare for weather shocks because forecasts were either unreliable or completely unavailable. Many used noticeable changes in their environment as a predictor of an impending shock such as sudden temperature changes, lack of rain during a rainy season, or heavy cloud cover — however these physical indicators don’t provide much advanced warning and do not provide detailed information on the severity of the incoming weather event.

All micro-retailers expressed interest in receiving more reliable and trustworthy updates on weather events through their mobile phones. In addition to this, micro-retailers described that weather information would only be useful if it also included retailer-specific insights on what the weather meant for them and what actions they should take to prepare.

I like the idea of SMS alerts. It would make my work much easier in terms of planning, like knowing what to stock if there will be a shortage in a drought.”
Miriam, middle-aged female shop owner selling consumer goods, rural area, Kenya

This information service should encompass different functions depending on the climate event:

  • In the event of heavy rain or flooding or another short-term shock, there is the opportunity for real-time information to help stock planning and to warn micro-retailers to move perishables to protected areas and to add fortification around their shop.
  • During prolonged periods of dry, hot weather or drought, existing platforms can provide micro-retailers with information in advance of the most severe drought conditions setting in (as this often takes many weeks) to assist with planning ahead. This information could allow micro-retailers to purchase produce such as flour and cereals in advance of a shortage, to circumvent running out of stock once the impact of the drought occurs — a tactic many micro-retailers used after they experienced one or more droughts in their area.

Weather information can also be combined with other tools such as financial products or supply delivery. For instance, information that a drought is imminent could be paired with a credit product that enables micro-retailers to stock up, potentially via local or community storage, when goods are available. Given the low cost of delivering weather information, and the potential upside for reduced losses for micro-retailers, and logistics and supply delivery, we believe there is an immediate opportunity for information to help with improved planning for both the digital B2B platform and micro-retailer in the context of climate shocks.

Rural area, Kenya. Photo courtesy of Mercy Corps.

Fast recovery credit products

We believe there is a need for short-term loan products that enable preparedness and recovery from rapid-onset shocks such as flooding.

When micro-retailers were asked about financial tools that they rely on after a climate disaster, supplier credit was the second choice after savings. We believe micro-retailers rated supplier credit so highly as a reflection of the trust, speed, and transparency of the supplier credit offered through digital B2B platforms, rather than a reflection of the credit product itself. We see this as further evidence of our hypothesis that these platforms are a strong mechanism for delivering climate-focused products to micro-retailers.

“Yes, I would consider taking out a loan after a weather event in the future. It would be nice if the loan provider could let me pay it back bit by bit depending on what money I have to spare at the time. I prefer it this way because there is no way to know the extent of damage until after the fact. I would use this money to buy stock or rebuild my shop, depending on what is pending.”
Philomena, middle-aged female food vendor, urban area, Kenya

Right-fit financing products that could enable better planning and preparedness to short-term shocks could take many forms:

  • Short-term (3, 5, or 7-day) loans that are able to be rapidly deployed via the digital B2B platform. This can provide a cash infusion to support micro-retailers in fixing small shop damages needed to reopen after a shock or prepare in advance by pre-purchasing stock or supplies such as sandbags to avoid flooding damages. This could be coupled with BNPL products after a disaster to support accessing stock.
  • A rotating line of credit for micro-retailers that they consistently use and repay via the digital B2B platform. This cash flow flexibility would allow micro-retailers to pre-buy and store stock — ensuring they have availability of stock during shocks which was a primary concern while recovering from both flooding and drought.

These credit products should be right-fit for the context of a shock or extreme weather event: they should be able to be deployed quickly, without any delay or physical travel required to verify collateral or cash out after an event and they should have flexible repayment options, noting that micro-retailers reported that they took on average one month to recover from a flood. This, coupled with weather information, stock planning, and predictive ordering information can increase preparedness.

Martha Ayiit Enyuku, 28, runs a small business in Kenya. Photo courtesy of Mercy Corps.

Integrated credit and savings products

Saving is a familiar financial habit for many MSMEs: 66.7% have started to save for weather-related events and 85.1% of these micro-retailers have already used their savings to help recover from a weather event. Savings were used in both flooding and drought scenarios for micro-retailers to provide for their basic needs, such as food, energy, and water, in the immediate aftermath of a shock.

Although the micro-retailers we interviewed use digital B2B platforms, we learned that most micro-retailers are using traditional, non-digital savings methods. We see a clear opportunity for platforms, or their partners, to offer savings and utilize that to build their creditworthiness and collateral for flexible credit to enable resilience to shocks.

Digital B2B platforms could offer a savings product which, once used by the micro-retailer, could act as collateral to access a long-term loan from the same platform. The micro-retailers interviewed clearly indicated a desire for credit products to enable their recovery after a disaster, and want this credit from a trusted source. Digital platforms may not be willing to take on the risk of cash loans to support these actions to build resilience, but through the implementation of savings products could learn more about a micro-retailer’s credit history and use their savings as collateral to de-risk the credit product.

For the credit product that could be collateralized with savings, digital B2B platforms already have the distribution channels direct to customers and have gained the trust of micro-retailers — a critical element to uptake of any credit product — making digital B2B platforms well-suited to incorporate these products.

We recognize that this would likely need to be implemented via a partnership between a digital B2B partner and an outside provider that specializes in savings. A well-designed savings product would provide yields or incentives to save, something that many digital B2B platforms may be unable to offer, and the reach and access to financial data provided by the platform offers a path to scale for digital savings providers.

Recognizing that there may be additional regulatory challenges to implementing savings, we see the opportunity for partnerships between digital B2B platforms and banks, MFIs, or fintechs, for example an ‘Earned Wage and Savings’ startup. Through a partnership, current digital B2B platforms could:

  1. offer savings to micro-retailers with yields or incentives paid by the fintech partner;
  2. assess credit-worthiness based on the trove of transaction data; and then
  3. offer flexible credit for flood and drought preparedness.

We see this as much more robust than short-term flexible credit or a standard digital savings product. The combination of savings and credit unlocks longer, flexible credit products for planning that can be utilized for preparedness and recovery from flood and drought, along with providing a savings option to provide for immediate recovery.

Market area, Nigeria. Photo courtesy of Mercy Corps.

Climate insurance

Micro-retailers are very aware of the concept of insurance and its potential for a positive impact on their businesses — especially in the case of those impacted by floods.

Climate insurance rated just below supplier credit as the financial tool retailers would like for building resilience to climate shocks, well ahead of group banking, humanitarian aid, or savings.

When we dove further into understanding the desire for insurance, the majority of micro-retailers expressed interest in an individual climate risk insurance policy, and were particularly interested in policies that would compensate them for damaged stock.

“Climate insurance would be interesting if they could pay me to restock after a flood. The business should also be sized up before determining the rates. If it was a yearly payment I would consider it to protect my shop.”
Sebit, a middle-aged female mini-mart owner, urban area, Nigeria

We found the desire for insurance interesting, given that we know a key challenge with insurance uptake is willingness to pay. This dissonance came through in the research, as many micro-retailers expressed concerns alongside their interest in insurance — such as what would happen to their premium payments if a weather event didn’t strike, or that they distrusted insurance policies and companies. Providers face a number of challenges to delivering appropriate and affordable insurance products in underserved communities that we described in our previous work on insurtech: the cost of premiums, the challenge of product design, the difficulty of assessing risk, costly last-mile distribution, and claims servicing. These challenges hold true, though to varying degrees, for traditional insurance, digital micro-insurance, or index-based weather insurance.

Although there are many challenges, we see potential in using existing digital B2B platforms coupled with emerging technologies to deliver on this enormous market and impact opportunity:

  • Existing digital platforms have data, distribution, trust, and can be a validation partner for damage.
  • The evolution in geographic information systems (GIS), remote sensing, internet of things (IoT), and other technology lowers cost of verification.
  • Many digital platforms are serving thousands of shops, providing de-risking via aggregation and bundling of insurance into core products.
  • Partners along the fast moving consumer goods (FMCG) supply chain, especially brands, could help share the cost of the premiums.

“The small and medium entrepreneurs around here have never thought of insuring their businesses, claiming that the insurance premiums are very high for them. They do not know that insurance could be a way of securing their businesses. There is a need for education on how insurance companies operate and how we can benefit out of it.”
Festus, a middle-aged male grocery shop retailer, urban area Kenya

Applying lessons from the insurtech innovations of the last 10 years in parametric and index-based insurance for smallholder farmers, we see an opportunity to offer embedded insurance via the digital B2B platform infrastructure. Localized weather forecasting, GIS, IoT, and robust data can unlock innovation for MSME flood insurance. We can leverage the robust data from these platforms, utilize emerging tech for low transaction cost (for example, via smart contracts), and transparent data so the risk can be split into micro-risk that is shared by parties vested in the FMCG chain.

Paul Mwendo Mutinda, 27, is recovering from drought in rural Kenya. Photo courtesy of Mercy Corps.

Shop adaptation solutions with appropriate financial products

Some shop owners expressed interest in solutions to adapt their shops and businesses in the longer run — particularly those who had experienced a catastrophic event. These tailored adaptation solutions could take many forms:

Shop Fortification

  • Upgrades or raising floors to prevent stock loss
  • Roof or wall patches or upgrades to prevent damages
  • Shelves to store goods off the ground

Cooling Solutions

  • Cooling solutions to store perishables for longer durations. These goods are usually higher margin products, and the first thing shops stop buying when low on cash or during floods

Storage

  • Well-designed storage can prevent damage to goods in the case of flooding or high heat
  • Long-term storage enables purchasing of products that see reduced availability during drought (such as grains), which can then be stored to ensure product availability throughout the drought

Pre-Stocking

  • Purchasing of goods in advance of a flood, in order to ensure stock availability

Product Diversification

  • Purchasing of goods that are less likely to spoil or be damaged during flooding, or less likely to have reduced availability during drought
  • MSMEs can diversify outside of sales of goods and become hubs for other services or last-mile product delivery (i.e. Amazon Drop Ship), this would enable them to be the final point of distribution for products and services they do not have to store, reducing risk of loss due to climate shock

These solutions all require creative financing products specifically designed for micro-retailers and the shop upgrades, pre-stocking, or assets they want to access:

  • Interest rates need to leverage data collected by last-mile platforms to ensure right-fit affordability.
  • Longer loan tenure should be offered as these products will be used for longer-term investments that may take longer to pay back.
  • Repayment should leverage education and engagement with the micro-retailer — using interactive and real-time dashboards of the micro-retailer’s business information — connections to mobile money, and connectivity and trust of the digital B2B platform to develop micro-repayment habits.

In many cases, using appropriate financial products to access these solutions isn’t enough. Our research also showed that many micro-retailers can’t implement some of these solutions for a variety of factors in addition to cost and financing, such as security, poor infrastructure, and limited physical space.

“I would consider getting a fridge if I could afford it. It is a nice idea — I would be able to store things like milk for longer periods of time or even buy more than I usually do because it won’t go bad. I could also start selling soda to my customers as they eat their food. I am also limited by the lack of secure storage space. I currently have to store my cooking equipment and leftover stock for the day in a friend’s house nearby because my shop is in an open space — I can’t lock it.”
Elizabeth, middle-aged female food vendor, urban area, Kenya

To address this, we see exciting innovation in shared resource services that can reduce the cost of accessing these critical adaptation solutions. Specific to this research, several ecosystem partners suggested shared energy, storage, and cooling as having great potential for MSMEs.

1) Shared, efficient distributed energy (solar or other) for MSMEs:

Under this model, a micro-retailer’s access to cheaper and more reliable energy is delivered in order to power other adaptation solutions, such as individual cooling solutions. Without cheaper energy, traction for in-shop cooling, refrigeration, or other powered appliances will be low, so we see access to reliable and cheap energy as a critical foundation for other shared resource services. Examples of shared energy solutions are localized, off-grid IoT solutions or hyper-local (within meters of a shop) prepaid energy meters that can leverage platform infrastructure.

2) Shared storage

Communal storage spaces that micro-retailers can access on a pay-per-use basis are emerging, especially in rural areas, with some demand in urban communities as well. These models, although potentially impactful for micro-retailers, face challenges with difficult unit economics as storage units have to manage security, energy cost, and community logistics.

3) Shared cold chain and cold storage

An evolution of simple storage is the concept of shared last-mile cold storage, along with cold chain logistics for the distribution of perishables produced or sent to the last-mile. These models are dependent on cheaper, communal energy so could see synergies with shared energy sources. When combined with flexible credit and predictive ordering, cold storage can be an important adaptation tool to protect MSMEs against flood and drought.

“I used my savings and took out an additional loan to get air conditioning for my shop. My stock doesn’t go bad, and more customers come to my shop because it is cooler. After that I had to get a solar system because the condition costs a lot when running on electricity.”
Sebit, a middle-aged female mini-mart owner, urban area, Nigeria

We think shared and community-based solutions are viable longer-term solutions that can leverage the same partnerships between fintechs, banks, and digital B2B platforms as the solutions described earlier.

Solar energy, rural Kenya. Photo courtesy of Mercy Corps.

Next steps

Through this research, it’s clear that climate change is already impacting MSMEs and their communities. It is changing their product and service needs and changing their aspirations for the future of their businesses.

We believe there is an immediate need and opportunity to deliver climate resilience innovation, such as the solutions described above, and we see digital B2B platforms as a key delivery channel to reaching climate-vulnerable MSMEs. Imagine a digital B2B platform in five countries serving 200,000+ shops. They have information on the sizes and locations of shops, verified income and cash flow data, are able to validate small business behavior, and have data on buying patterns from millions of transactions. They also have the trust of micro-retailers. The combination of data, distribution, and trust can be the infrastructure to deliver climate-adaptive products and services to these MSMEs.

Cutting-edge technology will increase the viability of this vision. GIS and satellite can help with verification and validation for insurance, especially impacts of floods. Blockchain, smart contracts, and decentralized finance technologies can increase transparency, reduce barriers to share risk and cost by partners, and decrease the cost of serving micro-retailers through smart contracts.

As climate change escalates we have an immense opportunity to positively impact the 162 million MSMEs globally with tailored products and services. In order to achieve this vision, we see a role for all stakeholders in the innovation ecosystem, from startups, to investors, to regulators. In order to build resilience to such a complex challenge as climate change, we see partnership, collaboration, and mutual understanding and action among these groups as critical to the success of enabling resilient micro-retailers and last-mile communities.

Note: We recognize this diagram leaves out two key players: financial institution incumbents and regulators. We recognize the need for financial institutions (banks, MFIs) to develop new business lines and leverage digital B2B platforms and fintech partnerships. We recognize the need for regulators to differentiate between productive and resilience use credit versus consumer credit, and incentivize and support the former, along for the journey.

The insights and recommendations from this research are the first step in a wider dialogue we’ll be continuing with the ecosystem, while also taking action ourselves by exploring how our portfolio companies can incorporate climate resilience into their offerings and how they think about their customers’ needs and aspirations.

Read the full series ‘Understanding MSME Resilience to Climate Change’:

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