There is increasing interest in the potential of microfinance to foster climate change adaptation. However, existing literature over-relies upon theoretical arguments rather than empirical evidence, and until now the emphasis has been on potential positive linkages. We address these weaknesses by empirically examining the role of microfinance in adaptation, drawing from household-level quantitative and qualitative data gathered from Satkhira District, Southwest Bangladesh. We find evidence that microfinance facilitates coping by reducing sensitivity to environmental and climate hazards. Credit is especially important because its availability is uncorrelated with the occurrence of flooding, unlike many other traditional coping responses. We also find evidence that microfinance facilitates adaptation by helping households to overcome financial barriers of adopting adaptation options that reduce exposure or sensitivity. However, credit limits are likely to restrict its role to incremental adaptations, which may not meaningfully reduce vulnerability. Transformational adaptations at times required access to bank credit which the poorest cannot access. This restricts their ability to effectively adapt and is penalized financially by having to obtain loans to cope. We also find evidence that microfinance can lead to maladaptation when used in non-profit generating activities as income streams are not produced to help repay associated costs. Almost a fifth of all loans were obtained for repaying existing loans. Thus microfinance may undermine longer-term adaptive capacity.
