A new type of pre-arranged credit is helping farmers stay on their feet after climate shocks and giving financial institutions a reason to stay with them.
Nasrin and her husband Rahim farm a small plot of Aman rice in northern Bangladesh. Like most smallholder households in their district, they depend on two harvests a year. Their relationship with BRAC's microfinance program has helped them invest in better inputs and gradually build a buffer. They are, by any measure, responsible borrowers.
However, this year the monsoon was different. Excess rainfall during flowering season damaged a large share of their crop, and the harvest came in at barely half of what they had planned for. With Boro rice planting season approaching, Nasrin and Rahim faced a familiar, painful arithmetic: not enough cash to buy seeds and fertilizer at a time of year when they also need to cover the cost of irrigation since Boro rice is a dry season crop that requires different conditions. In years past, they would have been limited to options like selling the goat, draining the savings, or turning to a moneylender. All choices that don't just hurt today but also have longer-term economic consequences: a smaller herd, a depleted buffer, or a debt that carries interest into the next harvest.
Fortunately, their access to credit was also different this season. Months earlier, their BRAC Microfinance loan officer had handed Nasrin a pre-qualification notice: if rice yields in her district fell below a certain threshold, she could access an additional loan quickly, without a new application, and without affecting her existing loan. Nasrin qualified because her borrowing history and repayment record met criteria BRAC had set in advance, to focus only on clients who had demonstrated the capacity to take on and service additional debt. This loan was designed to be quick to access: No insurance premium to pay. No claims process. When the trigger was met after the harvest, she was notified by a BRAC community development officer at her monthly group meeting, visited her local branch to accept the loan, and used it to purchase inputs for the next season. A two-month grace period gave the household time to recover before repayments began.
With the loan, Nasrin and Rahim planted their full plot of Boro rice on schedule, covering seed, fertilizer, and the irrigation the dry season demands, rather than scaling back and hoping for a better season next year. They didn't have to sell the goat or borrow from a moneylender. Through the lean weeks before the new harvest came in, they kept eating properly and kept their daughter in school, whilst a cap on the loan amount and requirement for clients to repay before they can take out further seasonal loans, ensured that the expanded lending was temporary and provided a safeguard against over-indebtedness.
This is a contingent line of credit, or CLOC.
What makes a CLOC different
Before a climate season begins, an eligible client is pre-approved for a loan that only becomes available if a defined shock occurs. The trigger can be a flood index, a district-level yield shortfall, or a government disaster declaration. It is different from insurance because there is no need to pay any premiums ahead of time, which often dampens demand for insurance. The client only decides whether or not to actually take up the loan after the trigger is met. This avoids one of the key problems with index insurance: that everyone in affected areas will either get or not get payouts regardless of whether they actually suffered losses. With a CLOC, clients who were not badly affected have no obligation to borrow and may choose not to, while those who do need it can access funds quickly, with a loan size capped at a portion of their existing loan and on terms that require full repayment before new seasonal credit becomes available.
CGAP’s latest reading deck explains in more detail how climate CLOCs work, what design choices matter, and how they can complement other financial products. A key benefit of CLOCs is that they avoid many of the issues that have constrained global uptake of index insurance, while still creating some of the positive economic effects that insurance brings. Evidence from BRAC's large-scale randomized trial in Bangladesh showed that clients pre-approved for a CLOC increased land under cultivation by 18 percent and grew crop production by 31 percent compared to those without access, even before any shock. Knowing that a safety net existed changed how farmers invested, allowing them to be more ambitious and avoid the common poverty trap of underinvestment as a risk management strategy.
The BRAC study also showed how important a CLOC can be for both clients and financial institutions if a shock does take place. After flooding hit, eligible clients maintained roughly 10 percent higher consumption than those without access, enabling households to better cope through the crisis. Meanwhile, BRAC’s repayment rates were comparable to their standard portfolio.
For Nasrin and Rahim, this was pre-arranged access to their own creditworthiness, a recognition that they had earned the right to emergency financing precisely when the formal financial system typically pulls back.
Beyond rice farmers in Bangladesh
As CGAP’s latest study finds, the impact of inclusive credit depends on how it is designed, delivered, and regulated. CLOCs will not be suitable for everyone, but recent pilots suggest that the core elements of CLOCs — pre-qualification, an objective trigger, rapid disbursement, a cap on the loan size, and a requirement to repay in full before new seasonal credit is approved — can be adapted across very different contexts.
Examples include an urban shopkeeper whose inventory was lost to a storm and who needs liquidity fast to restock and reopen. Or a tuk tuk driver whose motorcycle taxi was damaged by flooding and must have the engine repaired to start earning income again. Both could benefit from the certainty that they will have access to money if a crisis strikes, which gives them the confidence to invest in their livelihoods in the face of risk. Active pilots are now underway across South Asia and Latin America through the Resilience+ Innovation Facility, led by the University of California, Davis and BFA Global and supported by the Gates Foundation, with lessons expected through the second half of 2027.
But translating a promising pilot into widespread practice is not straightforward. Until the aforementioned pilots are completed, the evidence base, while rigorous, rests primarily on one large-scale trial. This means that key operational questions — including what proportion of eligible clients will actually draw down a loan when a trigger fires, and how to ensure that doing so helps them recover rather than adding to their financial burden— are still being worked out.
What the field now needs is sustained, deliberate investment to move from proof of concept to scale. This means risk capital for FSPs willing to pilot CLOCs; technical assistance to help institutions navigate design choices around triggers, loan terms, and client communication; and contingent wholesale financing, meaning funding that is itself available rapidly when climate shocks hit, so that FSPs can disburse to clients at the moment it matters. The key to success will be ensuring that the infrastructure for climate-responsive finance is climate-responsive all the way up the chain.
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