Socio-Economic, Institutional and Climate Determinants of Green Microfinance: Evidence from a System GMM Panel Approach

Abstract

This study examines the socio-economic, institutional, and climate-related determinants of green microfinance in developing countries. Using a panel of 20 African countries over the period 2010–2025, the analysis applies a dynamic panel data model estimated through the two-step System Generalized Method of Moments estimator. The study contributes to the literature in two main ways. First, it introduces a rural climate vulnerability variable, CLIM_RURAL, constructed as the interaction between a climate shock index and the rural population share. Second, it employs a composite green_microfinance index that captures the multidimensional nature of green microfinance, including green loans, environmental policies, environmental screening, and awareness-raising activities. The empirical results show that rural climate vulnerability has a positive and highly significant effect on green microfinance, suggesting that climate shocks affecting rural populations increase the demand for green financial products. Institutional quality also exerts a positive and significant effect, indicating that stronger governance frameworks facilitate the development of inclusive green finance. By contrast, lagged poverty has a negative and weakly significant effect, while agriculture and income inequality do not show statistically significant effects. These findings suggest that green microfinance is driven by both climate adaptation needs and institutional capacity. The study highlights the importance of integrating climate-risk management into microfinance products, strengthening institutional quality, and reducing financial constraints for poor rural households in order to promote inclusive and sustainable green finance.