Notice: Undefined index: id in /home/ft4user/foreststreesagroforestry.org/wp-content/themes/FTA/template-parts/content.php on line 3
  • Home
  • Webinar Report - Innovations to overcome barriers to access to finance for smallholders, SMEs and women

Webinar Report – Innovations to overcome barriers to access to finance for smallholders, SMEs and women


Notice: Undefined variable: id_overview in /home/ft4user/foreststreesagroforestry.org/wp-content/themes/FTA/template-parts/content.php on line 64
Posted by

FTA communications

Innovations to overcome barriers to access to finance for smallholders, SMEs and women

On September 14-18 and 21-25, 2020 the CGIAR Research Program on Forests, Trees and Agroforestry (FTA) held Forest, trees and agroforestry science for transformational change, a 10-day online event. The decadal event exclusive to the FTA community, gathered over 600 registered participants: researchers involved in FTA from its 7 managing partners (The Alliance of Bioversity and CIAT, CATIE, CIFOR, CIRAD, World Agroforestry, INBAR, and Tropenbos International), as well as invited keynotes from external organizations. The conference showcased 179 abstracts (60% of which is in collaboration with FTA’s external partners), 14 keynote presentations, 54 live presentations, 62 asynchronous presentations, and 40 technical posters.

The FTA researchers from all over the world convened online to present the most exciting research results in the programme, exchange experiences and lessons learned, and reflect on the way forward for transformative change in the fields of forestry and agroforestry science.

All the material from the conference can be found on the dedicated portal

As a follow up from the FTA 2020 Science Conference, FTA and its managing partners are now releasing knowledge products, extracting the highlights from the conference and bringing them to the public. The aim is to inform and support concrete action on the ground, focusing on transformative science derived from FTA’s most innovative research lines.

From Science to Action!

One of the first products deriving from the FTA 2020 Science Conference is the new webinar series “From Science to Action”. Open to the public, these events offer a way to showcase the best outcomes from the research discussed and presented in the various themes of the conference, bring together perspectives from different stakeholders and donors, and gather feedback from the audience. Most importantly, these webinars are also an occasion to present concrete actions that derive from FTA’s research: tools, publications, results that can be used by a wide variety of stakeholders in their activities. On the 26th of November 2020 the webinar series proudly opened its season with a first one on “Innovations to overcome barriers to access to finance for smallholders, Small and Medium Enterprises (SMEs), and women”, developed in coordination with Tropenbos International, who leads the FTA Priority 17 on Innovating finance for sustainable landscapes. The event can be replayed fully at this link.

Innovations to overcome barriers to access to finance for smallholders, SMEs and women

Over the years, the landscape approach has gained momentum and popularity in advancing interdisciplinary and holistic environmental management interventions. It has taken the center spot in discussions in international workshops, academic circles, and scientific debates as the go-to integrated approach in working towards sustainable use of forests, land, and other natural resources.

Much has been said about the landscape approach’s  merits, but scaling up its implementation is lagging. One of the reasons is the lack of access to finance. To address this, FTA works with Tropenbos International (TBI) on innovative finance for sustainable landscapes, focusing on ways to overcome existing barriers for smallholders, SMEs, and women, important landscape actors that are often missed in existing landscape investments. Bringing finance to vulnerable groups and understanding the flows of finance to and from a landscape is crucial to fully realize the sustainability of landscapes.

Michael Allen Brady, FTA’s flagship leader for sustainable value chains and investments, moderated the first webinar, which convened a mix of researchers, financial experts, and government representatives, and attracted around 200 participants, to tackle innovative financial schemes for sustainable land uses with smallholder involvement. The webinar was highly successful and it included 2 polls for further interaction and a lively debate through a Q&A panel chatbox. A number questions from the audience unfortunately went unanswered and thus the panel took on board them after the event and can be read in this document.

A product of an intensive 2-and-a-half-year consultative process, the latest report on ‘Innovative Finance for Sustainable Landscapes’ was launched at the webinar. The lead author of the report, Bas Louman of Tropenbos International (TBI), discussed common barriers that hinder large scale implementation of finance initiatives to transform landscapes. “Funds flow towards landscapes, but, in reality, only a small proportion reaches the field, and even less of that reaches communities and local farmers in small- and medium-sized farms,” Louman said. “We need to learn how to use finance better to transform and upscale our practices to become more sustainable,” he added.

Timeline for the production of the report, which included panel discussions at events, interviews, open consultations and a peer review.

FTA’s Working Paper #7  “Innovative finance for sustainable landscapes” developed with Tropenbos International [PDF]
The report digs deep into three relatively new financial instruments:

  1. Blended financethe strategic use of public or philanthropic development capital to mobilize additional external private commercial finance and can support SDG-related investment (pg. 19);
  2. Green bondsform of debt that links the generated funds to climate goals or environmentally friendly investments (pg. viii); and
  3. Crowdfunding pooling of small amounts of capital from a potentially large number of interested funders (pg. 44).

These innovative financial structures have potential to increase landscapes investments. However, challenges remain for smallholders for tapping into these financial sources. As manifested by the audience reaction to the first poll, more than 80% of them stated that these financial instruments alone are not sufficient or will only partially help overcome the current barriers. The equation is more complex.

Before initiating the discussions, the audience was treated to a poll for the following question: To what extent do you think that the discussed innovative finance structures (green bonds, blended finance, crowd funding) address the barriers for local farm and forest producer organizations to access finance? These were the results:

Participants of the webinar voted on the extent of the effectivity of the three financial instruments (green bonds, blended finance, and crowdfunding) in addressing the barriers encountered by smallholders in accessing finance.

Risk – both on the investors and investees side – is clearly one of the greater barriers in allowing financial flows in landscape management. How big are these risks, who should bare them, and as Felix Hoogveld of the Ministry of Foreign Affairs of The Netherlands asked: “If you blend public and private finance, how do you share the risks? How do you come to a reasonable and fair balance of risks?” “It is a negotiation,” Louman said. “Together, different actors should have a mutual understanding of each other’s business, what are reasonable business risks, what are additional risks due to entering into a relatively unknown business, and how much risks is each party willing to take,” he replied.

Another obstacle for smallholder groups is the literacy of farmers and SMEs about these financial instruments. “(It is a) challenge for a lot of investors and banks to finance farmer producer groups who do not have a credit history or are too risky for a traditional credit perspective,” said Ivo Mulder, head of the Climate Finance Unit of UN Environment Programme. There is a need to support farmers in strengthening their financial literacy in order to improve their presentation of business cases to financial institutions.

Financial regulations and capital requirements are also barring smallholders. “The longer-term investment loans, which all tie to sustainable landscapes, are extremely unattractive for financial institutions to look at,” Eelko Bronkhorst of Financial Access commented. “Simply because they are multi-year and therefore the capital allocation is risky,” he added.

Currently, there are pilot initiatives on innovative risk strategies such as the interventions illustrated in the report of Guatemala’s Association of Forest Communities of Petén (ACOFOP) and the forest company Komaza in Kenya, which both yielded positive results. But more need to be documented and promoted.

A second poll was then conducted to understand the audience’s point of view on the important steps for effective sustainable landscapes.

Most of the participants to the webinar thought that designing locally appropriate financial instruments, similar to what ACOFOP did in Guatemala, is the most important step to follow through for sustainable landscapes finance.

Designing a mechanism of blended finance, which incentivizes behavior change, and looks at the gender lens to modify investors’ perceptions and assessing opportunities, has been at the center of Impact Investment Exchange (IIX) work. “Instead of regarding women as a risky investment, we are actually able to show that their involvement in economic activities invested in mitigates risks. And we do this through data,” Chien said. By changing investors and companies’ perspectives and practices, IIX can tap financial opportunities and make them more inclusive to smallholders. “We connect the back streets to the wall streets,” Chien added.

Developing diverse investment portfolios with different levels of risk was also suggested. “(Usually) we look at only one crop, such as oil palm, rubber, rather than investing in a series of crops in the same area,” Louman suggested. “(Considering multiple crops) could spread the risks of investments and different asset forms.”

Presenting agroforestry as a ‘business’ case is reflective of this diverse portfolio. But for this to be successful, other mechanisms should be looked into, such as payment for ecosystem services (PES). “When you combine agriculture with planting trees, then actually those farmers are also producing public goods. When there is no PES, it would be even harder to achieve a kind of rate of return.”, said Busink.

The crucial role of governments in facilitating finance for sustainable landscapes was also highlighted in the conversation. “One thing the governments could think of is to ask for a percentage of the capital be directed to farmer producer groups,” Mulder said. Governments are integral in addressing fundamental issues in the landscapes, such as tenure insecurity, which implicates financing. “What is the long-term prospect for them (the farmers) to make investments, if you’re not sure that the land is yours after five years,” Busink said.

“Speaking the same language” is one of the recommendations. “So much gets lost in translation,” Bronkhorst said. “If we can find a way to translate our work into a simple business case to start… that could be a very practical approach,” he added. Collaborations with existing institutions that could act as intermediaries are seen to fill this gap. Farmers and SMEs should be put in a position to understand precisely what investors have to offer, with all the implications, while financers should take into consideration the culture, expectations, needs and methods of their future investees.

The momentum and the drive to unlock capital and investments for sustainable landscapes are getting stronger. With a new GEF project – Green Finance for Sustainable Landscapes, Mulder presented an opportunity to tap private capital from banks and financial institutions. “The finance case is (still) weak” Mulder said. “But we aim to increase financial, time-bound commitments,” he added.

In 2021, FTA will be bringing its technical expertise into consolidating its partnerships with UNEP, IIX and Financial Access, amongst other institutions, to accelerate the financing of landscape initiatives for sustainability. “We have an issue of urgency here,” Vincent Gitz, Director of FTA, underlined. “There is plenty of money for investments. Now is an opportunity to find how that could reach the bottom of the pyramid”, he said.

FTA and Tropenbos’ newly launched report Innovative finance for sustainable landscapes “is a wonderful way to set the stage for future collaborations,” Chien concluded.

 


Notice: Undefined index: id in /home/ft4user/foreststreesagroforestry.org/wp-content/themes/FTA/template-parts/content.php on line 3
  • Home
  • Financial products should be adjusted to better meet needs of community forest enterprises

Financial products should be adjusted to better meet needs of community forest enterprises


Notice: Undefined variable: id_overview in /home/ft4user/foreststreesagroforestry.org/wp-content/themes/FTA/template-parts/content.php on line 64
Workers select Ramón seeds at Melchor de Mencos. Photo by ACOFOP.
Posted by

FTA communications

Continuing a series of interviews on inclusive landscape finance, three members of the Association of Forest Communities of the Peten (ACOFOP) share their insights with Bas Louman of Tropenbos International.

Founded in 1997 to strengthen the position and user rights of communities in the Peten Mayan Biosphere Reserve, Guatemala, ACOFOP comprises 24 associated community organizations. Nine of these manage their forests under concessionary contracts covering more than 400,000 hectares.

In 2003, members created a commercial community enterprise (FORESCOM) to provide drying and molding services, technical advice on commercialization and financial services. They now generate USD 5 million annually, some of which is invested in social benefits such as local health and education services.

Some funds are used for reinvestments in protection and control of the forests and prevention and control of forest fires. National Geographic and the New York Times have reported their successes in integrated and sustainable forest management.  

ACOFOP member, Teresita Chinchilla; administrative advisor for member organizations, Elmer Mendez; and Mario Rivas of the productive and commercial area of FORESCOM share their views.

How do you define ‘inclusiveness’ and why should it be addressed by financial institutions?

Mario Rivas of ACOFOP at the plant of Laborantes del Bosque. Photo by D. Stoian

We have not really thought about the topic as such. ACOFOP and FORESCOM work with private banks and receive income from product sales. As access to loans is not easy, we also rely, in part, on international cooperation, for example for technical assistance. For example, the purchase of equipment for use by members was partially financed by international cooperation and after several years these were bought by the organizations.

In addition, it is a challenge to make efficient use of the harvesting season. Despite organizations always paying back loans, the topic of forestry has still not been able to generate enough trust with banks regarding the administrative procedures needed for applying for operational loans, given that they continue to ask for collateral while the organizations work on state land. As such, some of the organizations set aside their own funds for harvesting, or make arrangements with buyers, making payments in the form of timber.

Read also: Scaling up sustainable forestry projects key to attracting finance

What are the structural barriers to financing smallholders and small- and medium-sized enterprises (SMEs)?

First of all, it is difficult to build the trust required to allow loan applications to be processed more rapidly. Another barrier is the need to provide guarantees, especially when most communities do not own the land or property where they harvest the trees and only have concessions over the use of state forests.

Also, loans are usually for one year, and the timing of disbursements and demands for repayments are not adapted to natural harvesting cycles. In general, financial products need to be adjusted to better meet the needs of community forest enterprises, and loan negotiations are made more difficult because credit agents are not aware of the specific needs of forestry businesses.

Workers process wood at the sawmill of Laborantes del Bosque. D. Stoian

Finally, the costs of borrowing are high at 16-24 percent per year, although ACOFOP has been able to negotiate 12 percent in some cases.

Other barriers are related to smallholders’ own experience in running commercial operations. This sometimes creates problems in product delivery and cash flow. Non-timber forest products also face the same barriers, such as with the leaves of the xate palm (Chamaedorea sp.).

Most are sold to US customers with payment upon delivery, causing problems for harvesters especially when payments are delayed. As such, harvesters now demand advance payments from the organization. Others shift towards more opportunistic buyers, selling xate leaves at lower prices but receiving payment more quickly.

How is your organization addressing the financing needs of smallholders and SMEs, and what have you learnt from that?

Members of ACOFOP worked together to solve several structural barriers. In 2004, for example, we founded FORESCOM as a commercial company, contracting qualified personnel for the provision of technical support in forest management, business administration and marketing. Together, we have received international funding which allowed us to invest directly in community enterprises.

More recently, FORESCOM, with the support of ACOFOP, community enterprises and the Agricultural Research and Higher Education Center (CATIE), established a new finance mechanism to provide loans to member organizations at lower interest rates (9 percent) and with greater flexibility regarding the documentation required.

Usefully, loans have a payback period of three years, instead of the usual one year for commercial bank loans. The fund is still small, but we seek to increase it during the coming years. ACOFOP and FORESCOM have also assisted their members in seeking partnerships for financing.

Read also: More dialogue needed between farmers, forest enterprises and finance providers

What examples do you have of successful or promising financial innovations that promote environmentally sound and socially inclusive investments?

We consider ourselves a good example of progress towards sustainable use of natural resources within our landscape, leading to socio-economic benefits for the local population. From our experience, we have learnt that this requires an integrated approach, within which financial innovations are a key component. And these financial innovations have come more from within our local organizations as there has been limited access to private banks and other financial institutions for our members.

We felt the need to create our own fund that allows our members to obtain loans more appropriate to their needs, at lower interest rates, with more flexible repayment periods, and more flexible documentation and guarantee requirements. For example, community management plans and their annual harvesting authorizations form the basis of the loan applications.

Sawn wood, stamped with the FSC logo, is transported by truck. Photo by A. Rodas

A second internal innovation is increasing financial literacy. Community enterprises were supported to formalize themselves as not-for-profit organizations or as for-profit organizations, the main difference between these two being the distribution of benefits.

With both, they decided that 30 percent of net income should be reinvested in forest operations. As a not-for-profit enterprise, the rest is invested in social or productive projects that benefit communities. In the for-profit enterprises, most net income is invested in other projects not necessarily within the community, or is distributed among the community owners of the enterprise.

A third innovation that we are working on is the creation of a fund that can provide advance payments to organizations that trade in palm leaves. The idea is that this fund will grow from a charge on buyers and will be managed by a trust fund and the commercial operations of FORESCOM.

It was felt necessary to create such a fund because payments for palm leaves shipped to buyers are often delayed for months, putting the palm leaf collectors under economic stress. Access to this fund would allow collectors to continue their normal activities, while repayment to FORESCOM is guaranteed once buyers have confirmed the quantity of products received.

Finally, ACOFOP considers it important that community organizations participate in the formation of national financial mechanisms that aim to capture climate finance, to ensure it reaches the communities directly, or through intermediary organizations.

Part of the current problem is that much of this fund stays at the institutional level rather than being used for actions on the ground that benefit local people. ACOFOP is working on this at the moment, but so far it has only had limited responses from governmental institutions. We consider that national mechanisms need to be more open to inputs from community-based organizations.

Read more about ACOFOP operations here.

By Bas Louman, Tropenbos International.

This interview has also been published on the Tropenbos International website.


This article was produced by Tropenbos International (TBI) and the Center for International Forestry Research (CIFOR) as part of the CGIAR Research Program on Forests, Trees and Agroforestry (FTA). FTA is the world’s largest research for development program to enhance the role of forests, trees and agroforestry in sustainable development and food security and to address climate change. CIFOR leads FTA in partnership with Bioversity International, CATIE, CIRAD, INBAR, ICRAF and TBI. FTA’s work is supported by the CGIAR Trust Fund.


Back to top

Sign up to our monthly newsletter

Connect with us