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As part of the “Innovative finance for sustainable landscapes” interview series, Noemi Perez, an inclusive finance and investment specialist, with extensive experience with key issues gained from work in both the private and public sectors, spoke with Tropenbos International’s Nick Pasiecznik.
Noemi began her career sourcing timber for one of the largest door manufacturers in the world, Puertas Montealban, rising to general manager. After seeing how the corporate sector could support and promote sustainable finance for small-scale forest enterprises, she applied her experience to roles in the World Wildlife Fund (WWF) in Costa Rica and the Forest Stewardship Council (FSC) in Mexico.
She then cofounded the international, non-profit Finance Alliance for Sustainable Trade (FAST) in Montreal, Canada, in 2008, where she worked until April 2018. At FAST, she worked mainly with public funds seeking to match small- and medium-sized forest enterprises (SMEs) to private investors. Noemi is currently a freelance consultant.
The most basic problem is lack of literacy – not only financial literacy, but also basic literacy. How can we expect farmers or rural entrepreneurs to be able to access finance if many can’t even read or count? Even among those that can, there is a lack of understanding of business fundamentals, when what is needed is business acumen, as a prerequisite for good decision making, including finance. Thus, there is a serious and urgent need for basic education and business education. For example, in 2010, at an investment conference I attended, rural SMEs were invited to present their cases, but it was clear that some were not even differentiating between sales and profit.
Another constraint is that farmers often sell perishable agricultural produce, and do not have facilities to store goods while waiting for a better price. This makes them even more vulnerable: they have to sell at any price, or they run the risk of losing everything. The lack of strong producer organizations makes it very hard for individual smallholders to be bankable.
On the other hand, financial service providers are not willing to take risks in sectors where they have not previously invested. They may not have sufficient knowledge or information on how to manage risk in rural small-scale agricultural and forest business settings. Even institutions that claim to invest in forestry or agriculture, often say things like “we invest in agriculture, but we don’t invest in that country”, or “we don’t invest in that sector” without even looking at the specific business cases.
Where are the farmers? We need to inform financial service providers and bring them together with farmers. I have been to hundreds, if not thousands, of meetings and conferences on blended finance and similar initiatives, and there is hardly ever a farmer present, or not more than a single token representative. This is not right. We need to create situations where farmers can sit down and tell financial service providers face to face what it is that they need. At the same time, the financial sector needs to explain their own needs and constraints clearly to farmers. Then they can sit down together and discuss how to manage the risks.
Financial institutions need to understand small-scale agricultural and forest business needs. Adapting and creating specific products and services based on their needs is key, particularly medium- and long-term access to finance. They also need to know how value chains work, be in contact with different links in the chain, understand market requirements and make strategic alliances. They need to better understand smallholder production cycles, needs, products and markets, and that it is usual and acceptable to rely on local markets and not only on export markets.
On the other hand, farmers must understand the requirements of financial institutions, their restrictions, and that they need certainty that they will get their money back, to satisfy their own investors. Financial institutions must also make clear to farmers why they charge X or Y percent interest, and where this money goes, as often, rural, agricultural SMEs do not even understand why interest is charged!
In addition, one important thing we can do is to look more closely at successful small-scale agricultural and forest businesses in developed countries – how do they work and what makes them successful, what subsidies exist and what types of finance do they have access to? In developed countries, many small-scale agricultural and forest businesses make a decent income. Even though they have their own struggles, they live well. It would be useful to compare similar types and sizes of smallholder enterprises in developed and developing countries, how they are organized and how they operate.
Good examples of inclusive finance tend to occur where the true realities of farmers are well understood, such as the impacts of seasonality of production, for example. These success stories have almost always resulted from situations where farmers and financial institutions have sat together and talked and rural, agriculture smallholders have repaid. There are also excellent examples from banks that have specialized in agriculture, such as the Netherland’s Rabobank, or France’s Credit Agricole.
My vision is that every individual should have the right to access financial resources to improve their livelihood if they can demonstrate they have a viable business and produced positive social and environmental impacts. But how? First, we must promote greater dialogue between small-scale enterprises and financial service providers, as I have explained. This also highlights and connects to those small-scale agricultural and forest businesses that already have a secure market and long-term relationships that could immediately back up a loan. Next, we need to better understand current markets and take these into account – and not any potential future (e.g. export) markets that might take 5–10 years to materialize. Finally, we need to provide similar conditions for small-scale agricultural and forest businesses in developing countries as are offered to those in developed countries, including the needed levels of education from basic financial literacy to business acumen.
Cover photo: A market in the village of Minwoho, Lekié, Center Region, Cameroon. Photo by O. Girard/CIFOR
This article has also been published on FTA’s website.
Please note that the photos used here are for illustrative purposes and do not refer directly to FAST activities.
This article was produced by Tropenbos International 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.