Attracting finance to small and medium-sized enterprises

Attracting finance to small and medium-sized enterprises

General - 06 April, 2021

Financial institutions are often reluctant to provide loans to small and medium-sized enterprises in the forestry and agroforestry sectors. To change this, TBI provides them with information that shows the benefits of investing in these businesses.

All over the forested tropics, plantations of oil palm, soy, cocoa and other agrocommodities are rapidly expanding. As a result, farmers become overly dependent on one crop, and landscapes change from diverse mosaics into monocultures.

For a long time TBI members have been pointing out the risks associated with unbridled agrocommodity expansion, while proposing practical alternatives. A promising alternate model is based on small and medium-sized enterprises (SMEs) in the agroforestry and forestry sectors. These enterprises generate sustainable incomes, are resilient in the face of climate change, and deliver additional benefits, such as carbon sequestration. In the view of TBI, SMEs are crucial for achieving sustainable landscapes.

One of the main problems faced by agroforestry and forestry SMEs is their limited access to capital. This is mostly because financial institutions have little or no experience in these sectors; they lack basic trust and knowledge of how the sectors operate, and are therefore reluctant to provide loans. As a result, a huge potential remains untapped. To convince financial institutions that it is safe — and worthwhile — to invest in such businesses, information is needed.

Ghana-RJ.jpgIn 2020, Tropenbos International has been exploring the numbers behind that information. In Ghana, a case study on mixed agroforestry systems suggested that the financial benefits per hectare could increase five-fold when changing from cocoa monocultures to integrating cocoa with food crops and fruit trees and other perennials. In addition, under the FFAST-AAA initiative, a more extensive business case was developed for combining cashew, cocoa and black pepper cultivation in the Ghanaian forest zone. This included full-fledged market analyses, business risk assessments, stock inventories and feasibility studies. The resulting numbers convincingly show the economic benefits of mixed tree-based systems.

These numbers provide a solid basis for engaging in discussions with potential producers, off-takers, and especially, financiers. The willingness of financiers to provide loans is expected to rise once they see that agroforestry and forestry SMEs can be profitable businesses and can reduce farmers’ dependency on a single commodity, while lessening the pressure on the remaining forests.

Financial information is also needed at the international level, where discussions take place about ways to spend the money that has been pledged to achieve international sustainable development and climate objectives. At the request of the Dutch Ministry of Agriculture, Nature and Food Quality, TBI staff organized several round tables in 2020, with representatives of the Dutch government and national and international organizations. These meetings were used to emphasize the need to connect international financial flows with landscape-level actors and financiers, who can support SMEs in the forestry and agroforestry sectors.

In this way, TBI works both from the bottom up and from the top down. The ultimate goal is to increase the viability and sustainability of agroforestry and forestry practices, so they benefit local people and the environment. In the coming years, it is expected that financial institutions and local producers will increasingly be able to find each other and work together.

Artboard 1 copy.pngThis article is part of the TBI Annual review 2020,
due for release in May 2021