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the Netherlands - 13 December, 2021
Smallholders and small and medium size-enterprises (SMEs) in the global south often lack the capital to invest in sustainable businesses, even when they are profitable. This is especially true in the forestry and agroforestry sectors, which are considered risky by banks. To address this, Tropenbos International (TBI) is developing a financial support unit, named Green Finance for SMEs, or GFS in short. Here Eveline Trines, senior expert business & finance at TBI, answers five questions about this new programme, made possible by the Dutch Postcode Lottery.*
‘Monocultures of agrocommodities are expanding in many parts of the forested tropics, replacing a diverse mix of food crops, agroforests and forests. The commodities are mostly intended for international markets and leave the countries as raw materials, with large companies taking most of the profits. A significant portion of these export commodities is produced by smallholders with less than two hectares of land, who rely on technical advice, seeds and fertilizers from the company that buys their produce. This increases smallholders’ dependence on large companies and may even result in depts. We believe it doesn’t have to be this way. There is an alternative development model that is more inclusive and sustainable. In this model, smallholders and SMEs in the agroforestry and forestry sectors diversify their income-generating strategies and produce also goods for the local markets. However, one of the main barriers for this model is that smallholders and SMEs often lack the capital to invest in their businesses, and therefore do not take the risk to diversify. They cannot get loans, for example because they lack collateral, or the interest rates may be too high, or pay back periods may be too short. That’s where we want to make a difference with the GFS initiative. In our view, access to finance for smallholders and SMEs is a crucial component of efforts to retain — or bring back — landscapes that are healthy, diverse, vibrant and climate-proof.’
‘The GFS is a financial support unit that provides assistance to smallholders and SMEs, as well as to financial service providers. It will help smallholders and SMEs with developing bankable business cases in the agroforestry and forestry sectors, with different crops and commodities. At the same time, the GFS initiative will work with local banks to develop financial instruments and products that are suitable for smallholders and SMEs. The GFS initiative also strives to operate as a revolving fund. The money in this fund can, for example, be used to provide guarantees to financial institutions that give loans to smallholders and SMEs under certain economic, social and environmental conditions. If a guarantee is not used, the money can be re-used for a next farmer or business. The guarantee will decrease the risk perceived by the banks, and should make it easier for them to provide loans for business ideas they would otherwise not have financed. If we do a good job with providing assistance to smallholders and SMEs to set up or expand their businesses, the guarantees will barely be used, so the money will be available again for yet another excellent business enterprise.’
‘For a start, we focus on Colombia, Ghana, Indonesia and Suriname, which are all part of the Tropenbos International network. Ghana and Indonesia have a head start, because there we have already been developing connections between SMEs and financial service providers, as part of another programme, called Mobilising More for Climate. Eventually, we hope to be able to assist all of our network partners.’
‘Rather than focussing on either smallholders and SMEs or financial institutions, the GFS initiative tries to address bottlenecks on both sides. It brings smallholders and SMEs closer to financial service providers, by helping them to develop sound business cases, including bank-worthy documentation, profit and loss accounts, and cashflow projections. At the same time, it brings financial service providers closer to smallholders and SMEs, by helping them to develop and implement new financial products. Importantly, all of this is done in a tailormade way. The type of support that the GFS initiative provides will depend on the context and needs in the landscape. We believe that this can unleash an enormous potential that has remained largely untapped up to now.’
‘I will be happy if we can show that, three years from now, the GFS has effectively increased the provision of loans to new, inclusive and innovative businesses that are sustainable and provide improved livelihood opportunities to local people. These would ideally include businesses that focus on forestry and agroforestry, producing for local, national and international markets, as well as businesses in the secondary sector, such as transportation, warehousing and primary processing. These are the building blocks for vibrant and resilient landscapes, providing income and food to local people, while maintaining healthy ecosystems that provide important environmental services for the world at large.’
*Since 1989, the Dutch Postcode Lottery has been raising funds to support organizations working for a fairer, greener world. Thanks to the Postcode Lottery’s 3 million participants, it has grown to become the Netherlands' biggest charity lottery, supporting over 100 non-governmental organizations.
Photo credit: Small holder agriculture plot mosaic in eastern Africa. ©Jan - stock.adobe.com