> Posted by Michiel Sallaets, Communications Manager, Incofin Investment Management
Approximately 2.6 billion of the world’s 7.1 billion people live on less than $2 per day, and smallholder farmers are the single largest group of these, with over 600 million people. Despite some progress, the provision of financial services to rural communities, and in particular to individuals whose livelihoods depend on agricultural activities, remains a challenge. Specific risks, such as weather conditions, disease, and variations in market prices create barriers for providing financial services to this group.
Impact investors, local governments, and even local private lenders are working to overcome these challenges, and some successful models have emerged. Yet difficulties remain. The Dalberg study “Catalyzing Smallholder Agricultural Finance” showed that the smallholder demand for financing could be as large as $450 billion (estimate for 2011). In addition, of the financing that is currently provided (estimation of $9.4 billion in 2011), 90 percent is for short-term finance. Thus, only 0.2 percent of smallholders seeking financing for investments in the infrastructure and equipment that can help them achieve higher yields and productivity have their needs for financing met.
Understanding and addressing smallholder financing needs is critical in reducing poverty. Through more than 12 years of supporting rural microfinance institutions in developing countries, Incofin Investment Management has seen this repeatedly. Fairtrade International, a global non-profit working to provide a better deal for farmers and workers, had seen the same problem among its network of more than 1.2 million farmers and workers. In a survey conducted in 2012, Fairtrade farmers in Latin America alone expressed a need for $500 million to invest in infrastructure, working capital to cover purchases like seeds and fertilizer, and bridge financing to cover the period between harvest and receipt of payment from a buyer (trade finance). The survey highlighted the high demand and lack of supply for long-term loans that provide farmers with the opportunity to invest in new technologies and equipment that can lead to improved efficiency and higher yields over a sustained period.
Recognizing this gap, Incofin IM, Incofin cvso, Fairtrade International, and Grameen Foundation joined to establish the first fund to focus on the unmet demand by smallholders for long-term loans. In October 2012 the Fairtrade Access Fund was launched with $1.75 million of capital. Incofin IM is responsible for managing the fund while the other three parties take the sponsor role. The Fund is an impact investment fund designed to provide rural people with opportunities to increase their market access through financial products and technical assistance that meet the specific needs of farmers. Its investments are designed to have a positive social impact on the lives of smallholder famers while delivering a fair financial return for the fund’s investors.
Working through Fairtrade certified producer organizations, such as farmers associations and cooperatives, the Fairtrade Access Fund offers a full range of loan products to meet a variety of financial needs. It also provides technical assistance to the producer organizations as a means of strengthening their management and agricultural practices, making them better candidates for future financing. By addressing both the lack of access to appropriate funding and some of the factors that create this market gap, the Fund seeks to further stimulate the development of smallholder farmers.
Choosing to focus on Fairtrade-certified cooperatives is a means of ensuring that the Fund delivers a strong social return. The lack of negotiating power of an individual farmer means that downward pressure on prices from large buyers can result in a farmer selling his crop for less money than he invested in producing it. The Fairtrade minimum price ensures a transparent price that allows farmers to plan for the coming period. By increasing access to financing for Fairtrade certified organizations, further incentive is provided to other producer organizations to seek certification.
Since its launch in Latin America, the Fund has provided nine loans for trade finance and long-term investments to Fairtrade cooperatives in Honduras, Peru, Paraguay, and Nicaragua. The first long-term loan disbursed by the Fund will be used by COCLA, a Peruvian cooperative with a long history of working with Fairtrade certified organizations, to purchase new machinery for drying coffee and cocoa. Drying the coffee and cocoa themselves allows the producer organization to receive a higher price for their beans. They also produce and distribute value-added products made with these commodities, such as roasted coffee and chocolate bars that are sold in supermarkets and their own coffee shop chain. COCLA generates impact in the short term for its 24 member cooperatives by increasing the processing capacity, the quality of the final product, and the diversity of options for the cooperatives and their members. With products like this, the cooperative becomes more attractive to prospective members, as it helps them improve product standards and timely delivery, due to the increased processing capacity. For example, two new cocoa cooperatives are in the process of becoming members of COCLA, a decision made more attractive by the facilities, such as access to a new drying machine, that COCLA is able to offer them.
There are also significant benefits for the farmers, in part because it brings more of them into the Fairtrade circle (where they get a better price and access to more markets). In the long term, farmers also have the opportunity to access better prices and increase the volumes they can deliver to the cooperative. Furthermore, the investment in the new coffee and cocoa drier will generate new jobs in several links in the production chain of COCLA.
Since its launch in October four new investors have entered the fund, helping it to grow to over $7.5 million. The total amount lent so far has reached $4.85 million, and Incofin IM is currently assessing transactions with prospects in eight countries to finance coffee, bananas, honey, sugar cane, blueberries, sesame, and walnuts. By replicating its experience with COCLA and other Fairtrade certified cooperatives on a larger scale, the Fairtrade Access Fund aims to push the boundaries of financial inclusion as it reaches out to the world’s smallholder farmers.
Michiel Sallaets joined Incofin Investment Management in February 2013 as the Communications Manager. Previously he worked as a PR consultant in the Belgian PR department of Hill+Knowlton Strategies where he advised clients such as BlackRock, Citibank and Adidas on media relations and developing communication strategies and materials. Furthermore he helped clients in building strong relations with stakeholders using social media. He began his career at Burson-Marsteller where he did an internship in the PR and PA department, being responsible for the media relations of the high-level event “European of the Year Awards.”
Image credit: Fairtrade International
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