Rabobank Foundation recently entered into an agreement with Rainforest Alliance regarding a Sustainable Finance Initiative in Central and Latin America. This programme aims to enhance the flow of financing for millions of small farmers, enabling them to farm more sustainably, thereby reducing risks in agricultural commodity supply chains.
The decreasing availability of agri-commodities caused by social and environmental issues has prompted food and agribusiness companies to improve supply chain sustainability. To achieve this, they are increasingly requiring supplying producers to adopt good agricultural practices according to certified standards, such as Rainforest Alliance.
The Rainforest Alliance certificate is recognised by consumers around the world as the symbol of environmental, social and economic sustainability. Many Rabobank clients, including Ecom, Unilever, Mars, Chiquita and Nestlé, have been working together with Rainforest Alliance for many years to improve sustainability in various commodity sector.
But to comply with certified standards, farmers must set up a comprehensive management system that protects natural resources (forests, water and soil) and biodiversity; reduces waste and pollution; improves working and living conditions for farm workers and their families, and most importantly, increases yields and quality. This requires up-front and on-going investments, which most farmers cannot afford.
There is also a large demand for short-term and long-term finance. The former is required for improving farm operations and bridging the gap between the times of the production cycle when farmers incur expenses and when the payment for the sold harvest reaches the farmer. The latter is for undertaking farm investments such as improvement in production practices and infrastructures.
“Farmers have difficulties to get loans, because most local banks in developing countries are not that experienced in agri financing,” explains Michaël de Groot, Rabobank Foundation. “Therefore, we must show them that farmers engaged in sustainability programmes generally have a lower risk profile than conventional farmers.”
Sustainable Financing Initiative
To gradually improve the situation, Rainforest Alliance has developed a Sustainable Financing Initiative (SFI), aiming to increase access to and availability of farmer finance. This initiative was developed together with Rabobank, Citibank, and International Finance Corporation (IFC). Rabobank Foundation provides an initial funding of EUR 130,000 and technical assistance in farmer finance for 2012. “If the programme is successful, we will extend our participation in 2013,” Michaël notes.
The fund will be used for financing operations and for hiring a financial officer who will join the Rainforest Alliance Agricultural Team based in Costa Rica. The financial officer will align the communications between Rainforest Alliance and Rabobank and liaise with project partners.
The SFI will initially focus on Mexico and Central America. However, there are opportunities to broaden its scope to Peru and Ecuador through cooperation with the Progreso Foundation, A Non-Government Organisation based in Amsterdam. Rabobank Foundation has been supporting Progresso since 2001, together with other NGOs, including DOEN, PSO and Cordaid.
Building knowledge and capacity
Rabobank will work closely with Rainforest Alliance in defining strategies and activities that will stimulate the flow of farmer finance. They will start by improving the knowledge of technical staff, enabling them to incorporate financial literacy in a capacity-building programme. One of the main goals of this programme is to reduce farmers’ risks, which will subsequently encourage lenders to provide financing, Michaël says.
“Concurrently, we need to develop tools and materials for the loan process,” explains Michaël. “These include pre-screening of the farmers’ credit eligibility and tools to improve financial literacy, business skills, product enhancement and market access. Furthermore, we will organise farmer training to help them understand how financial instruments work and how to gather and present information for loan application.”
Furthermore, Rabobank Foundation and Rainforest Alliance aim to develop standardised loan packages that meet farmers’ need for investments and fit the lenders’ capacity. “Together with the lenders, we will establish innovative risk-mitigation instruments that will broaden the pool of bankable farmers,” Michaël explains. “These will include partial risk guarantees, interest-rate subsidy for marginalised farmers and first loss instruments. Then we will see if the farmers’ relationship with commodity buyers can be leveraged to increase their loan eligibility.”
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