New SSI report sheds light on investors’ requirements for granting finance to smallholder farmers in developing countries

Ottawa, March 27, 2020 – What are the sustainability issues financial service providers (FSPs) consider important when assessing investment requests from smallholder farmers in developing countries? The International Institute for Sustainable Development (IISD) consulted 51 investors during the summer/spring of 2019 to better understand their criteria for granting finance to smallholder farmers. The results are available in the recently launched State of Sustainability Initiatives’ (SSI) report “Expert Consultation with Financial Service Providers: Understanding the sustainability issues agricultural producers need to consider to be investment-ready and access finance.”

Agricultural producers are an engine of economic growth and job creation in developing countries, where they make a major contribution to food security. Smallholder farmers are responsible for providing around 80% of the food consumed in developing countries; in some (such as sub-Saharan African countries), they also provide close to 70% of total primary employment.

Despite playing a major role in the economy and food security, agricultural micro, small, and medium-sized enterprises (MSMEs) in developing countries face significant challenges in accessing finance. Their demand is estimated at USD 240 billion per year, while the supply of finance offered by formal and informal FSPs, including value chain actors, reaches only an estimated USD 70 million.

Female producers face particular obstacles in this area—such as their vulnerability to climate change impacts and lack of training or land tenure—that constrain their potential to qualify as “bankable” and thus access finance.

According to the report, the investors consulted by IISD consider governance, business management, and climate change as having “high importance” when assessing financial requests from smallholder farmers in developing countries. For Cristina Larrea, one of the report’s authors and Sustainability Standards Workstream Lead for the IISD’s Economic and Law Policy program, many agricultural producers in developing countries are not “bankable” as they don’t meet FSPs requirements for grant finance.

“We know that, in many cases, the agricultural producers don’t know the requirements to access finance. Neither do many of the organizations that provide technical assistance to them. And meeting these requirements is crucial for reducing the risk associated with investments (particularly in developing countries) and closing the finance gap,” explained Larrea.

In addition, the report also provides recommendations to smallholder farmers on how to enhance their ability to access finance, e.g., by adopting sustainable practices to adapt to climate change and comply with voluntary sustainability standards (VSSs). This could help address investors’ perceptions of risk when they consider finance requests from agricultural producers.

According to Cristina Larrea, the requirements suggested by the 51 investors to improve farmers’ “bankability” will be explored in-depth in the upcoming “SSI: Standards and Access to Finance”, which will examine the issue from the lens of VSSs. Specifically, the publication will explore how complying with VSSs can reduce financial risk and enable farmers’ access to finance. That report will be published later this year.

 

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