Sustainability Certification Dramatically Improves Smallholder Farms’ Access to Credit, New Study Finds

September 24, 2013

Smallholder farmers suffer from a lack of credit access, but sustainability certification can help change that, according to a new study published by the Rainforest Alliance and funded by the Citi Foundation.

To better understand smallholder farmers’ issues concerning financial administration and credit access and to better inform technical assistance packages, the study, entitled “Farmer Bankability and Sustainable Finance: Farm-level Metrics that Matter,” conducted in-depth surveys of 110 smallholder coffee and cocoa producers in Colombia and Peru, 63 of which are Rainforest Alliance Certified™. It also solicited feedback from international social finance and metric organizations as well as local, in-country financial institutions on their experience of lending to farmers.

It’s estimated there are nearly 500 million smallholder farms worldwide, with more than 2 billion people dependent on them for their livelihoods. Commonly less than 5 acres (2 hectares), smallholder farms are often the backbone of the local economy. Yet most operate far below their potential because they lack money for the best seeds, organic fertilizers, equipment and technologies. They need capital and credit to make the investments necessary for improving yields and profits and adopting sustainable agronomic practices, and also to ride out volatility. But on many small farms, inadequate record keeping, often in notebooks, fails to give banks the financial data they need to assess creditworthiness, severely limiting loan access.

The new study shows that sustainability certification and technical assistance have important roles to play in helping farmers access credit and thrive. Obtaining certification often involves training in financial record-keeping as well as mandatory annual monitoring. Certified sustainable farms are significantly better at tracking key financial metrics than non-certified ones, and are awarded larger, more frequent loans, the study finds. Better access to credit, combined with better market linkages and improved financial, agronomic, organizational and professional skills, helps certified farmers sustain and improve their livelihoods over the long-term.

Small farmers typically record information related to crop production, volume and sales prices, but the study suggests they can dramatically improve their credit access by collecting more data on production cost, income and delivery history. Ninety percent of certified producers surveyed track both revenue and expense metrics for their farms, while only about 30 percent of non-certified producers do so. Certified producers were found to be better equipped to complete credit applications on their own than non-certified producers. The average dollar value of the loans to certified producers was $5,562, compared with $3,311 for non-certified ones. Certified producers received 1.36 loans on average each year, compared with 0.66 for non-certified ones. Certified farms surveyed therefore received on average nearly 3.5 times the credit the non-certified ones did.

“The economic and environmental stakes of widening farms’ credit access are high,” said Michelle Buckles, director of Sustainable Finance at the Rainforest Alliance. “The agriculture sector needs capital to make sustainability improvements and improve farmer incomes, and millions of smallholder farmers need loans.”

Global demand for loans by the 250 million smallholders that sell their products is estimated at nearly $500 billion, yet less than $400 million was disbursed by social lenders in 2011, according to a study by Dalberg Development Advisors. In Colombia, agriculture is 10–14 percent of GDP and 40 percent of exports, but it receives less than 4 percent of all loans nationally. In Peru, agriculture is 6.4 percent of GDP and 7 percent of exports, but it receives only 3 percent of loans.

"The growth of certified agriculture has the potential to improve smallholders’ credit access dramatically,” said Tensie Whelan, president of the Rainforest Alliance. “Certified sustainable farms have far-reaching positive environmental and social impacts. But we should also recognize their far-reaching economic ones. When they can access credit, they can be more profitable and productive, and that could significantly impact national economies.”

To widen credit access for smallholder farms, the study recommends that certification, metric and lending organizations should adjust and standardize metric templates, loan applications and producer profiles, incorporating the recommended 25 key indicators deemed most important to apply for a loan. The Rainforest Alliance and its partners provide extensive technical assistance to farmers and producer groups in Colombia and Peru, and the study encourages technical assistance providers to design programs that teach producers to keep records that at a minimum meet lenders’ key standard indicators, as well as intermediate-level programs to improve the practices of producers who already keep minimum records. It also recommended SMEs and cooperatives get additional training in financial and credit management, and analysis of the key standard indicators, to improve their ability to on-lend capital to smallholders.