Coffee growers in Uganda and non-timber forest producers in Sudan work tirelessly during their harvesting seasons. Non-timber forest producers harvest both gum arabic, an edible stabilizer that can be found in food and cosmetics, as well as forest honey and hibiscus among other products. The coffee growers and non-timber forest producers harvest their crops and then sell them to earn a profit. But this work and subsequent income fluctuates with the seasons.
Near East Foundation
On paper, it may seem that these small-scale farmers have money because on average their overall income exceeds their outgoing expenses. But what is on paper and what actually happens are two different stories. Many of these farmers gather and sell their products during the harvesting season and make an income. Then there are other times of the year when they can’t harvest and sell their products. During that time they have little to no income. Their money, like their products, is seasonal.
To deal with the income-poor months, many of these farmers try to obtain loans to tie them over until the next income-generating period. Unfortunately, banks often refuse to provide loans to these farmers as they are seen as debtors that are too risky. Instead, farmers are forced to borrow from loan sharks, at higher interest rates. This has led to situations where farmers end up in debt traps, where they farm land that is no longer theirs to pay off outstanding debts; or are forced to migrate to others areas where they have to compete with other farmers over land, access to water, and other scarce resources, leading to tensions and instability.
Breaking the cycle
A first step to break the cycle is to decrease the likelihood of farmers falling into a debt trap when they run out of funds between harvests. One way to do this is to show that these farmers are not as risky as many investors think. They have just not built up sufficient credibility with banks.
To facilitate this, GRP is working together with Lutheran World Relief (LWR)‘s Mountain Harvest and the Near East Foundation (NEF) to support small-scale farmers in Sudan and Uganda to access reasonably priced loans through the Innovative Finance for Resilience Programme. This will allow the farmers to build up track records of repayment that can then be used by other funders, such as banks, to make more reasonably-priced loans.
GRP’s Head of Innovation and Scaling, Jesper Hornberg says, “We choose to work with Lutheran World Relief and the Near East Foundation in the first phase of this programme because they have a strong local presence and creditability that is critical when rolling out a programme of this nature.’’
The programme aims to provide farmers with more reasonably priced loans, which in turn can help the farmers retain their land and have more stable finances. This can also positively influence the stability in the region, as farmers will not need to migrate and compete over scarce resources in other areas.
Blended finance is one of the innovative financial tools that this programme aims to use. In this case, it is used as an innovative financial tool to allow farmers to access funding/loans at lower interest rates than they could otherwise access. Blended finance is the “mixing” of different forms of finance and innovative solutions to bring different forms of funders into the same funding “pool.” This often occurs when development finance is used to mobilise the flow of private capital to new markets or users, like these farmers.
Clint Bartlett, a Senior Advisor at GRP and UNDP, says “blended finance is a new and critical tool in bringing about better access to capital. If used well, it can help bring resilience to important local systems.”
Through this programme, GRP aims to change how these farmers are perceived, catalyse and unlock new flows of funding, and help bolster their resilience. Hornberg says, “Ultimately this work is about building more trust among stakeholders, be it farmers, bankers, or funders to promote stability and enable resilience to flourish.”
About the Innovative Finance for Resilience Programme
GRP is working together with the United Nations Development Programme (UNDP) and is supported by the Global Environment Facility’s Challenge Program for Adaptation Innovation to support organisations that are managing and supporting innovative finance mechanisms operating in fragile and conflict-prone regions. In December 2020, GRP announced a call for Expressions of Interest for this programme. From that call, the Lutheran World Relief and the Near East Foundation have been selected, and the work is now underway.