Smallholders, family farmers and Indigenous Peoples play a crucial role in protecting landscapes, supporting biodiversity and promoting food security. But without proper access to finance, they have a limited ability to invest for the future. Governments and funders should do more to support them.

Producer organisations offer huge potential for channelling climate and nature finance to rural communities, acording to new IIED research. In fact, forest and farm producer organisations (FFPOs) are the unsung giants in the battle against climate change, spending as much as USD368 billion of their own income annually on tackling the impacts of climate change – such as pest control, soil improvement and protecting biodiversity.

This significantly dwarfs the USD230 million climate finance pledged at COP 27 and highlights the need to totally rethink the way finance is approached for a sector that produces 80 percent of the world’s food.  

It is also many times the amount of investment that smallholder farmers receive from international climate funds. A recent report by Climate Focus highlighted that only USD2 billion of international climate finance actually reaches smallholder farmers on the ground. 

Finance from within

Smallholders need to be able to experiment with different crops and diversify what they produce in order to respond to the changing climate and secure their livelihoods. 

But because FFPOs are quite often small-scale and rural, and require small loans for a variety of products, traditional banks usually will not lend them money, opting instead to lend to a large, mechanised monoculture producer who in their eyes is more “reliable”.

So, how are these smallholder farmers managing to finance themselves? The answer is from within: through credit cooperative unions. These may initially have started out as a cash box in a village which leant farmers money and which over the years has grown into a more formalised digitised credit union which now also takes investments from those outside the farming community. 

Unlike corporate banks which are risk-averse and typically have high interest rates, these credit unions are trust-based and don’t require large amounts of collateral. They are based on the knowledge that the credit union has of the members themselves. They know the farmers and the income streams they have. They understand that in order to adapt to climate change, their members need to diversify their products – perhaps experimenting with raising chickens alongside growing avocados and tomatoes, for example – and are prepared to allow loans for that purpose.

Traditional models of financings would not do this, so credit unions are pivotal to climate resilience – allowing smallholders to try new ways of diversifying their income and making their livelihoods sustainable at an affordable cost. 

These small-scale credit cooperative unions form clusters which together are represented by the World Council of Credit Unions (WOCCU). The scale of financing by credit unions far exceeds the all climate finance put together. Globally, WOCCU represents an astonishing 87,914 credit unions in 118 countries, helping to improve the lives of 393 million members. 

IIED’s report sets out how governments and funders can do more to support FFPOs in this area. This could be by helping FFPOs establish savings groups which will eventually grow into credit unions; partnering with FFPOs to grow their financial cooperatives and share risk; or channeling funds for nature and climate action through existing strong FFPO financial cooperatives. 

The sweet taste of success
One example of how alternative financing has transformed the fortunes of a cooperative is El Ceibo. Based in the town of Sapecho in Palos Blancos, Bolivio, El Ceibo was set up to support its members (originally, 12 smaller cooperatives) to commercialise their cocoa production. 

Back then, none of the finance organisations in Palos Blancos offered loans that were appropriate for cocoa production. So, El Ceibo decided to take matters into their own hands. 

In 1994, they set up a USD100,000 fund with money saved from its own profits to provide funds to its members. To start with, it provided loans in kind with cocoa seedlings, and later it provided cash credits to members. 

As the fund grew, El Ceibo decided to explore other finance models and, in 2008, it partnered with Pro-Rural, a non-profit organisation which works to strengthen social and environmentally sustainable businesses in Bolivia. Together, they established a rural investment fund called Alternative Finance for Development (AFID) – both organisations sharing the associated risk. 

Today, AFID is its own entity with assets of over USD2.5 million, and provides finance for El Ceibo’s 48 cooperatives, supporting over 1,300 families. El Ceibo now also channels money from external organisations, such as banks and governmental organisations, through AFID. 

As David Martin Cahuana Mollo, the general manager of El Ceibo, explains, “AFID has been the financial arm that has been able to provide resources to our producers when they have needed it most, especially during the cleaning and pruning season [...] So that is where our entity provides them with resources in a quick and easy way with low interest rates that are appropriate for agriculture. It’s a role that AFID has fulfilled very well and has allowed the cocoa chain to be maintained and expanded.” 

Crucially, cocoa producers who have obtained credit from AFID are then in a better position to apply for loans with private banks further down the line because they have built up a positive credit history. 

It is a wonderful story of success, which all started from loans in the form of cocoa seedlings. As they say, from small seeds, big trees grow, and it is an example of how FFPOs can generate crucial investment finance for their members – transforming lives and communities.