Impact Banking: access to finance helps farmers escape poverty

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Man cutting cocoa from tree

Against a backdrop of cocoa trees, a group of men sitting in a field on faded red garden chairs listen to a single speaker in the middle. He’s talking to them about the effect fertilisation can have on their harvests. For some of them, it may be their first educational experience ever. The men listen carefully. What they learn here today could drastically change their lives.

As long as governments continue to turn a blind eye for a handful of dollars, not much will change. Liesbeth Kamphuis Liesbeth Kamphuis Director of Impact Banking

Education is an integral part of programmes implemented in the cocoa and coffee industries aimed at improving the position of smallholder farmers. ABN AMRO is teaming up with a number of partners and its own commodity clients to provide sustainable finance to farmers for example they can buy fertiliser and seedlings. “This initiative is called Impact Banking,” says Liesbeth Kamphuis. She and her colleague Emilie Ottervanger of Trade & Commodity Finance are the kingpins of this innovative lending concept. Kamphuis happened to witness the scene described above while visiting Uganda: “It could just as well have been a coffee plantation in Vietnam or a palm oil company in Sumatra."

Finance and education

The idea behind Impact Banking is straight forward. Farmers are given a loan of several hundred dollars to buy fertiliser or new planting materials in order to increase their production and eventually improve their standard of living. ABN AMRO and its commodity clients jointly take on the risk of the loan. The client has both a practical and a moral motive, as it depends on the harvests of many millions of smallholder farmers and operates in a sector in which social abuses are still a major problem.

Obviously, the loans are relatively small when compared with "standard" commodity loans to producers and traders to meet their working capital needs. These loans can easily reach USD 400 million. The main difference is that Impact Banking focuses first on the impact on people and the planet, and then on the return.

In addition to financing, farmers are always given training and guidance. Ottervanger says, “Don’t forget that these farmers often have big gaps in their knowledge about things we simply take for granted. There are stories about fertiliser programmes which failed in the past – not because of the quality of the fertiliser, but because the farmers just put it on their plants in one go.” Today farmers are given specific training in fertilizing techniques and the basic principles of a company balance sheet.

Trapped in poverty

The biggest problem for these farmers is to get access to finance. Before granting a loan, lending institutions always want to see a balance sheet. Smallholder farmers don’t have this for the simple reason that they have nothing to report on. Their only assets are a few old cocoa trees, which have no value after a couple of decades when they stop bearing pods. The little income they had drops further, making it even harder for them to buy fertiliser and new trees, and ruining their prospects for improvement. To reduce costs, they often put their children to work on the farm. The children inevitably “inherit” the farm one day, with the result that these families stay trapped in poverty for generations.

Accessing the right link in the chain

"Problems in the commodity industry can’t be solved overnight, not even with the best intentions," Ottervanger continues. "To stay with our cocoa example, the chocolate we consume in the Western world comes from millions of smallholder cocoa farmers. They have to find a way to make ends meet without the support of trade unions. Between them and the consumer are a handful of traders and production companies. Those are our clients. They have a local presence and know the cooperatives the farmers are members of. We think improvements can be made by working with our clients to tackle a major problem: these farmers’ inability to get access to finance. That’s where impact can be achieved and livelihood of farmers could be improved."

A new opportunity for improvement

Kamphuis says that past initiatives in the commodity sector have had little effect. "First, schools were built, then certification marks were launched. But as long as governments continue to turn a blind eye for a handful of dollars, not much will change." Impact Banking represents a new opportunity for these farmers to improve their lives. The combination of finance and training should help them grow their revenue and thus improve their standard of living.

Ottervanger adds, "You could say that Impact Banking blends sustainability and commerce. It’s not microfinance, which often involves too strict repayment schedules and focuses on one small business at a time. We lend exclusively to large groups of farmers. One of the projects we are currently working on involves 15,000 farmers. A number that big gives sufficiently profitable scale of operations. If a project like this is going to be a success, there has to be a positive business case in place for the farmer, for our client and for us. For the time being, we’re looking to build a loan portfolio totalling EUR 50 million. I think that’s a great start for impact finance."

ABN AMRO is keen to emphasise the self-reliance aspect of Impact Banking. Farmers are given a loan, not a donation, which means this banking product benefits both them and the bank. Ottervanger says, "The concept of 'benefit' is a broad one. Besides financial returns, we believe taking our responsibility in these vulnerable supply chains and to have impact is at least as important for us."

The government as a hindrance or an accelerator

As with other loan products, a careful risk assessment is carried out. “Let’s say we were to introduce a programme of precision farming aids using the latest technology, like mobile banking for the farmers. That means a reliable mobile network has to exist. If a country doesn’t have a good network, perhaps because of weak state capacity, we and our clients then face a major risk ,” Kamphuis explains.

However, there are examples of governments that create excellent growth conditions – by authorising new crops or improving infrastructure, for instance. The Doi Moi reforms introduced in Vietnam which have given the economy there a major boost are one example. Unfortunately, the governments of most African nations are still dysfunctional, and thus pose a risk to the success of ABN AMRO’s Impact Banking programmes.

Assessments and improvements

Kamphuis and Ottervanger have been involved in this initiative for about two years. Kamphuis: "Our manager Suzanne Larsson already saw a few years ago that we could make an impact here. She made sure that we could focus all our time and energy on this subject. We spent the first year working on product development and started looking at projects since last year. I think it’s still too early to talk about success or results. Our partner – the Dutch Sustainable Trade Initiative (the Initiatief Duurzaam Handelen (IDH), as it’s known in Dutch) is helping us with using the right KPIs and is reporting on the effects. As soon as we have something meaningful to announce, we’ll certainly be sharing it."

Smaller lenders like Root Capital have been running similar projects for some time now. And they’re achieving good results, both in the area of finance and for the communities they’re lending to. "As a large bank, it’s up to us to let Impact Banking grow to allow our commodity clients to make their supply chains more sustainable," concludes Ottervanger, "and of course in the interest of the cocoa, coffee and palm oil farmers.

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