Design of a financing facility to increase lending to smallholder farmers in the Ghanaian cocoa sector

Design of a financing facility to increase lending to smallholder farmers in the Ghanaian cocoa sector

Overview: The Rainforest Alliance was awarded a feasibility study design grant in 2016 Q1. The Rainforest Alliance will use the Convergence Design Funding to explore an investment and risk sharing facility for local financial institutions in Ghana to lend to smallholder cocoa farmers and their organizations for climate smart agriculture (CSA) investments. The Rainforest Alliance anticipates that a guarantee mechanism will incentivize local financial institutions to lend using their own capital as well as support co-investment from private and public sectors. The Rainforest Alliance will work closely with Rabo International Advisory Services B.V. throughout the design activities.

Design question and learning potential for the market: How can a facility be structured to create the appropriate incentives for financial institutions to lend to smallholder farmers, while also enabling private investment in the financial institutions to further increase their lending?

Despite various efforts to provide smallholder farmers with formal financial services, many remain financially underserved. In the past, governments and donors tried to improve farmers’ access to finance by guaranteeing the agriculture lending portfolios of financial institutions against default. With few exceptions, this approach did not produce its intended results – often because lenders did not have strong incentives to ensure loan repayment. The Rainforest Alliance’s design activities will also aim to incentivize local financial institutions to lend to smallholder farmers through a guarantee type structure with a number of nuances to ensure intended results are achieved. The Rainforest Alliance and Rabobank Investment Advisory Services will work closely with partner financial institutions to structure the guarantee in order to avoid misaligned incentives, as well as to ensure the financial institutions develop internal capacity that is uniquely suited to smallholder lending. In conjunction with lending, the Rainforest Alliance’s design activities will also include on-the-ground technical assistance. In addition, the design activities will explore how investors (e.g., fund managers, private foundations) can provide additional capital to financial institutions to increase their lending while gaining exposure to the sector. Should the feasibility study prove positive, the final design could be replicated in most developing markets with large smallholder farmer populations who lack access to financial services.