Current practices and innovation in finance for smallholder oil palm

CIFOR have recently published an InfoBrief on Current practices and innovations in smallholder palm oil finance in Indonesia and Malaysia, authored by SHARP partners SNV and Financial Access Consulting Services.

The publication is supported by a recent parallel CIFOR publication analysing gaps between existing credit schemes and smallholder realities and a more general review of responsible and inclusive financing of the palm oil sector.

Together, these studies consider long-term financing solutions to promote sustainable supply chains. They evaluate outcomes for smallholders of past and current policies and financing schemes and analyse the considerable potential for such schemes to promote improvements in smallholder production linked to sustainable supply chains. Evidently Financial Service Providers could play a more significant role by tying environmental, social and governance conditions to the financial services they provide to palm oil companies that source products from smallholders. However, of 23 banks reviewed in the latter study, only BNP Paribas have a policy addressing SH inclusion.

The main study identifies an urgent need, not just for accessible finance but also for support to farmers on income generation from alternative sources to bridge the 3-5 year production gap after replanting. Innovative financing schemes initiated by the private sector, commercial banks, impact investors, development finance institutions and governments have emerged, but large gaps remain between demand and supply, with few financially successful examples. High transaction costs and risks associated with agricultural lending often deter banks from investing in this area.

Some solutions to reduce transaction costs and perceived risk levels are suggested:

  • Medium to long-term FFB supply arrangements with mills to reduce SH income risk
  • Identification of pools of potentially bankable farmers, which would reduce lending costs for banks
  • Support for smallholder organizations to enable them to improve their management practices and trace palm oil and thereby act as aggregators for data collection from, and loan distribution to, smallholder farmers reducing costs and risk for loan providers.