Survey identifies obstacles and opportunities to smallholder finance in Latin America

Certification is key to gaining lenders’ confidence for small-scale palm oil producers

The contentious reputation of palm oil, particularly in relation to land and labour conflicts, deforestation and weak governance, is creating the largest barrier to investment in the sector, a SHARP-commissioned study has found. Investors say they are looking for proof of sustainability via certification, something which many smallholders cannot afford or lack the technical capacity to implement. This may hinder access to finance and investment to improve sustainability in small-scale oil palm cultivation.

These are the findings of a survey of financial service providers (FSPs), conducted for SHARP by the Finance Alliance for Sustainable Trade (FAST) to explore access to finance for smallholder palm-oil producers in Latin America and the Caribbean.

Most of the FSPs surveyed were banks, with a smaller input from micro-finance and not-for-profit organisations. Their responses suggest that, in addition to the concerns around sectoral sustainability, smallholders in particular are constrained in access to finance by their lack of collateral, relatively low productivity and the challenge of meeting the cost of improving sustainability. To access loans farmers will need to demonstrate certification goals, secure supply chain relationships and attain a significant level of organisation. A certain number of years in operation, high quality products and improved productivity are also considered important.

Diagram: Factors that are most likely to encourage greater investment in the palm oil sector, according to surveyed financial service providers

Evolution of government regulation will encourage financial investment in the sector. The fact that smallholders are the dominant producers of palm oil in Latin America and the Caribbean was not seen a constraint to investment, and the majority of FSPs are open to greater venture into the region. Human rights and child labour issues were nonetheless a significant concern expressed by survey respondents.

"FSPs could be better informed about sustainability initiatives in palm oil"

The authors conclude the report with a summary of the multiple challenges and opportunities for investing in this sector from the perspective of the financial stakeholders surveyed, as well as recommendations. One challenge was that the contentious reputation of the sector impedes investment in smallholder farmers; this could be counter-balanced by FSPs being better informed about sustainability initiatives in palm oil and how these play a role in addressing ESG issues. FSPs could also develop financial products and services tailored to address the high costs for farmers to convert to sustainable practices and achieve certification. Training for smallholders to increase credit readiness and develop attractive investment plans could also play an important role. Coordination of public and private investments may then help build capacity for financial access and address some of the difficulties pertaining to the sector.

To download the report in English, click here for a high resolution version or here for a low resolution version. To download the report in Spanish, click here for a high resolution version or here for a low resolution version.