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8. Conclusions

The financing of forest-based activities reflects specific needs and constraints: small-scale enterprises need to plant, purchase and process inputs, innovate, improve their productivity and modernize constantly. Their financial needs involve various microfinance services: short-term loans to finance inputs such as fertilizers and labour, storage, processing of products; medium- and long-term loans for equipment and seedlings, etc; savings to smoothen consumption and uneven cash flows and to build assets to cover investment needs; insurance to protect their crops and insure loan repayment; and payment services.

The demand of small-scale enterprises for microfinance services has extremely diverse characteristics, varying according to the rural ecological zone, the type of activity, the degree of diversity and intensity of production systems, the type of micro-client, and the degree of market integration. This implies that standardized microfinance products do not always fit their financial needs, and more targeted microfinance services may be needed.

Financing forest-based small-scale enterprises carries a high level of risks, climatic and economic, which are often covariant and therefore harder to manage through the usual mechanisms used in microfinance, such as solidarity group lending.

Household income deriving from a small-scale enterprise is often integrated with other household budgets, often less risky and better for generating short-term revenue than forest activities. Financing for forest-based and non-forest-based activities, consumption and household investments are fungible in the household practice; it is sometimes difficult to tie funds to a single specific activity.

Table 3 outlines in general terms the importance of different microfinance services for timber and non-wood forest product activities, based on the previous sections of this publication. Capital and financial needs for small-scale enterprises providing ecotourism will be mostly linked to activities not directly related to forestry, such as the building of amenities, and working capital to run the facilities and expenditures for utilities. For small-scale fuelwood enterprises, access to finance has not been identified as a main constraint for carrying out the activity; the needs for microfinance services of households dealing with fuelwood would be those typical of rural households.

Limited access to microfinance services is a constraint to the development of small-scale enterprises in the forest sector. The nature of their activity and the fact that they are generally located in areas of remote access make it particularly challenging and costly for microfinance institutions to reach out to them. However, worldwide experience indicates that it is possible to provide microfinance services successfully, i.e. in a sustainable manner, even in difficult rural environments.

Several key factors and government interventions that can facilitate the outreach of microfinance institutions to small-scale enterprises are: establishing a policy framework conducive to microfinance, securing appropriate land tenure and property rights, providing business development services and market infrastructure in support of production and marketing, and enhancing the capacity of microfinance institutions to effectively service such enterprises.

Conducive policy framework

Firstly, governments should ensure that adequate financial policies, land tenure and infrastructure are in place to help forest-based small-scale enterprises to access sound and reliable microfinance services. Ceilings on interest rates limit the ability of microfinance institutions to attain viability and give more households permanent access to their services. Subsidized targeted credit programmes, most often beset by poor loan collection rates, undermine the development of sustainable microfinance and distort the market. Rural microfinance institutions should not be forced to provide substandard financing products for small-scale enterprises or to risk a worsening of their portfolio quality, for example by imposing mandatory forest-lending quotas. Sound financial procedures and management autonomy of microfinance institutions should be respected. As noted in the case of the Sudan, an inadequate legal framework in terms of both land tenure and microfinance policies may hinder the development of strong self-sustainable microfinance institutions, and the presence of subsidized credit programmes encourage flawed borrowing patterns among clients.

To create greater and longer-term benefits, governments should establish a supportive policy environment that:

The case of community forest enterprises in Petén, Guatemala, shows how clear forest tenure rights and the legal establishment of forest concessions successfully drew two banks, BANRURAL and Bancafé, into servicing small-scale timber enterprises. Allowing for cost recovering prices and promoting competition and institutional efficiency while focusing on transparency in pricing will facilitate interest rates to come down over time. According to CGAP, in four competitive markets not affected by interest rate caps, the microfinance portfolio yield decreased from 57 percent in 1997 to 31 percent in 2002. For the same period, total operating expenses decreased from 38 to 24 percent. This downward trend was driven primarily by efficiency improvements stimulated by competition (CGAP, 2004).

Business development services, social facilitation and rural infrastructure

To avail themselves profitably of microfinance services, small-scale enterprises must be economically viable and sound. Forest extension and business development services, selecting potential forest entrepreneurs, training on cost-effective innovations (products, business processes, technology) and providing marketing support are all ways to prepare such enterprises for microfinance initiatives. This is shown in the case of MEDEP in Nepal, where the provision of business development services and follow-up after enterprise establishment are key to its success. In Petén, extensive support from technical and business development service providers together with successful organization and solidarity among the community enterprises facilitated access of small-scale enterprises to commercial banks. In order to support the sustainability and the benefits of small-scale enterprise access to microfinance services in Petén, the commercialization and marketing company Forescom has been established to ensure better market conditions for the producers. As small-scale enterprises grow, business development services should also develop and cater to their evolving needs.

When targeting disadvantaged areas and communities, social mobilization support may also be necessary, and must be kept distinct from the financial intermediation. Social intermediation should support awareness-building for small-scale enterprises on microfinance services; the dissemination of information on microfinance institutions; the development of basic literacy, numeracy and skills training for women, indigenous people and other disadvantaged groups; and the mobilization and establishment of self-help groups to participate in microfinance markets. When supporting the expansion of microfinance services to small-scale enterprises, governments and donors should never overlook the importance of accompanying microfinance facilitation with the necessary business and social backing.

Investments in basic telecommunications, roads and education can also contribute significantly to the success of microfinance in rural areas, both by increasing the prospective economic return of small-scale enterprises and by reducing transaction costs for microfinance institutions.

Enhancing the capacity of microfinance institutions

Experience has shown that microfinance institutions often need several years to cover their costs and establish a sufficient scale of operations and sound institutional organization. Especially in areas with low levels of economic activity and scarce penetration of microfinance institutions and services, where small-scale enterprises are likely to operate, some longer-term donor support (subsidies) may be required to help establish microfinance institutions. Kick-starting mechanisms such as the provision of matching grants, temporary interest rate subsidies for long-term loans, and equity finance at concessionary terms may be envisaged, but should be accompanied by procedures guaranteeing fairness of access and good targeting. Because these should be considered temporary initial arrangements, their design should ensure that they complement and accelerate the development of sustainable microfinance institutions instead of substituting them. Strong microfinance institutions will have the capacity to mobilize resources in the market, provide the microfinance services demanded by poor people, minimize transaction costs and offer competitive prices.

The decision to support a rural microfinance intervention should be based on the prospect of the microfinance institution reaching the twin objectives of outreach and sustainability within a reasonable and agreed time frame. For this purpose, high-quality, targeted technical assistance should assist the microfinance institution in adopting appropriate microfinance technology and services for small-scale enterprises, and improving their management and financial performance. Areas where governments and donors can best focus their assistance include: institutional and human capacity building of microfinance institutions, including training on small-scale enterprises and their activities; the improvement of financial infrastructure; exposure to and promotion of best practices; transparent information; support for reducing transaction costs, product innovation, and commercial mobilization of resources. Inadequate financial skills, difficulties in mobilizing savings and accessing long-term funding, and lack of attractive microfinance products are hampering the success of the credit and savings association EGAPA in the Sudan.

Important support interventions that can significantly increase the performance of the microfinance sector in a country or region include: upgrading and mainstreaming informal financial institutions (registration, reporting, legal status, prudential practices, supervision); supporting linkages and networks among microfinance institutions and establishing apex services; linking banks with local informal financial microfinance institutions; and transforming agricultural development banks into sustainable providers of agricultural finance and other microfinance services.

In order to become fully sustainable and expand services to poor people in areas of low population density and remote access where most small-scale enterprises operate, microfinance institutions will have to develop innovative products, delivery mechanisms and financial technologies to break these barriers and lower costs. Furthermore, they will need to establish sustainable linkages between more formal financial institutions and informal service providers. Delivery of microfinance services to small-scale enterprises should involve higher degrees of client involvement and division of labour between borrowers' representatives and microfinance institution loan officers. For example, by using group banking methodologies the number and the duration of individual transactions can be reduced.

Despite its rigidities, group lending with its reduced transaction costs and lending risks is a powerful mechanism to reach smaller enterprises and poorer households, some of which would have no access to microfinance services in its absence. Collateral substitutes such as group solidarity help lenders and borrowers overcome some of the problems regarding the availability and effectiveness of conventional collateral in rural and forest areas. Strategies of client graduation applied to groups, based on the principle of increasing the loan size and maturity upon successful repayment, help customers build up a track record with the microfinance institution. This reduces the importance of conventional tangible collateral while allowing for increasing loan amounts. Group lending is also a valuable tool for microfinance institutions to reduce the costs involved in reaching small-scale enterprises. In addition to reducing transportation and transaction costs, it requires less knowledge of forest production due to peer member screening and repayment pressure, and helps microfinance institutions achieve financial sustainability with lower interest rates. Group lending modalities (based on group formation, training, preparation of business plans, and repayment guarantee) coupled with business development services were effectively adopted under the MEDEP approach to achieve outreach expansion.

For small-scale enterprises that have attained a greater economic development and have more diversified demand for microfinance services, and for those that are likely to have more heterogeneous financial needs in terms of amounts, duration and repayment terms, group lending may not be the best option. Micro-entrepreneurs who take out individual loans from microfinance institutions are able to start their loan on a date of their choice, and loan terms and repayment frequency are more likely to suit their needs. Under individual loan technology, clients also avoid bearing the risks of guaranteeing the loans of everyone in a solidarity group.

By providing both group and individual financial services microfinance institutions can maximize their outreach, building on the same delivery infrastructure and acquired knowledge of the sector. To maintain sustainability, higher rates can be charged for individual flexible products, which are likely to cost more but will be directed to more economically active enterprises. Maintaining low-cost group products can provide microfinance institutions with a profitable source of income, thereby contributing to their overall financial performance. Diversifying microfinance services by expanding the range of credit and savings products available, broadening clientele, and establishing operations in more favourable regions so as to compensate for the risks of remoter areas, help them reach sustainability.

Other possible measures to reduce transaction costs include: using collateral substitutes such as pledging of forest assets; automating banking operations and improvements in management information systems and banking software; introducing staff incentive systems linked to the performance of branches and individual loan officers; reducing excessive paperwork, bureaucratic delays and controls.

Local institutions and authorities such as agriculture extension workers and foresters can play an important role in helping microfinance institutions. They can screen clients and help microfinance institutions understand the economic activities for which they intend to borrow and the risks involved. They can supervise loans and enforce repayment, thereby also contributing to the reduction of transaction costs. The case of Brazil nut harvesting in Peru shows that in the absence of adequate awareness support, economic activities requiring sectoral knowledge can discourage microfinance institutions from entering the market, even when other supply chain actors have succeed in providing microcredit gainfully. Village arabic gum traders in the Sudan are able to operate with high profit margins, lending on the basis of personal guarantees, thanks to their knowledge of the sector and the limited number of competing microfinance institutions.

Since small-scale enterprises active in timber production are likely to require longer-term loans than microcredit typically provides, government and donors should also help microfinance institutions to access long-term funds at affordable costs, thus enabling them to engage in longer-term forest financing. It is important that microfinance institutions access longer-term sources for an appropriate matching of assets with liabilities, for example, by issuing bonds or attracting equity investments by new shareholders.

It is important to note that microcredit should not always be provided, nor act as substitute for institutional development. If conditions are too hostile for its provision, as may be the case in marginal areas with weak infrastructure and unstable policy and macroeconomic framework, efforts should be focused first on developing appropriate savings and creating an environment conducive to the progressive development of sound financial systems.

Focus should be placed on providing microfinance services for rural households rather than credit for tree crops. When possible, financing should respond to the overall funding needs of rural household activities and their repayment capacity, and not fund specific small-scale enterprise investments only. While the repayment schedule for loans for productive purposes should be based on the estimated cash flow generated by the investment, household cash flow from other activities can serve as an additional source of funds to repay the loan. Some microfinance institutions have responded to this problem by basing the lending decision on the existing repayment capacity of the rural household without making any appraisal of newly proposed investments or activities. Loan appraisal methods that take into consideration the entire family business and household cash flow, rather than focusing only on the cash flow of the specific small-scale enterprise investment activities, can help expand credit opportunities. In the case of Brazil nut harvesting in Peru and similar cases, this may be the best approach to reduce customers' credit risk and overcome seasonalities and production-related problems.

Microfinance services should offer small-scale enterprises a choice of various financing options adapted to heterogeneous investment and production strategies. In marginal areas with a predominance of low-return activities, self-help groups or credit cooperatives, which are savings-oriented and operate at nominal costs, or NGO microfinance institutions with a strong social emphasis and poverty outreach focus, may be more suitable. In areas with high potential for good economic return and profitable small-scale enterprises, large credit cooperatives and rural and commercial banks with individual and group methodologies may be more appropriate.

Box 20 provides a list of government initiatives that can positively support the development of microfinance for small-scale enterprises, showing which institutions are more suitable for providing microfinance services to small-scale enterprises.

Table 3
The importance of various microfinance services for different forest-based small-scale enterprises



Non-wood forest products


High - to generate assets to finance capital-intensive investments

High - to smoothen seasonalities and idle periods due to shortages of raw materials

Individual lending


High - flexibility is important for more developed enterprises, and those with specific financing needs

Low - the lack of collateral is a common problem

Group lending

Moderate - when access costs make individual lending prohibitive

High - more standardized loans usually with lower interest rates and social collateral

Short-term microcredit

Moderate - to finance recurrent investments and working capital after tree planting

High - to finance working capital requirements

Long-term, larger microcredit


High - to finance tree planting investments (as an alternative to equity finance)

High - to finance equipment purchases (as an alternative to leasing)

Low to moderate - possibly to finance processing equipment purchases (as an alternative to leasing)


High - for equipment purchases

Moderate - for equipment purchases

Equity finance

High - to finance tree planting investments

Low - mainly for possible capital-intensive, high-risk processing activities



High - crop and property insurance

High - for loan repayment for high-risk businesses


High - for loan repayment for high-risk businesses


Moderate - to help support household income

High - to finance working capital and smoothen seasonalities

Box 20
Proposed government support and suitable microfinance institutions
for small-scale enterprises

Government support

Conducive microfinance regulatory framework
Land tenure and property rights
Development of microfinance services addressing longer-term, higher-risk financing needs
Supporting reduction of transaction costs and conventional collateral requirements
Encouraging provision of microleasing
Social mobilization through field extension workers and foresters facilitating access to microfinance institutions
Increasing microfinance institutions' appreciation of and ability to appraise small-scale enterprises
Processing and marketing support
Business development services and microfinance facilitation
Facilitating upgrading of microfinance institutions, and strengthening of linkages among microfinance institutions
Linking small-scale enterprises to potential investors to provide longer-term equity of lending capital for higher-risk investments
Equity financing
Matching grants

Microfinance institutions

Banks for mobilization of savings where safe deposits are lacking
Credit cooperatives and NGOs with strong social facilitation skills where transaction costs are very high or social objectives pre-eminent
NGOs when there are strong specific environmental concerns and objectives
NGOs or credit cooperatives for equity financing
Banks for bigger and more financially sophisticated loans and for the provision of leasing and micro-insurance services

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