Sitting at the forefront of the climate crisis, forest and farm producer organizations (FFPOs) have a vital role in supporting smallholder resilience and attaining climate change and biodiversity goals. Together, their members have a transformative potential to achieve sustainable development and respond to climate change at scale.

They cannot, however, fulfil entirely this role without sustainable and adequate access to financial resources to support their activities. Currently, only 10 percent of global funds for climate change adaptation and mitigation reach the local level, and just 1.7 percent are accessible to locally controlled organizations.

Obstacles to smallholder finance

Smallholder producers, Indigenous Peoples and local community (IPLC) groups, women’s organizations and their enterprises in low-income countries, particularly in Africa, struggle to access sufficient finance to meet their needs. They have limited access to the few finance opportunities available, which often come at unfavourable scales with constraints and terms and conditions that do not suit their unique activities.

While many smallholder organizations have well-developed business and organizational capacities, strong credit track records, valuable assets, and effective governance systems, they face disproportionate risks that limit their access to finance. Investors and financial institutions have a limited understanding of the many value chains in which grassroots organizations operate and the scale, terms and conditions appropriate for supporting their activities. As a result, they fail to provide financial products tailored to the needs of smallholder groups for improving and scaling up sustainable forest and farm management practices. Unfavourable policy environments and weak governance systems in many contexts create further disincentives for financing smallholder producers.

The potential of community microfinance

In this context, the Forest and Farm Facility has witnessed the promise of community microfinance for providing rural communities with much-needed funding towards sustainable natural resource management and resilient livelihoods. FFPOs, given their close relationship with and understanding of their members, smallholder value chains and livelihood activities, are therefore well positioned to provide financial products on suitable terms. When successfully implemented, microfinance offers business and value chain development opportunities, supports resilience and climate-adaptation activities, and provides social services across communities.

1) Developing innovative business plans and diversifying value chains

Delivering small loans, savings services, insurance and other financial services to low-income populations helps them build assets, stabilize consumption, manage risks and develop sustainable livelihood opportunities. In Madagascar, the Women’s National Platform for Sustainable Development and Food Security (PNFDDSA) uses funds from Village and Savings Loan Associations (VSLA) to provide women with business plan development training, support start-ups such as tree nurseries with loans and organize trade fairs. The VSLA mechanisms in Madagascar have come to represent a critical support structure for smallholders as they often provide the only accessible means to obtain production inputs such as seed and equipment as well as household expenses for education and health at affordable rates without the need to provide guarantees.

Savings associations and microfinance allow the establishment of new enterprises based on identified market gaps and can be strong opportunities for local value chain development. For example, in Nepal, many community forest user groups have incorporated spice-based agroforestry in their community forests. To improve the local turmeric processing capacity in these communities, thereby increasing local revenues, 20 Bungdal Women’s Micro-Enterprise Group members formed a turmeric production and processing enterprise with finance from FECOFUN, the national federation of community forest user groups. Similarly, El Ceibo’s internal finance mechanism in Bolivia allows it to build technical capacities and business development with targeted support to women. This support has led to 853 members adopting practices aligned with Fair Trade standards and organic production – improving their market position whilst respecting socio-environment requirements.

2) Supporting green initiatives and adaptation to a changing climate

More recently, green microfinance has emerged to specifically support climate change adaptation and mitigation at the local level. For example, in Ghana, the Tele-Bere VSL Association mobilized 150 Village Savings and Loans (VSL) groups with over 4 500 members (over 85 percent women) and over GHS 2.6 million (approximately USD 450,000) in savings per year. Tele-Bere collaborates with smallholder forest and farm producers to strengthen communities, landscapes, and ecosystems through restoration and conservation activities. These efforts specifically aim to help smallholders adequately adapt to the growing adverse impacts of climate change. Using VSL funds, Tele-Bere piloted small water systems across the Upper Easter region, enabling year-round agroforestry and agroecology practices and the production of crops, including vegetables, during the dry season.

3) Promoting social safety nets, community cohesion and gender equality

Microfinance is vital to establishing social safety nets within communities, often incorporated within the overall microfinance mechanism. In Tanzania, the regional network of smallholder farmer groups MVIWAMA has established 15 community microfinance groups totalling 485 members, including 290 women. These groups have obtained loans valued at TZS 68.9 million and accumulated savings worth TZS 33.4 million, which is used for a variety of purposes. Members of these groups contribute to a social fund to support social issues, such as paying for school fees for children from vulnerable households. The social elements of microfinance mechanisms foster strong community connections and social networks, which enhance overall community well-being.

As shown in all the initiatives discussed above, microfinance is especially important for women and ensuring that women have equal opportunities to access finance yields strong results. These projects are essential for showcasing the entrepreneurial and innovative role that women can play in local value chains. The success of women-led initiatives with women supporting each other following the introduction of microfinance schemes is evidence of the long-term sustainability of these mechanisms.

Community microfinance as a way forward

Community microfinance has significant potential to empower smallholder organizations by providing them with tailored financial products and services. When designed and delivered appropriately, microfinance can strengthen the resilience and sustainability of smallholder livelihoods and support forest and farm management practices that contribute to climate change adaptation and mitigation. By building smallholder groups' financial and organizational capacities, microfinance gets money where it matters and helps to unlock their potential as agents of change for sustainable development.