A lack of access to microfinance is a problem for many small-scale producers of forest products. Microfinance institutions must develop new methods to deliver their services successfully in remote, rural locations.

Work done by small-scale forest-based enterprises includes processing and marketing raw forest products. These enterprises face many problems that constrain their development. Problems include a shortage of raw materials due to the overuse of natural resources, small and insecure local markets to sell their products, limited access to larger markets and fierce competition within these markets. A lack of appropriate technology is a further barrier to the development of these enterprises.

Small-scale forest enterprises also require microfinance to buy inputs such as fertiliser and equipment and to pay for insurance. However, research from Forestry Department of the Food and Agriculture Organization shows that access to efficient microfinance is the major constraint for small-scale forest based enterprises. They often have problems getting money from microfinance schemes, due to the risky nature of their activities and their remote locations.

Institutions providing microfinance must make significant changes to their services so that they are available to small-scale forest-based enterprises. Research from the Parbat district of Nepal highlights many important issues for developing successful microfinance initiatives:

• local entrepreneurs who are well motivated and prepared to take risks to begin micro-enterprises
• entrepreneur microfinance groups who can work together to share skills and training, and help small-scale enterprises to overcome constraints
• business development services, including skills development, technical and managerial support, technology transfer and market promotion
• a demand-driven approach, with microfinance services responding to local demands
• accurate monitoring and business counselling services after a microfinance enterprise is established.

For microfinance institutions to be successful in rural areas, government and donors must develop approaches that best meet the needs of each location. They should consider local constraints to accessing microfinance, local needs and existing financial services in an area. Government initiatives should also develop the infrastructure necessary to support production and strengthen the economic capacity of microfinance institutions.

Policy lessons to develop microfinance services include:

• offer a range of different finance options to meet different local needs
• create policies that ensure local economic stability, such as land tenure and property rights
• raise awareness of microfinance services, for example through literacy, numeracy and skills training for women, indigenous and disadvantaged groups
• provide technical assistance so that microfinance institutions can meet the needs of small-scale enterprises
• focus on providing microfinance to rural households that run small-scale enterprises, rather than credit for buying tree crops and larger-scale forest enterprises.

Source(s):
‘Microfinance and forest-based small-scale enterprises’, Food and Agriculture Organization, based on a draft by Paolo Spantigati and Anna Springfors, 2006 (PDF) Full document.

Funded by: United Nations Food and Agriculture Organization

id21 Research Highlight: 14 July 2006

Further Information:
Paolo Spantigati
Asian Development Bank
Nepal Resident Mission
Nepal

Tel: +977 1 422 7779
Fax: +977 1 422 5063
Contact the contributor: pspantigati@adb.org

Forestry Department, Food and Agriculture Organization

Other related links:
'The benefits of working together: small and medium forest enterprises'

'Measuring microfinance’s impact on poverty in Peru'

'Learning more about microfinance beneficiaries in Peru'

'Debt from microfinance traps Bolivia’s poorest'

See id21's links for forestry