Improving microfinance services for small-scale forest enterprises

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 includesprocessing and marketing raw forest products. These enterprises face manyproblems that constrain their development. Problems include a shortage of raw materialsdue to the overuse of natural resources, small and insecure local markets tosell their products, limited access to larger markets and fierce competitionwithin these markets. A lack of appropriate technology is a further barrier tothe development of these enterprises.

Small-scale forest enterprises also require microfinance to buyinputs such as fertiliser and equipment and to pay for insurance. However, researchfrom Forestry Department of the Food and Agriculture Organization shows thataccess to efficient microfinance is the major constraint for small-scale forestbased enterprises. They often have problems getting money from microfinanceschemes, due to the risky nature of their activities and their remotelocations.

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

• local entrepreneurs who are well motivated and preparedto take risks to begin micro-enterprises
• entrepreneur microfinance groups who can worktogether to share skills and training, and help small-scale enterprises toovercome constraints
• business development services, including skillsdevelopment, technical and managerial support, technology transfer and marketpromotion
• a demand-driven approach, with microfinanceservices responding to local demands
• accurate monitoring andbusiness counselling services after a microfinance enterprise is established.

For microfinance institutions to be successful in ruralareas, government and donors must develop approaches that best meet the needsof each location. They should consider local constraints to accessingmicrofinance, local needs and existing financial services in an area. Governmentinitiatives should also develop the infrastructure necessary to supportproduction and strengthen the economic capacity of microfinance institutions.

Policy lessons to develop microfinance services include:

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