Smallholder finance in the palm oil sector

Key messages

• Smallholder farmers require significant financing to establish, maintain and replant their oil palm plantations, in order to both increase productivity and improve the quality of the fresh fruit bunches (FFB) produced.
• Smallholders are also limited in their capacity to self-finance their plantation operations.
• There is a significant gap, both in terms of amount and accessibility, between the demand smallholders in the palm oil sector make for credit and the supply of that credit by banks and financial institutions.
• The majority of credit approved for smallholders can only be used for working capital and cannot cover the costs of replanting or accommodate the timeframe required for it.
• A credit maturity gap also exists in the majority of financing schemes, with loan repayment schedules beginning immediately after fund disbursement. Few financing schemes consider oil palm farmers' initial wait for a harvest, and thus provide loans with a grace period adapted to these timescales.
• Risk sharing gaps are visible when farmers repay their loans, as any variation or volatility in production costs and palm oil prices is borne by producers.
• Legal gaps are also evident, with many smallholders not holding proper documentation, which prevents them for using their land as collateral to access credit from banks.
• These gaps reduce the possibility of smallholders accessing formal credit, which in turn drives an informal local lending market with higher interest rates.
• In order to improve formal credit access for smallholder oil palm farmers, the different gaps (i.e. maturity, risk and legal) must be addressed.

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