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Agricultural systems diversification as a green strategy against risk of default in rural loans

par Ariza Salinas, Laura Camila
Président du jury Szafarz, Ariane
Promoteur Huybrechs, Frédéric
Co-Promoteur Bastiaensen, Johan
Publication Non publié, 2020-09-27

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Résumé :

The provision of financial products in agriculture areas is a challenge for the microfinance sector. Many rural MFIs fail to achieve the triple bottom line, meaning, the social, economic, and environmental performance, mainly because agriculture borrowers tend to be exposed to uncertain climatic and market variations. These hazards can cause producers the loss of their income sources and eventually the inability to repay loans. This profile of borrowers ends up being very costly and risky for rural MFIs, considering that they also need resources to access the remote locations of their clients. In response to these obstacles, green strategies (meaning for the purpose of this investigation: A way to manage environmental and climatic risk by reducing the vulnerability of clients to climatic events) have arisen as an alternative to costly risk management tools that poor rural producers can´t afford. Among them, crop diversification was found to be appropriate to poor farmers, facing highly vulnerable conditions of climate variation and degraded land.The current investigation will help to understand, first, how diversification of agricultural systems, in rural households, can be used as a green strategy to reduce the risk of default in rural loans. Second, what would be the positive impacts of promoting this strategy among microfinance institutions, specifically in the case of Ecuador. For achieving this goal, a literature review was performed, followed by the analysis of a survey with 308 respondents among loan officers of 7 rural Microfinance Institutions (MFIs) in Ecuador. The access the anonymized dataset was provided by YAPU Solutions, a software and consulting company focused on supporting the improvement of operational processes of institutions targeting smallholder farmers. Our analysis shows that crop diversification helped rural producers to increase productivity and profitability; improve yield stabilization; reduce the costs of external inputs like pesticides and fertilizers; and increase resilience against climatic uncertainty. We hence conclude that crop diversification can be a viable strategy to increase the repayment capacity of poor and vulnerable rural borrowers. However,some constraints encountered for the implementation of crops diversification were the difficult access to markets for small rural households, the increase in work force and the lack of technical assistance. From the data provided by YAPU Solutions, we could see that higher levels of presence of impacts among provinces and MFIs were positively correlated with the % of Portfolio at Risk 30 days (PAR 30) and the use of crop diversification by clients. These results are coherent with the findings of the literature review that stated an increase in risk of default when families suffer negative impacts on their income sources, due to climatic events, but also that crop diversification is more efficient among poor farmers under highly degraded climatic conditions.It is interesting to highlight the low importance of crop diversification among MFIs in Ecuador. Nevertheless, according to literature, clients adopting this green strategy are more resilient against climatic hazards and can even become more productive and economically stable. We suggest that MFIs could benefit from these borrowers as an effective strategy to decrease the rates of default. This could be especially relevant for small holders affected by loss of incomes due to climatic events. Our analysis reveals that the most important green strategies among loan officers in Ecuador is the use of organic production practices and inputs (“organic” farming). We hence suggest that crop diversification could be complemented by organic farming. If appropriated value chains and prime for organic production are in place, the combination of crops diversification and organic farming could support to address the biggest challenge of crop diversification, namely, access to markets, and at the same time contributed to strengthen climatic resiliencies of smallholders. Indeed, when certified, agricultural products can be sold at higher price with respect to traditional production (that make use of pesticides and herbicides, especially in monocropping systems). This would suggest, that combining various modalities of green strategies, like crop diversification and organic farming, among others, will allow MFIs to address adaptation to climate change in a less risky and integral way. By tackling different sectors and obstacles at the same time, the combination of various green strategies can open the possibility for MFIs to access new markets and attract investors interested in promoting an environmentally sustainable rural development.