Financing a green transformation in developing countries
Nairobi, 7 September 2012
The world needs more food for its growing population and smallholding farmers produce most of it in the developing world.
But smallholders, who are often poor, find it difficult to produce more food if they don’t have enough money to buy the tools, seeds and other material necessary for the job.
Loans are often complicated to get, have high interest and have to be paid back in a short period. All of this makes it nearly impossible for poor farmers to borrow money and improve their food production and lives.
“For better or worse, finance is how our society usually takes small ideas and makes them big,” said Munden in a video presentation to researchers attending the World Agroforestry Centre’s Science Week in Nairobi, Kenya.
The scheme, called Inari, “will blend a diversity of loans based on their risk and reward profiles so that private investors can buy them in bundles,” said Munden. “It makes no sense to create a ‘one size fits all’ system that forces strict adherence to a single practice or set of practices.”
By matching the flexibility and diversity required for sustainable land use with the rigidity and uniformity that financiers need in order to invest their capital, Inari will stimulate the participation of private investors, who can profit from buying the bundled loans, similar to how stock investments works.
The Inari system expects to carry three main attractions for producers: lower interest rates, a longer timeframe for repayment, and flexible repayment schedules.
By creating a financing mechanism that will give cheaper, more flexible loans to producers engaged in sustainable land use, lenders will be encouraged to put forward the money by making it cheaper for them to do so.
“We think that this cheap capital can be justified by intelligently combining those loans into securities,” he said.
The target investors will be people in “low-interest-rate countries,” primarily in the developed world, who would buy securities with a higher rate of return.
“If we’re right about all this, the potential investment flows run well into the hundreds of billions of dollars,” he said.
Munden will release the intellectual property behind Inari’s securitization system into the public domain and he and his team will have no financial interest in the investments that Inari makes.
Inari will partner with public institutions for its research, development and implementation, “leveraging some forms of public support to protect the investors purchasing securities from risks associated with things like war, extreme weather events and the like,” he said.
The Inari system is at an advanced stage of development but Munden clarified that it will be refined further by working with institutions like the World Agroforestry Centre, which is working to expand agroforestry—a sustainable land use—on smallholders’ farms across the tropical, developing world.