The Unbanked: From Debt Cycles to Financial Inclusion and Resilience

By Adam Miller, Putri Damatashia, Novia Sagita

Small-scale fishers and smallholder farmers in tropical countries are often financially excluded, leading to debt cycles and environmental loss in community-centered conservation areas. Financial exclusion limits access to formal/informal credit and financial services, forcing resource users to rely on sources of credit with high-interest rates and unfavorable terms. 

This leads to high debt burdens, reduced income, and limited ability to invest in productive assets, which can restrict their capacity to invest and participate in conservation[1]. Debt cycles can also lead to overfishing, harmful agricultural practices, deforestation, loss of livelihoods, and increased vulnerability to climate change, which can negatively impact the environment[4][5].

Small-scale fishers and smallholder farmers are the key players in frontline resource management and conservation. Still, when burdened with debt and financial constraints, they may resort to unsustainable practices or be forced to sell their land, forest, or fishing rights, leading to environmental degradation and the breakdown of community-led approaches [6]. Addressing these challenges requires strategies that promote sustainable livelihood strategies, access to affordable credit, and support for community conservation efforts that enhance resilience and reduce dependence on debt[3]. 

Planet Indonesia has documented this burden across nearly all our sites in Indonesia. The debt cycle–conservation nexus is complex and primarily is not addressed by the variety of socio-ecological programmatic approaches.

A local fisherman works with his net.

Key Challenges we have witnessed
over the past ten years:

1. Limited Access to Finance:

Small-scale fishers and smallholder farmers often face difficulties in accessing formal credit and financial services, referred to as ‘unbanked.’ This limited access to finance can be attributed to various factors, including low returns, high-risk perception, lack of trust in financial institutions, and cultural barriers.

2. High Debt Burden:

Small-scale fishers and smallholder farmers often accumulate high debt levels for various reasons, such as borrowing for agricultural inputs, equipment, or fishing vessels. Also, the majority of existing financial institutions offer high-interest loans. The debt burden can become overwhelming, especially when coupled with factors like low crop yields, market fluctuations, and natural disasters. High debt levels can lead to financial stress, reduced income, and limited ability to invest in productive assets, and are indexically linked to natural resource exploitation. 

"Small-scale fishers and smallholder farmers often accumulate high debt levels for various reasons, such as borrowing for agricultural inputs, equipment, or fishing vessels."

3. Vulnerability to Financial Stress and Lack of Resilience:

Resource users with high debt-to-asset ratios almost always live in a state of financial stress. In times of economic downturn, disturbances, or poor yields, they may struggle to cover their financial liabilities and meet their debt obligations[5]. Climate change, collapsing fish stocks, and limited livelihood opportunities all link to increased vulnerability to financial stress. Without access to financial resources and risk management tools, resource users struggle to recover from setbacks and adapt to changing circumstances further perpetuating the negative cycle of financial exclusion and environmental collapse.

4. Limited Investment in Productivity:

The debt burden can restrict small-scale fishers and smallholder farmers from making necessary investments in their businesses and livelihoods to enhance yields and sustain income-generating activities. They may be unable to afford fishing equipment, improved farming techniques, or access to new markets, which often drives individuals to overharvest, illegally log, poach, and live in states of reduced livelihood productivity.

Impact on Community-Led Conservation:

Debt cycles and financial exclusion negatively affect community-centered conservation efforts. When burdened with debt and financial constraints, smallholder farmers and small-scale fishers may resort to unsustainable practices or be forced to sell their land or fishing rights, leading to environmental degradation and loss of community-based conservation initiatives. This can further exacerbate their financial exclusion and hinder their access to credit for future investments.

Living a ‘life in debt’ creates barriers to participation and most certainly has negative psychological impacts that reduce a feeling of control over one’s future and self-motivation.

The Planet Indonesia Approach

We have integrated financial resilience groups into our community governance model since the very start of Planet Indonesia in 2014. Our founding team had over 25 years of experience working with credit unions, microfinance institutions, and other financial product providers in Indonesia before creating our organization.

This experience has created some simple but vastly essential differences between traditional financial inclusion models and our approach. To best communicate those, we have created the following table to compare and contrast how we integrate financial inclusion and resilience to address the debt cycle–conservation nexus.

Key Principles of Financial Inclusion

Autonomy

Smallholder farmers and fishers must have a say in financial decision-making. Financial services should be designed to empower community members to make choices that suit their unique circumstances and goals. This may involve:

• Offering a range of financial products and services.

• Providing flexible loan terms.

• Aligning savings options with seasonal cash flows.

Competence

Enhancing the financial literacy and skills of smallholder farmers and fishers is essential for building confidence and a sense of competence. Financial education programs can support knowledge in:

• Basic financial concepts.

• Budgeting.

• Managing household finances effectively.

When vulnerable communities feel competent in handling financial matters, they can actively participate in locally-led initiatives across conservation-development frontiers.

Relatedness

Building strong social connections and support networks can positively influence the financial inclusion of smallholder farmers and fishers. Community-based financial initiatives that involve peer learning or group savings can:

• Foster a sense of relatedness and trust among community members.

• Provide a safety net.

• Encourage collective problem-solving during challenging times.

At Planet Indonesia, we believe local community members and leaders must lead in designing and implementing financial inclusion programs that enhance relatedness and ensure that initiatives are culturally appropriate and context-sensitive. By integrating Self-Determination Theory principles into financial inclusion initiatives, stakeholders can help to create a more inclusive, sustainable, and empowering system for smallholder farmers and small-scale fishers.

References:

1. Holmes, G., & Sandbrook, C. (2016). Conservation and development interventions as networks: Implications for evaluating the impact of conservation on social-ecological systems. Global Environmental Change, 37, 114-123. doi: 10.1016/j.gloenvcha.2016.01.004

2. Rakotonarivo, O. S., Schaafsma, M., Hockley, N., Mandimbiniaina, R., & Jones, J. P. (2017). Conservation and livelihood outcomes of community forest management in Madagascar. Conservation Biology, 31(1), 55-65. doi: 10.1111/cobi.12797

3. Mwampamba, T. H., & Chhetri, B. B. (2015). Community-based forest management and livelihoods in Tanzania: An analysis of policy and practice. Environment, Development and Sustainability, 17(4), 795-814. doi: 10.1007/s10668-014-9608-5

Citations:

[1] https://www.frontiersin.org/articles/10.3389/fsufs.2019.00003/full

[2] https://www.ers.usda.gov/amber-waves/2019/october/larger-farms-and-younger-farmers-are-more-vulnerable-to-financial-stress/

[3] https://www.fao.org/3/i5251e/i5251e.pdf

[4] https://sustainabledevelopment.un.org/content/unsurvey/attachments/IFAD_and_the_2030_Agenda.pdf

[5] https://www.cell.com/trends/ecology-evolution/fulltext/S0169-5347(23)00037-X

[6] https://agricultureandfoodsecurity.biomedcentral.com/articles/10.1186/s40066-017-0109-5

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