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De-risking Lending in Ghana’s Cocoa Sector to Promote Climate Smart Cocoa Adoption – Proposed Framework

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Cocoa is important raw material to the global chocolate industry (Financial Times, 2015). Globally, between 40–50 million people depend on the cocoa sector for their livelihood (Beg et al., 2017). In Ghana, the crop remains a key source of foreign exchange and contributes about 13% to gross domestic product (GDP) (Aboah et al. 2019; Asubonteng et al., 2018). Export earnings from cocoa is about 30% (Monastyrnaya et al., 2016). In terms of employment close to 30 % of Ghana’s population derive their income from the sector’s Supply Chain (Anthonio and Aikins, 2009; Gockowski et al., 2011). To increase the output of cocoa, smallholders tend to engage in area expansion rather than intensification which leads to clearing of total forest (Jagoret, Deheuvels & Bastide, 2014). This practice has led to a significant reduction in the volume of forest cover in Ghana thereby rendering the sector susceptible to climate change effects. Although the cocoa sector faces hydra-headed challenges, climate change tends to increase the vulnerability of the smallholder farmer (Fountain & Huetz-Adams, 2018). Climate change is a phenomenon that has been taking place throughout history but over the last century it has accelerated, and scientists believe it is increasingly due to human activities (J. Cook, et al, April 2016). To ameliorate these challenges the smallholder farmer needs to adopt sustainable production systems that guarantee a decent livelihood for family farmers while avoiding practices that are detrimental to the environment (Amiel Lauran, & Muller, 2019).

To reduce the impact of climate change on the Ghanaian Cocoa Sector, the Consultative Group for International Agricultural Research (CGIAR) through the International Institute of Tropical Agriculture (IITA) in Ghana together with its partner, Rainforest Alliance has recently documented and aligned Climate Smart Cocoa practices across the three impact zones (Cope, Adjust and Transform) to help farmers mitigate the effects of climate change.

However, to achieve this, the adoption of improved agricultural and climate-smart practices must be promoted in the sector. Access to Financing CSC activities by the smallholder farmer is a critical challenge to promoting and sustaining the adoption of CSC practices among cocoa farmers in Ghana. The lack of finance will increase the use of traditional methods of adaptation to climate change (Abraham & Fonta, 2018).

While the agricultural sector in Africa is constrained by numerous challenges, finance remains a critical cross-cutting factor. It remains a critical policy challenge in most sub-Saharan African countries since creating assess will serve as a stimulus to the adoption of improved technology by the smallholder farmer in most developing economies. Agricultural finance is fundamental to the adoption of improved inputs and technologies among smallholders. By creating access to finance, we promote the use of productivity-enhancing inputs like fertilizer, improved seeds, pesticides, and investment in long-term new technologies (Balana & Oyeyemi, 2020; Twumasi et at., 2019). The lack of finance or credit will therefore limit the use of high-yielding technologies and varieties (Njagi et al. 2017).

Specifically, access to finance improves smallholder investments in productivity-enhancing farm inputs or agro-processing equipment which results in increased productivity, higher-value products, diversity of agricultural production that drives economic growth.

This notwithstanding formal sector lending to the sector remains low in most of these countries, for example, the share of commercial bank lending to agriculture in Africa ranges from 3 percent to 12 percent. Specifically, in countries like Sierra Leone and Ghana commercial bank lending to Agriculture is estimated at 3 and 4 percent respectively. Other countries like Kenya, Uganda, Mozambique, and Tanzania have 6, 8, and 12 percent respectively. Credit market failures constrain the optimal adoption of new technologies (Makate et al., 2019; Ogada et al., 2014) including Climate Smart Agricultural (CSA) practices. Smallholders tend to rely on their own income (i.e., on-farm and off-farm) to finance their productive activities (Adjognon et al., 2017). The irregular and inadequacy of own income make it difficult for the smallholder to invest in farm enterprises that thrive on new technologies and practices (Birdle et al., 2020). Again, with technologies that require high up-front investments, adoption remains out of reach for households with limited cash (D’Souza & Mishra 2018; Chhetri et al., 2017).

Although some CSA practices can be accommodated within the production systems of smallholders without requiring external funding (Asfaw et al. 2014; Di Falco et al. 2012), the lack of finance will jeopardize the adoption of resource-driven CSA practices among smallholders (Carter et al., 2016; Conradt et al., 2015).

The average production cost of farmers practicing CSA cocoa production is higher (GHS 920-USD 242) compared to the conventional cocoa production (GHS 621-USD 163) system in Ghana Akrofi-Atitianti et. al., 2018). For such farmers, labor constitutes the largest cost component for about 51% of total cost compared to 42% for conventional production (Akrofi-Atitianti et. al., 2018). By developing innovative financial mechanisms will promote the adoption of Climate Smart Agricultural practices in the Ghanaian cocoa sector. Promoting the take-up of CSA technology cocoa farmers will produce higher output per hectare with an average value of GHS 2786 (USD 733) compared to GHS 1978 (UD $521) for conventional cocoa (Akrofi-Atitianti et. al., 2018).

IITA and the Rainforest Alliance developed this blueprint to provide a step-by-step process to complement the climate-smart cocoa practices and enable the financing of climate-smart cocoa in Ghana and it is the result of the assessment of the current agriculture finance sector with a major focus on cocoa.

Citation

Dalaa MA, Saeed AR, Deffor WE, Kofituo R, Asare R. 2021. De-risking Lending in Ghana’s Cocoa Sector to Promote Climate Smart Cocoa Adoption – Proposed Framework. CGIAR Research Program on Climate Change, Agriculture and Food Security (CCAFS).