Promoting financial inclusion of small-scale fisheries in Peru

Economic and cultural barriers mean that small-scale fishers in Peru often remain locked out from accessing financing, and from the benefits and opportunities of formalization.

By Cristina Rocca, Future of Fish Sustainable Business Analyst

Fishers are the stewards of the ocean, and their decisions directly impact the sustainability of the environment and community’s livelihood. Because of this role, fishers should be well-positioned to access different sources of support and capital for projects, which can incentivize sustainability and resilience and support many UN Sustainable Development Goals (SDGs). But in Peru, that’s not the case. Peru’s small-scale fishers are often locked out from accessing the financing that would make the biggest difference. In this post, we dive into the current funding landscape and the challenges to financing small-scale fishers.

There is a diverse panorama of funding opportunities available in Peru, from international impact investors and philanthropic funders to domestic public sector institutions, to savings and credit unions, microfinance institutions, and innovative fintech platforms connected to the banking system. This funding landscape includes myriad philanthropic and catalytic funders and impact investors focused on promoting innovations which support the economic and social progress of vulnerable populations, in alignment with different SDGs.

Anecdotally, impact-focused funders have expressed interest in investing in small-scale fishers as they are at the unique intersection of social, economic, and environmental issues. But historically few, if any, of these funders have been able to engage with small-scale fishers. Significant grants and investments in the space from these actors remain limited due to high levels of perceived risk and low levels of fisher formalization — that is, most fishers operate without a formal business structure or fiscal registration, and often lack the appropriate sanitary and fishing permits. WIthout formalization or business capacity, fishers may not have the ability to apply for and effectively manage the funds and investment. Even public sector funds targeted specifically for innovations in the small-scale fisheries and aquaculture sectors have heavily favored projects in aquaculture, principally because few coastal wild-capture fisheries were able to meet investment requirements and find the matching funds necessary to apply.

In addition to catalytic and public funding, Peru has relatively healthy banking and financial systems, including a vibrant and relatively big microfinance sector, and progressive fintech and digital wallet environments which are supported by a solid regulatory framework and consumer protection policies (Global Microscope, 2019). Even so, financial inclusion for fishers through these tools remains rare because of a lack of digital and banking cultures in the rural communities. Of the financial institutions that do serve borrowers from the fisheries sector, rural and commercial banks, and credit and savings unions, are the financial institutions that lend most frequently to fishers, although loans to fisheries still represent less than one percent of their portfolios. These institutions mitigate the risks through higher interest rates and down payments, as well as strict formalization and collateral requirements (World Bank, 2019).

This year, the challenges in getting funds to small-scale fishers was revealed more clearly than ever. In response to the COVID-19 crisis, the Peruvian government designed emergency stimulus funds and special low-interest credits specifically intended for artisanal fishers, but even these struggled to effectively reach and support their intended populations. The inability of the government to effectively financially support the fishers in their time of most need highlights the same barriers fishers face when normally trying to access any type of formal financing.

These barriers, that hinder fishers investment readiness and ability to effectively execute projects, make the job of an interested funder more complicated. This gap in the formal financial inclusion of small-scale fishers persists due to barriers and limitations on both sides of the issue. We explore the barriers in the section below, and a second blog post will detail our proposed approaches to addressing them (so stay tuned!).

Fishers’ barriers to access and funder limitations

Fishers are blocked from access to formal funding sources for a number of reasons. The most significant of these is the lack of formalization, but it is also intertwined with other factors such as organizational governance and cultural norms. With well over half of the Peruvian economy operating informally, ensuring regulatory compliance is not seen as necessary or even normal in many sectors. Artisanal fishing is no exception. While the majority of the small-scale fleet have not wanted to (or have not been able to) embrace formalization, it is one of the requirements that funders refuse to waver on. This requirement has solid justifications, since formalization provides two key elements needed for formal finance mechanisms to work: transparency in the fiscal and financial situation of the capital recipient, and recognition and capitalization of assets to be used as collateral to leverage credit. Therefore, for initiatives that aim to coordinate capital for investment and project development in small scale fisheries, addressing and promoting formalization at every level — from individual fisher to boat owner, commercializer, and association — will be crucial.

The effects of the barriers differ depending on the structure and maturity of the fishery. In general, though, informal sources currently account for more than 85% of financing to small scale fishers in Peru, especially in advancing funds for working capital. These informal lenders, who are often buyers, other supply chain intermediaries, or inputs suppliers, provide capital at rates higher than formal lenders to cover the cost of risk, but tend to have flexible repayment terms and don’t require stipulating conditions of formality or collateral (World Bank, 2019). As such, fishers become indebted and are tied to that stream of business, making it hard for them to control their business and investment decisions, and preventing them from accessing formal sources of capital.

Another significant barrier is the ability to secure formal market relations, especially in high-value fisheries, which would demonstrate the potential capital flow to attract funding. Again, informality is the norm in fishing ports or “playas”, where sales are done through verbal agreements, transacted in cash, and on a day-to-day basis, and are frequently linked to those buyers and intermediaries that are the informal lenders. Fishers in these informal situations are subject to the volatility of markets which leaves them less able to plan cash flow. This volatility, along with the lack of formal purchase orders and proven market relations, further reduces fishers’ ability to become investment ready.

Additionally, there are a number of other social and environmental issues which also significantly impact artisanal fishers’ ability to access formal capital. Members of fishing organizations tend to associate just for the social benefits and fail to grasp the other economic benefits of cooperative and aggregation models. Frequently, producers lack financial education and business acumen and are often disconnected from supply chain and market information which could allow them to make strategic alliances, create new lines of business, and define specific business plans that could increase their opportunities of accessing finance. Intense volatility in volumes captured due to climate change and aggravated environmental conditions, and fluctuations in the prices fishers are able to secure, greatly affect fishers’ cash flow and capacity to repay loans on a traditional cycle, as well as to save.

There are also limitations on the funders’ side of the gap which inhibit their ability to effectively deploy capital to the artisanal fisheries sector. By working in silos, funders miss out on collaborative strategies that may include key stakeholders in the local system as anchor firms, public programs or supply providers, or blended finance schemes. These kinds of collaboration could help funders to minimize risk and provide other sorts of support, such as financial education or capacity building, to complement and ensure the viability of their investments. Informality also leads to lack of data and general understanding of the reality and needs of fishers. This in turn leads to a mismatch between the sizes and kind of capital offered to and demanded by the sector, and can also overlook the capacity building and technical assistance grants needed for progress and sustainability through the successful implementation of projects.

All these barriers, from cultural to economic, mean that small-scale fishers in Peru often remain locked out from accessing financing, and from the benefits and opportunities of formalization.

Stay tuned for the next blog post in our series, where we’ll explore potential solutions and opportunities for increasing access to finance in Peru’s small-scale fisheries.