• Open Access

Forest conservation and restoration using eco-loan financing (ELF) in Costa Rica: report on a working model


  • Editor
    Rudolf de Groot

Evelyne T. Lennette, Apartado 548-4250, San Ramon, Alajuela, Costa Rica.
Tel: 011-506-2445-4642; fax: 011-506-2445-5627. E-mail: elennette@nectandra.org


Nectandra Institute, a small U.S. nonprofit organization based on private philanthropy, initiated a zero (monetary) interest loan program (Eco-Loan Financing, or ELF) to qualifying rural community water management associations to buy watershed land in northern Costa Rica. Each borrowing community repays the capital and eco-interest (e.g., reforestation, regeneration of native forest on the properties, watershed restoration and management, continuing environmental education, etc). The project's effectiveness since 2007 in achieving its conservation and education objectives was due to: (1) the facility and flexibility of the negotiations between borrowers (entire communities) and lender (conservation promoter), (2) the communities’ involvement and enthusiastic acceptance of the project's ecosystem conservation insured its post-loan continuance at the grassroots level, (3) the rapid reloaning of repaid capital fund, thereby amplifying the donors’ investment several times, and (4) the potential for its replication and scalability elsewhere in Central America.


Costa Rica ranks third among 163 countries in the World Economic Forum's Environmental Performance Index, published in 2010 by Yale and Columbia University. This report evaluated 25 indicators reflecting each nation's environmental health (disease burden, water, air), ecosystem vitality (air and water pollution, biodiversity, habitat conservation), and policies on natural resources. This noteworthy ranking for small Costa Rica (51,100 km2) rested in large part on its environmental accomplishments. Its biodiversity also places it as one of the richest of 25 hot spots in the world (Myers et al. 2000), with vascular plant species >5,000 spp. per 10,000 km2 (Barthlott et al. 2005). Concerted governmental efforts since the 1970s protected 26.5% of land area as national parks and various categories of reserves now containing nearly half of the country's forest (FONAFIFO 2002). The other half is in private hands. Given the nation's general stretched financial resources, establishment of more national parks will be politically unrealistic. Yet, continuing countrywide deforestation is occurring through legal loopholes, outright violations, and weak enforcement of existing laws (Ferroukhi & Aguilar, 2004), steadily diminishing a world heritage where “rare plants and animals are common, and the common plants and animals are rare” (Forsyth & Miyata et al. 1984).

Nectandra Institute's (NI) mission is to regenerate cloud forest in northern Costa Rica on private land through grassroots outreach programs. Effective conservation must include forest, water, and biodiversity that are inseparable ecologically, biologically, and geographically. The undeniable importance of water to life is readily understood by all, yet the linkage between water, forest, and biodiversity is less apparent and thus less appreciated. Tropical forests are water sponges; they are the water reservoirs in most of Costa Rica and the tropics. NI emphasizes in its work with the communities the direct relationship between the health and extent of forest cover in the region to the quality and quantity of water for human consumption.

In 2006, NI launched its proof-of-concept eco-loan financing program designated as Eco-Loan Financing (ELF) to engage communities to restore the Balsa River Watershed located between the Cordillera Central and Cordillera Tilarán (Figure 1). NI began working with several community water management associations, known as ASADAS (Asociaciones Administradores de Acueductos). There are 1,513 ASADAS (AyA 2011) in Costa Rica throughout rural areas of the country. They are federally registered legal entities, served by volunteer boards of local residents. Semiautonomous and financially unaided by the government, the ASADAS responsibilities are to find fresh water springs, to provide, and distribute local potable water at basic cost to every water user in those rural communities. In recent years, the ASADAS have come under pressure to protect their water springs and recharge areas from encroaching land development (agriculture, industrial, and urbanization), but few have the funds or means to obtain standard loans to purchase the private land on which the springs are located. NI's philanthropic Eco-Loan program takes advantage of the communities’ initiatives to accomplish the mutual goals of protecting water supply and forestation regeneration. Through ELF, ASADAS borrow the capital to purchase properties from which the communities draw their potable water. In lieu of monetary loan interest, the communities pay eco-interest in the form of time, labor, and other community resources toward forest regeneration on the purchased lands, thereby raising community awareness on the importance of forest ecosystems. Examples of ecological interest payments include land stewardship, restoration of watershed, community-organized reforestation, monitoring of the forest regeneration and waterways, formation of youth ASADAS for future succession, educational field trips to the sites, awareness-building presentations during community meetings, and Adopt-a-Seedling Program by local residents to name a few.

Figure 1.

Map of Costa Rica, location of Balsa Watershed in relation to the greater San Carlos Watershed (inset).

NI also helped the communities form women clubs to complement the mostly male-run ASADAS to carry out local environmental initiatives, such as waterways monitoring, recycling, and educational outings for school children. Through NI's free workshops, representatives from the ASADAS gain practical understanding of the many issues related to water and its management. The objective of NI's partnership with these ASADAS is to use the protection of local community water sources as the driving incentive for the restoration, conservation, and management of forest cover and biodiversity in the watershed.


NI introduced itself to the communities with movie and discussion nights screening videos (e.g., Al Gore's Inconvenient Truth) with environmental themes to the ASADAS’ general membership. Concurrently, NI provided a free training program to ASADAS representatives on various water-related subjects (hydrology, ecology, watershed restoration, water quality analysis, environmental laws, principles of management, etc). NI then publicized the availability of ELF loans and the qualifying criteria, followed by a request for proposals from the ASADAS that participated in the workshops. A mini proposal writing workshop was also held to guide the interested parties.

NI scored proposals using a set of predetermined and publicized variables, which included the degree of ecological deterioration on the property, number of water users/families affected, the proportion of co-financing, size and price of the property, the degree of dependence on the water supplied by the spring(s) on the property, the financial plan for loan repayment, the general membership's involvement in the restoration of the property, and willingness to receive continuing environmental education.

NI and the winners of the competition negotiated the specific terms of the customized loans, including the nature of the collateral (the property), co-financing, the respective property restoration and management plans, payment schedules, the commitment to protect the watershed/forest for perpetuity, and the required completion of proper, legal documentation of property title. With agreement from both parties, NI issued a letter of intent to make the loan, stating the required conditions. The ASADAS general assembly, consisting of the entire community, had to vote and approve the terms of the loan. The borrower was entirely responsible, legally and financially, for negotiating the purchase of the property with the seller. NI did not participate in or influence these negotiations. The eco-loan was executed during closing on the property.

During the term of the loan, each borrower made log entries to document the negotiated activities considered as eco-interest payments with dates, type, duration of the activities, and the number of participants. For simplicity, eco-interest was quantitated in terms of person hours of work carried out on the property with NI staff present. No monetary value was assigned to each hour of work.


Loan profiles

From 16 ASADAS applicants in three rounds of request for proposals between 2007 and 2010, six eco-loans were approved and executed. The demography of borrowers A through F consisted mostly of family dairy and food crop farms (Table 1). A through E collectively managed water for 7,970 residents using 1,560 water meters, an average of 5.1 residents per meter, drawing water from a total of 21 springs all within 7 km from the respective community centers. Another 2,650 nonmetered residents benefit directly from loan F. Community A, for example, was wholly dependent on a single spring located on the purchased property and the furthest away from the users. In contrast, community D had 10 springs. The loan to community A was a pilot loan to work out the details. Borrower F was also distinct; it was a regional coalition of several local water associations formed solely to purchase land in high watershed for forest regeneration to protect groundwater recharge zone. In the past 12 years, borrower F successfully raised funds and bought several hundred hectares through its own effort.

Table 1.  Characteristics
Community IDABCDEF
  1. avoluntary charge

Characteristic of property
 Size of property (ha)10.961.04.2 4.3 9.4 100.1  
Loan characteristics Eco-loan
 Land costs (in $USD)81,61094,08340,53750,94977,375176,676
  Ratio of ELF fund in purchase 1.000.560.740.920.63 0.76
 Loan term (years)16.51614.5  14.5  1312
 Price/ha ($USD)7,5151,5449,56111,8768,1971,765
 Duration of loan process
Demographic of community
 No. of residential water meters (customers)300168300242550n/a
 Population served1,5007601,2001,2103,3002650
Characteristics of water supply
 Source of water (no. of springs)133104n/a
 Distance from community (km)74555n/a
Cost of water to members ($USD)
 Base monthly charge (+ cost/m3 additional) 4.61(+0.26)1.82(+0.09)2.27 (+0.04)3.07(+0.17)4.01(+0.20)n/a
 New connection fee236916413698n/a
 Avg. monthly use/home (m3)2020192022n/a
 Fee increase to pay eco-loan01.82/monthOne-time $196 a01.63/monthn/a
Exchange rate Dec. 20101$= 509.09 colones     

The six properties cost a total of $523,346 USD (ranging from $40,537 to $176,676 USD) for 190 ha (4.2–100.1 ha, respectively), with an average of $87,224 per property. The various ASADAS chose different mechanisms to support their loan capital repayment, including raising basic users’ fees (50% by E and 100% by B), levying one-time voluntary fee per meter (by C), or no fee change (A & D). Borrower F continued with their traditional, organized fund-raising through community events, such as auctions, annual agricultural fairs, bingos, and even local beauty pageants.

The borrowers collectively co-financed the purchases with $126,882, whereas NI's ELF financing totaled $396,464 (40% from private donations, 50% from private foundations, and 10% from public foundation). The customized loan terms ranged from 12 years to 16.5 years, with borrowers’ equity ranging from 0% (pilot loan to A) to 44% (community B). Payments were in fixed quarterly installments to simplify NI's recordkeeping. Exceptions were made for year 1 in consideration of the borrowers’ extraordinary legal and processing fees during the property sale.

Thus far, the repayment from the six borrowers has been entirely problem-free, on time, and without defaults. Repaid loan principal is reused to make more loans. Approximately 7% of the $396,464 loaned out to date was funded from previously repaid loan principal.


Eco-interest payment is divided into direct and indirect ELF activities. The former activities are structured, organized, and mostly coordinated with NI staff. The latter include both educational (with conservation themes) and semisocial public events, often attended by whole families and participants from neighboring communities outside of the ELF network.

Forest regeneration work included tree transplantation, wild seed collection, and germination. A list of native trees appropriate for the region was prepared by our NI biologist. The native seedlings and cuttings were obtained from the properties (those with remaining forest) or from nearby forests, or Nectandra's wild-seedling nurseries. A limited number of species were made available by ICE (National Electric and Telecommunication Agency). When the plantlets were ready for transplantation, outings including entire families were organized to plant the seedlings. Smaller work parties followed later to weed, irrigate (when necessary), and do general maintenance of the growing seedlings. ASADAS representatives and NI biologist jointly monitored transplanted trees for survival and growth. At regular intervals, photos of the reforested plots were taken from reference positions and angles to document forest regeneration. Organized bird counts on the properties were initiated recently for baseline determination of fauna indicators.

Monitoring and documentation of general waterways were also included. Interested homemakers and many school teachers in the eight women's clubs were trained to assist our NI's geographer to collect specimens for a 5-year baseline study of the state of water health in five specific creeks, using macroinvertebrate leaf packs and standard biochemical water analyses. The club members also organized various environmental educational activities for school-age children and recycling projects in the communities.

Youths from three communities formed Youth ASADAS with NI's help. Their activities ranged from advocacy work with local public agencies to global positioning system (GPS) mapping of the local water system and river clean up work.


An ELF program is an effective tool to promulgate forest restoration through local community stewardship, as an alternative to state-sponsored conservation. Its basic design includes a financial component to enable communal ownership, and a concomitant social and educational arm to engage participation by all stakeholders. Our results indicate that a high degree of grassroots participation can be motivated through building awareness of the importance of tropical forest to the health of the water supply.

Some of the initial questions were: How readily can ELF be used to recruit local communities to reforest/regenerate their local watersheds with native trees? Can community members of all age groups be engaged to participate in the eco-interest payment activities? Can the eco-interest loan repayments be used to semiquantify the communities capacities to accept, embrace, and integrate conservation as part of their communal and civic responsibilities?

There are several lines of evidence for ELF's acceptance and positive impact. First, the number of loan applications exceeded the capital available, without publicity. Second, the communities were eager to receive information through participation in NI's free, preloan training workshops. For every ASADA that eventually received a loan, five times that accepted invitations to attend the workshops primarily for its content. This was prior to the announcement of available loans. Third, the negotiations and discussions between lender and borrowers have been uniformly collaborative rather than adversarial. We believe this was due, in small part, to the source of capital funds (philanthropy) and in large part to the zero interest and NI's free services. The latter two clearly expressed NI's emphasis on equal partnership and the ultimate conservation goal—to give priority to the restoration of the earth's natural capital.

Financially, ELF also has advantages that may not be obvious. From the standpoint of the donors’ contributions to the capital fund, the co-financing by the communities represent a 20–25% increase in the purchasing power of their donation. As a revolving fund and not a one-time land-purchasing program, the purchasing power and duration of the money are amplified substantially through multiple lending cycles of the original capital. With the last decade's local currency depreciation of about 10–14% annually, the original capital as administered through ELF can be loaned out at least three or four times, tripling or quadrupling the value for each original philanthropic dollar contributed before it is completely depreciated. Thus far, the communities are paying back the loan principal on time and without defaults. Significantly, community leaders understand clearly that ELF represents a valuable community asset to be shared by all ASADAS and that any defaults from one would deprive other ASADAS from receiving future loans. In addition, the communities accepted the eco-interest payments without hesitation. Our estimate of many thousand of hours of both direct and indirect interest payment did not include the cost of material, transportation, tools, supplies, etc assumed by the communities.

While the concept of eco-interest was clearly understood by the borrowers, who negotiated the lists of manageable responsibilities acceptable to both loan parties, how well the borrowers deliver their eco-interest overtime would not be known for some time. However, the emerging trends appear promising.

The six borrowers’ actual conservation activities have been roughly inversely proportional to the forest cover (Table 2). For example, C and D are closer to urban centers, their watershed areas the smallest with no forest cover, and the land prices among the highest. Reforestation should be of highest priority. C & D did indeed put most of their effort (72% and 58%, respectively) into reforestation. Borrower A & B (10% and 20% property forested), spent less time (46% and 15%, respectively) in reforestation work. While these numbers cannot be statistically evaluated for the project's small scale and short duration, they nevertheless represent a trend in the appropriate direction.

Table 2.  Eco-interest
ASADA identificationABCDEF
  1. 1Activities with NI staff in person-hours

  2. 2Unstructured, educational semisocial ELF activities in person-hours

Size of property (ha)10.961.
Property's forest coverage (%)102000060
Eco-interest paid in resforestation
 Native trees transplanted1,8763256043750250
 Native seedlings grown in nurseries7012531821500
 Total trees2,5773509225900250
Direct eco-interest (%)1
 Watershed restoration2606(46)61(15)373(72)146(58)0(00)212(62)
 Monitoring & documentation2291(22)64(16)83(16)38(15)0(00)24(7)
 Educational1 & advocacy2365(28)253(63)50(10)66(26)64(67)29(9)
 Planning sessions248(04)21(05)13(3)3(1)31(33)75(22)
 Total man hours21,310(100)399(100)519(100)253(100)95(100)340(100)
Indirect eco-interest2641,106914365834

In any land-buying scheme, price speculation is a worry. In several cases, the land owners were from the same community, sharing the same concerns regarding water supply, hence were willing to not overcharge. By not being involved in the purchase negotiations, NI respected the roles of the ASADAS’ representatives and of the property sellers to make transactions/decisions and at the same time minimized NI's effect on speculation.

Ecologically, environmentally, and socially, the eco-interest paid has been substantial. Nurseries have been established, some 3,400 trees were transplanted as a start, entire segments of the communities not previously involved (women, youths, and children) are now participating in conservation, education, data collection, and monitoring activities. These individuals are and will be contributing to the continuance and future of the program. While it is too early to gauge the success of the reforestation program with the native tree seedlings, it is clear that potential inaction on the borrowers’ part might slow the forest regeneration, but not prevent it. The average 14.4-year loan term may seem short. However, it is long enough for most seedlings to grow to legal tree size (15 cm in girth at 1 m above ground). Trees are legally protected by Costa Rican conservation laws, which forbid logging and land-use change from forest to other uses.


Looking ahead, NI has started engaging other organizations in Costa Rica about the possibility of eco-financing initiatives in their respective areas of action, i.e.,“to clone” the loan program. As a conservation tool, ELF in Costa Rica has many advantages: (1) ELF loans are in demand. (2) Communities can be motivated if the incentives match their needs. (3) ELF loans affect every member of the water association, whose approval put the strength of the entire community behind it. A yes vote is a pledge by each to reforest and restore a piece of legally titled property in Costa Rica. (4) ELF loans are agreements between private parties. As common legal contracts, they are readily understandable by the average adult, can be easily arranged by civil attorneys, and thus far, are noncontroversial with governmental agencies, which have jurisdiction over various aspects of water administration, such as MINAET (Ministry of Environment, Energy, and Telecommunications), AyA (National Water and Sanitation Institute), and the respective municipalities. In fact, some of these same government agencies have provided free technical assistance with the formulation of restoration plans and have also donated trees for reforestation. (5) Loans are practical, universal legal tools. By the same token, eco-loans can be universal conservation tools, applicable anywhere and under most cultural conditions. The specific terms of the loans, including the possibility of low interest, are negotiable and the variables can be customized to each and every situation, for both the lenders and the borrowers. Reaching an agreement gives both parties equal footing pre- and postnegotiation, an important factor in forging good working relations. In fact, we feel the ELF concept can be easily replicated by any organizations (nonprofits, for profits, individuals, banks, corporations, cooperatives, etc) and anywhere in Central America, where some 24,000 water boards are distributed across six countries (FANCA 2007). Last but not least, ELF recruits citizens into grassroots conservation work on their own terms, yet legally obligates whole communities to regenerate native forests with their own resources during the loan term, and to maintain them in perpetuity.


We gratefully acknowledge financial support from the blue moon fund, The Corridor of the Clouds Fund from Tides Canada, Anonymous Foundations A & B, and donors of Nectandra Institute. Advisory and technical discussions from Ann Gallie and Dougal McCreath are much appreciated.