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Banking on Growth: How Finance Institutions Can Close the Smallholder Finance Gap

A sector having undergone exceptional growth in the last few decades, microfinance has brought financial service access to previously unreached communities around the globe. Urban poor, in particular, have reaped the benefits of this shift by starting and growing small businesses and managing income shocks with greater flexibility. Though smallholder farmers comprise the largest group of the global poor, available credit meets less than a sixth of their estimated $200 billion in financial needs. Improving access to high quality seed, fertilizer and other agricultural assets can increase yields, but most farmers cannot afford the high upfront costs of these investments without access to credit.

Smallholder finance offers the single greatest opportunity for growth and impact in financial inclusion today, but strong interest across the sector has not yet translated into more credit for farmers. Despite this growth and impact opportunity in untapped rural markets, a combination of operational cost and perceived risk has prevented the majority of financial institutions from financing them. Of 900 banks surveyed in Sub-Saharan Africa, only 95 provide smallholder financing.

Successful credit provision in rural settings means adapting the microcredit models originally designed to cater to small businesses in densely populated urban and peri-urban areas. While smallholder finance remains somewhat a niche market, the innovations of some leading organizations have provided useful lessons. There are three specific ways institutions have evolved to make services work for farmers. First, they reduce risk by offering services that foster greater farmer returns on investment. They also trial creative approaches to credit provision, solving traditional rural lending challenges. Finally, by sharing best practices, they enable more rapid scale and the implementation of new products.

Reduce Risk by Increasing Farmer Returns 

Though there are many low-tech farming methods smallholder farmers can adopt to improve their harvests, many farmers have been slow to adopt them. Trainings on simple improvements like seed spacing and fertilizer dosage as well as improved access to markets and buyers help farmers increase their farm productivity and harvest profits.

Opportunity International’s (OI) agriculture finance program links farmers growing cocoa, maize, onion and chili with credit and access to extension services. Extension officers visit loan clients in their fields to promote best practices in crop planting and maintenance and troubleshoot in cases of poor crop health. This type of access to agronomic advice and education is key to improving production. The "holy grail" is a service delivered efficiently to keep costs low enough to maintain affordable loan prices for farmers and sufficient margins for the lender. OI has experimented with different methods of extension service to address this challenge, ranging from direct employment of extension officers to partnerships with government extension programs or local agro-dealers who are also able to offer client training and support. 

Following harvest, farmers often struggle to get their crops to market, find a buyer for their crop, or sell their crops at favorable prices. VisionFund International (VFI) improves the sales prospects for its clients first by providing clients with recommendations on crop varieties experiencing high market demand. Farmers receive loans to purchase quality seed and fertilizer and, following harvest, sell through collectives formed by VFI to leverage bargaining power for better prices. Market access support requires constant adaptation, as market conditions and policy environments can vary drastically from one season to the next.

Get Creative with Credit Provision

For many farmers, loans in the form of cash do not solve the problem of transporting purchased farm inputs from urban markets to their rural farms. The short loan tenor and rigid repayment schedule of a traditional microfinance loan does not match their lumpy, seasonal cash flows. Repayments due during harvest time may also force farmers to sell their produce when prices are lowest. Asset-based financing and extended, flexible loan terms are two innovations that meet the unique financial needs of smallholder farmers.

Since inception in 2009, Juhudi Kilimo has provided loans to over 25,000 Kenyan clients for assets such as dairy cows, milking cans, water tanks, poultry, greenhouses and biogas digesters. Such asset loans require more upfront research to select assets that are in demand and will provide the highest return on investment for farmers. Providing the well-informed recommendations to clients is important for long-term loyalty and trust in an institution’s advisory services.  

In Cambodia, Agora Microfinance launched their Credit Product line after carrying out cash-flow surveys in client households. The loan’s term extends across two harvest seasons, allowing a client to draw disbursements from an approved amount in as many or few tranches as they prefer. Repayment is similarly flexible, with no penalties for early payment. After 10 years of high performance, this loan has grown to represent over half of AMK’s rural portfolio, proving increased flexibility does not necessitate increased risk. 

Share Best Practices to Rapidly Implement and Scale Solutions

Though institutions providing smallholder finance are still a minority in the sector, their collective experience provides a wealth of lessons. There are several examples of public and private actors working collaboratively to ensure this knowledge is diffused. 

One Acre Fund is excited to be a part of Propagate, a recently launched coalition of smallholder finance practitioners. Its call to action aims to lower barriers to entry to deliver smallholder financing, enable growth through the attraction of appropriate investment, and create partnerships to drive innovation in smallholder finance services.The coalition is working to serve as a rallying point for other institutions supporting the growth and development of smallholder finance and is seeking new partnerships to accelerate growth in the sector.

The Council on Smallholder Agricultural Finance (CSAF) is an alliance started by seven social lenders with a focus on facilitating market entry to increase agricultural lending to smallholders and agricultural businesses. Members commit to socially responsible lending principles and environmental standards for which they submit metrics data for evaluation each year. In 2015, CSAF disbursed $597 million to businesses sourcing from 2.1 million farmers. The coordination and reporting of this lending across 66 countries has enabled others in the sector to understand growth opportunities and gaps in the sector.

From the vantage of the average farmer, options for loans and other financial services are still not easy to find. Though relatively few, many smallholder finance providers are taking important steps forward to change this reality. By adding options for training, input and market access, they’re making agriculture lending less risky and more impactful. Creative credit provision models are injecting new energy into the sector and meeting client needs while maintaining strong portfolio quality. By finding new avenues to collaborate and share information, they’re making it easier for other institutions to try new approaches to lending. Perhaps in the not too distant future, when that same farmer sits down to consider her choices for an upcoming season, she’ll have a wealth to choose from as a result of these concerted efforts.

Cher-Wen DeWitt is a microfinance partnership analyst at One Acre Fund.