Bridging the Finance Gap for Smallholder Farmers
This post was written by Jane Abramovich and Matthew Foerster of TechnoServe.
Alice Obwona (right), chair of the Kidere Village Savings and Loan Association in northern Uganda, oversees a meeting of participants in the group.
One of the biggest challenges for smallholder farmers is gaining access to finance that can help them grow their business. In fact, according to a recent Dalberg report, local banks in developing countries currently supply just three percent of the total estimated financing demand for smallholder farmers—a huge gap in the market.
While social lenders, microfinance institutions and many commercial lenders have made trailblazing efforts to expand financial inclusion for rural smallholders, their reach remains limited. This is where informal groups—savings and credit cooperatives (SACCOs), rotating savings and credit associations (ROSCAs), and others—play a critical role in rural communities, allowing farming families to not only save, but to access much-needed capital. In certain countries, the percentage of the rural population accessing services through informal financial institutions is actually two or three times that of those using formal bank providers.
Based on our work around the globe to increase smallholder farmers’ access to finance, TechnoServe has gained key insights into the ways that informal financial institutions operate most effectively with smallholders. For example, as part of the East Africa Dairy Development program, we helped farmer business groups introduce informal savings and credit services, allowing members to obtain loans from pooled savings and build their asset base. Similarly, in Project Nurture, a program working with mango and passion fruit farmers in Kenya and Uganda, TechnoServe shifted its initial strategy from commercial banking solutions to supporting existing and new savings and credit cooperatives (SACCOs).
For smallholder farmers and farmer organizations that require more sophisticated financial products or larger amounts of capital over time, informal financial institutions can serve as a stepping-stone for their members to graduate to commercial financing. By building a history of prompt loan repayment, smallholders can improve their overall creditworthiness and send a positive signal to commercial lenders.
But we know access to finance alone is insufficient for promoting agricultural growth and development. Providing credit is rarely the optimal first step in supporting smallholder livelihoods. Instead, farmers first need assistance quantifying their production yields, understanding price formation and determining break-even points. To accomplish this, TechnoServe has developed simulation-based financial literacy trainings. These and other best practices are documented in our guide to working with informal financial institutions.
In order to capitalize on the potential of savings groups, greater investment is needed to build their capacity, including improvements in operational efficiency, strategic planning, product innovation and embedding technology solutions where possible. Stronger connections to formal financial institutions also would help to expand opportunities for smallholders who need more advanced credit and risk management products. Informal financial institutions remain the first, last and only source of capital for millions of smallholders, and they will continue to play a critical role in serving the hardest-to-reach and least-organized farmers.