How Digital Financial Services Can Meet The Financing Demands Of Smallholder Farmers
This post was written by USAID's Liz Diebold, Nandini Harihareswara and Harsha Kodali, and originally appeared as part of a blog series on digital financial services on Microlinks.org.
More than 1.5 billion people live on the world’s roughly 500 million smallholder farms that supply about 80 percent of the developing world’s food. But these farms are also home to the majority of people living in absolute poverty. Most smallholders lack funds to invest in their farms, and without inclusive market systems, they are unable to access financial tools and services. Evidence suggests there is a $430-440 billion shortfall in serving the global demand for smallholder finance.
In most countries, common approaches to meet this demand remain insufficient. As Kay McGowan mentions in her previous post, donors play a critical role in ensuring the creation of well-functioning financial systems. These systems must meet a wide range of needs (such as savings, credit, payment, and risk management), and serve farmers at scale in a financially sustainable way. Indeed, in addition to ongoing agricultural finance efforts supported by Feed the Future, the U.S. Government has added digital financial services (DFS) to its toolbox. It is also investing in mobile technology and information, communications and technology (ICT) platforms supported by Feed the Future and the New Alliance for Food Security and Nutrition.
DFS and Agriculture: Accelerating our Goals/Results
While DFS are not a cure-all, they can be a strong complement to current interventions. DFS are uniquely positioned to deliver financial products cheaply, mitigate risk for both providers and consumers, and provide efficiency and cost savings at transaction points. For example, DFS can:
- Make it easier for farmers to save for their future and ongoing expenses: Extending savings to smallholder farmers provides an increased propensity to invest in longer term outcomes and helps mitigate risk at the household level. For example, a study of a Malawi program, in which cash crop receipts were deposited into a mobile savings account, found that farmers in this group invested 13 percent more in inputs, corresponding to a 21 percent increase in crop value. An 11 percent increase in household consumption after harvest was also observed. Furthermore, digital savings products, such as M-Shwari in Kenya and M-Pawa in Tanzania, which currently offer interest-bearing savings accounts to about 4.5 million people, have demonstrated the ability for DFS to directly provide the poor with products for that they previously had no/poor access.
- Increase access to new and existing credit products: DFS can improve the risk proposition of offering credit products, specifically by increasing the level of information that a creditor has to make a lending decision. Products like M-Shwari and M-Pawa open the door to short term loans for financially underserved populations based on their demonstrated savings history. Since M-Shwari launched, 20.6 million loans totaling $277 million have been disbursed to 2.8 million unique borrowers with an average loan of $15. To put this in perspective, just 700,000 people had a personal bank loan and 310,000 had a microfinance loan in Kenya in the same period.
- Increase farmer household resilience: Partners providing a weather-indexed microinsurance product called Kilimo Salama (“Safe Agriculture”) found that offering crop insurance as a digital financial product increases smallholder access to this important product and lowers provider costs in reaching them. In 2013, this product also opened the door to $8.4 million in loans to more than 175,000 farmers and saw these farmers earn 16 percent more than their uninsured neighbors.
- Enable farmers to buy the inputs they need when they need them: This is reflected in evidence from Kenya, in which mobile money users, including not only savings but digital payment services and checking accounts, applied significantly more purchased inputs, leading to a 35 percent higher profit per acre of production than non-users. In this case, DFS enabled lower transaction costs between value chain actors, which led to greater quantities of inputs purchased.
- Address the needs of women: DFS have been proven to alleviate some challenges that are of particular relevance to women, including physical access to markets and the insecurity of carrying large amounts of cash. A study on digital social cash transfers in Niger showed that the m-transfer mechanism allowed women to temporarily conceal the arrival of the cash transfer from their husbands, enabling them to discuss the uses of the transfer at a more “private” time. Additionally, digital social cash transfers empowered women in intra-household decision making. It also made women feel more secure to travel and purchase household items.
While the Opportunity Is Great, Challenges Remain
While evidence suggests that DFS can help alleviate some of the key issues affecting smallholder farmers, especially women, we recognize that there are obstacles to achieving results overnight, such as low mobile access/ownership rates, insufficient agent liquidity, and low financial and technological literacy. However, there are products and programs that are seeing success in rural areas. Often they are still in their early stages, so we are eager to learn from them and to continue promoting innovation to achieve full financial inclusion for smallholders. We also hope, with the release of the Procurement Executive Bulletin discussed in Fernando Maldonado’s recent post, that more innovative examples of how DFS can advance our agricultural objectives will be discovered.
DFS is one more important tool in our agriculture finance toolbox, and it is therefore important that USAID staff and partners who contribute to our work in Feed the Future understand how to use DFS to empower smallholder farmers and accelerate results under our agricultural objectives. We are excited that one of our flagship partnerships within our Portfolio Acceleration initiative, a new collaborative effort between the Bureau for Food Security and the Global Development Lab, is exploring opportunities to deepen the understanding and implementation of DFS solutions that can accelerate existing Feed the Future goals and targets.