Meeting the Financial Needs of Agricultural Families
With an estimated 2.5 billion people living in 500 million smallholder farm households in the developing world, agricultural production plays a powerful role in poverty reduction. A new paper by CGAP, Segmentation of Smallholder Households, differentiates this large and diverse population of smallholder farmers into three segments determined by commonalities in how they engage with markets and how those markets are organized.
“Not all smallholders are the same and this paper signifies renewed momentum behind understanding the financial needs of various smallholder segments,” notes Michael Tarazi of CGAP. “The segments identified in the paper aren’t meant to be iron-clad divisions, but rather a starting point for recognizing common financial needs and goals and matching them with appropriate financial products.”
Smallholder households have complex financial needs that include achieving specific agricultural goals in addition to other objectives such as consumption smoothing and off-farm businesses. The relatively low population density of rural areas, the small size of most transactions, and the natural volatility of agriculture has made providing financial services to smallholder farmers challenging.
“Agriculture is by nature seasonal,” says Robert Peck Christen, co-author of the report. “Farmers in the same area generally want to borrow at the same time and are often undertaking the same activities. They are therefore exposed to the same risks, which creates challenges for financial service providers.”
Providing financial services for specific agricultural activities has proven challenging thus far, but the paper notes some promising opportunities that can fill the gaps between demand of smallholder households and the supply from financial service providers. Commitment savings accounts, for example, are practical ways to limit the accessibility of funds and target their use. Mobile phones are a powerful delivery channel for reaching large numbers of clients with a range of information at a low cost. More information is needed to better understand what products agricultural households find useful, but these models suggest potential offerings relevant to each of the three main segments CGAP identifies.
Access to finance remains a necessary – but insufficient – condition for improvements in agricultural production and reduction in poverty, according to the CGAP paper. To improve supply, a more precise understanding of how agricultural households differ and what is working in agricultural finance is a necessary first step.
Erin Scronce is Marketing Manager and Website Editor at CGAP.