Facilitating Access to Credit for Smallholder Farms in Post-Conflict Areas
This post is by Eric Lakoussan, Market and Value Chains Manager, Food Security and Inclusive Access to Resources for Conflict Sensitive Market Development (FARM) Program, Mercy Corps; Nicholas Meakin, Senior Advisor, Digital and Financial Inclusion, Mercy Corps; and Nadia Pinter, Economic Development Intern, Mercy Corps.
Agricultural growth is one of the most powerful tools to help end poverty, yet smallholder farmers across sub-Saharan Africa still face considerable barriers to achieving higher agricultural productivity, especially in areas characterized by high levels of insecurity. Mercy Corps’ Food Security and Inclusive Access to Resources for Conflict Sensitive Market Development (FARM) program sought to alleviate challenges for smallholder farmers in accessing and using financial services to increase quality and quantity of their production. FARM is a four-year stabilization program (April 2017 to April 2021), funded by the Dutch Embassy with the objective of improving the security and socioeconomic conditions of more than 44,000 households in North Kivu in eastern Democratic Republic of the Congo.
FARM initially implemented a credit provision model based on the traditional nongovernmental organization assistance practice of linking farmers with microfinance institutions. However, this direct method places stress on smallholder farmers; without additional systems change or farmer support, default rates can be high. In addition, microfinance institutions may not establish long-term lending relationships. FARM’s pilot provision model sought to improve economic stability by involving the private sector to a greater extent by leveraging existing supply chain relationships. Through this arrangement, farmers faced less risk. They were able to access inputs such as land, certified seeds, and market entry, to realize a significant increase in production quality and quantity.
Challenges in direct credit provision
In general, financial institutions are reluctant to establish a presence in North Kivu due to perceived risks related to agricultural production, the unprofitable operating costs of opening a branch and the volatile insecurity in the region. Furthermore, smallholder farmers do not have sufficient assets for use as collateral; they lack experience and understanding of formal financial services; and they find most formal credit products unaffordable and not suited to their seasonal cash flows and needs. FARM implemented two different models of credit provision in partnership with the Equity Bank.
The first model is the more traditional in which producer organizations (POs), cooperatives composed of smallholder farmers, accessed and managed loans from Equity Bank directly with assistance from FARM. This assistance included the establishment of a loan guarantee fund (LGF) to cover the risk of default by the POs, as well as support to POs to improve their organizational and technical capacity. However, this type of assistance often faces challenges in facilitating sustainable connections between POs and financial institutions. Direct models such as these often see POs accessing credit during the program, but once the LGF fund has finished, they are unable to access further credit.
Bon Marche credit provision model
In conjunction with the direct model, FARM piloted a second model that lessened the risk for POs to default on loans, as well as encouraged more participation by the private sector itself. FARM linked POs to "offtaker" Bon Marche, a private maize flour processing company who effectively acted as a broker between the POs and Equity Bank. Bon Marche received credit from Equity Bank and used part of this credit to provide POs with in-kind loans consisting of access to land, certified seeds and ploughing services. Bon Marche received in an agreed volume of harvest from the POs at market price. At the point of purchase, Bon Marche made deductions for the services provided against the harvest payments to the POs.
By connecting these cooperatives to Bon Marche, it was hypothesized that a more sustainable partnership would create a guaranteed market through which POs could sell their products and that the processing company would benefit by receiving a fair price on the maize they acquired. For this model, FARM’s assistance offered capacity-building for both the participating POs as well as Bon Marche to ensure an optimal partnership for both groups. A separate LGF was established for this model by FARM, but at a significantly lower cost than that which was in place for the initial provision model.
Implementation of the model
To implement the credit provision model, FARM carefully selected which POs should participate, and then provided capacity building support to the POs to ensure they benefited from the partnerships with Equity and Bon Marche:
- FARM scored POs across a number of factors, including internal governance, access to market and their reputation within the community.
- FARM worked closely with the POs to improve their organizational capacity, agricultural productivity and access to market, and outlined a division of responsibilities between FARM and Bon Marche.
FARM also provided support to the POs to help them manage the risks associated with partnering with Equity and Bon Marche.
Identifying and supporting producer organizations
To identify POs most likely to benefit from participating in both models, FARM scored them across a number of factors, including internal governance, access to market and their reputation within the community. To enable these POs to successfully participate in the partnerships with Equity and Bon Marche, FARM worked with Bon Marche to improve the POs’ organizational capacity, agricultural productivity and access to market to ensure that they were able to fulfill their obligations and benefit from the partnerships put in place. Sharing the capacity-building responsibilities between FARM and Bon Marche reduced the burden on FARM and ensured that learnthe support services were provided in a more market-oriented and sustainable manner.
Risk assessment and mitigation
It was important to help the POs to mitigate the risks they face as effectively as possible. To mitigate risks, FARM trained government extension service providers to supervise POs and to provide advisory support to ensure that POs met Bon Marche’s expectations in terms of quality, price and timing of their harvest supply. FARM also led the creation of the contract agreement between the POs and Bon Marche and ensured that the agreements were fair and equitable for both parties. FARM organized periodic governance meetings between POs and Bon Marche to discuss any issues encountered during their collaboration.
Outcomes and observations
Through the loan received from Equity Bank, Bon Marche was able to provide services to 168 smallholder farmers (including 64 women). This support included access to land, ploughing services, and high-quality, certified seeds. Bon Marche used the remainder of the loan amount as working capital to run its factory.
All participating producer groups respected their commitments to Bon Marche at the end of the harvest, thanks to the close monitoring system set up by FARM in collaboration with the local public extension services and Bon Marche technicians. Bon Marche was able to repay the loan in full, in contrast to the direct credit provision method, which suffered from some POs defaulting on their loans.
In the course of designing and implementing the two models of credit provision, the FARM team learned a number of valuable lessons. POs are not a homogenous group. FARM observed three types of farmers; subsistence farmers income-generating farmers, and commercial farmers. Each group has differing objectives, needs and constraints, suggesting some key implications:
- An assessment of POs is required to ensure services are designed or adjusted to meet their needs and capacities. Weaker POs may also benefit from further assistance to improve the resilience and food security of their member smallholder farmers, before introducing them to formal credit. FARM helped smallholder farmers to form savings groups through which they have built their savings and supported income-generating activities. The building of assets and diversification of income sources can increase farmers' resilience in times of agricultural production failure and enable them to meet any loan obligations they may have.
- The partnership with Bon Marche proved a very effective way of providing smallholder farmers with a bundle of services and a guaranteed market, while reducing the risk of default and the level of assistance required from Mercy Corps. On the whole, this model, rather than linking POs directly to a financial service provider, is likely to be particularly suitable for POs with limited capacity. Because much of the support was provided by Bon Marche rather than FARM, this model fits more closely with a market systems approach and should prove more sustainable in the long term.
- Even with the LGF in place with the model of direct credit provision, POs required a lot of assistance to develop the organizational and agricultural capacities and market linkages needed to ensure they were able to access, manage and reimburse the loans. This model is likely more suited to stronger POs with better managerial and technical capacities. These POs are more likely to continue to receive credit from Equity Bank even when the LGF ends.
- LGFs tend to face a common challenge of achieving significant additionality (the value of loans that were granted that otherwise would not have been granted without the LGF) and sustainability (the extent to which lending continues once the LGF is removed). The experience of FARM may indicate that there is a trade-off between the two. As with all market systems approaches, the aim is to ensure that the results of the intervention emerge from lasting changes in the market system itself, and are not just a temporary response to the activities of the program.
 This product offered a competitive interest rate (1 to 1.67 percent per month) and an appropriate loan amount (up to $5,000 per PO). It required only one repayment at harvest time rather than the traditional weekly payments
 Equity agreed to a coverage rate of 21 percent of the loan amount, with Bon Marche pledging monthly rental income from a property as collateral to cover the outstanding loan amount.