The demand for smallholder financing is staggering. Over 270 million smallholder farmers in the regions of Latin America, sub-Saharan Africa, and South and Southeast Asia require over USD 200 billion in financing to grow their businesses and improve their livelihoods.
But this demand is largely unmet; formal financial institutions and value chain actors meet less than a sixth of this need. Today the Initiative for Smallholder Finance released the joint publication Inflection Point with the Rural and Agricultural Finance Learning Lab – an initiative of The MasterCard Foundation jointly implemented by GDI and Dalberg – that explores new sophisticated approaches to meet this need. The study finds that doubling the industry’s projected annual growth (from roughly 7% to 14%) would allow these providers to meet more than half the need by 2025.
We looked closely at what it would take to change that growth trajectory and came away with a strong sense that while it’s not easy, it is possible. But meaningful progress will require a concerted effort across the smallholder finance ecosystem, driven by a higher level of collaboration than we’ve ever seen before.
What has changed in the era of “farmer finance”?
In talking to nearly 80 different organizations for this study, we saw a significant change in what we call the era of “farmer finance.” With increasing measures of coordination across the smallholder finance sector, we’re seeing a new level of sophistication emerge in the industry.
The landscape has dramatically evolved even in the past four years since Dalberg published the 2012 report Catalyzing Smallholder Agricultural Finance. Following decades of more singular approaches to providing smallholder farmers with financial services, the smallholder finance industry is now marked by a more diverse set of actors – financial service providers, funders, market and research platforms, and technical assistance providers – yielding new approaches to collaboration and greater access to information and technology than ever before.
So given these shifts, what are we seeing as the biggest opportunities for unlocking smallholders’ access to finance? Let’s break it down into these three approaches: customer centricity, progressive partnerships, and smart subsidy:
- Customer Centricity
Financial service providers must fundamentally change how they engage with clients to better understand who their clients are, and to design offerings and interactions that increase demand and reduce risk. In short, smallholder farmers are not going to use financial products that do not take their distinct needs into account. Putting the customer at the center will boost financial inclusion, but also will improve business model sustainability of financial service providers and others.
One example of customer centricity in action is the way that Opportunity International and One Acre Fund have been able to drive adoption of financing and overcome farmers’ aversion to risk by bundling loans with financial literacy training and/or extension services that these farmers require. Not only do farmers receive the financing they need, they also get financial training that teaches them how to use their finances effectively. This has resulted in building a strong reputation with other local farmers, guaranteeing market access and has also increased the marginal returns on capital.
- Progressive Partnerships
Progressive partnerships, such as those between financial institutions and value chain actors, can enable cost and risk sharing. Ultimately, this reduces the need for direct subsidy of services and thus increases smallholder financial access and reach.
One type of progressive partnership we’re seeing, is those between community-based groups – an important provider of financial services to smallholder farmers – and formal financial institutions. Formal financial institutions benefit from community-based groups’ ability to access a segmented group of customers, strong customer relationships, and historical data on their customers. In turn, this partnership allows community-based groups to benefit from improved systems and capabilities, increased levels of return on savings, higher profit margins, and even loan capitalization.
- Smart Subsidy
Lastly, the study finds that support from more and smarter subsidies can draw much-needed capital into the sector through blended capital models, where public or philanthropic funds enable the entry of investors seeking market-returns. To target these subsidies effectively, stakeholders must consider whether the subsidy required is catalytic or ongoing, and whether the business constraint targeted is risk or cost.
One example of a well considered approach to smart subsidy is The MasterCard Foundations’ rural finance portfolio. The MasterCard Foundation has become very disciplined in developing and launching initiatives with a clearly defined grant making strategy and research agenda. The MasterCard Foundation complements their grant making services with targeted learning goals for the sponsored initiative to achieve. Alongside this example of grant funding we need to start innovating new ways of attracting larger corporate and commercial funding for a more significant growth in the space.
The current era of farmer finance is at an inflection point, requiring new (and intentional) collaboration if we hope to serve millions of smallholder farmers and their families. We’re proud to be a part of this transformative point in time where we can truly change the trajectory of the industry. In an increasingly engaged and dynamic community of practitioners – each of us have a key role to play in expanding access to finance for smallholder households and we hope that you’ll join us.