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Seven Takeaways from CGAP’s Live Online Chat on Smallholder Families

Making the business case for targeted financial services
Women in agriculture, Bangladesh. Photo credit: Mahfuzul Hasan Bhuiyan, 2016 CGAP Photo Contest.

On February 9, 2017, CGAP hosted a live chat on the business case for targeted financial services for smallholder families. The chat, hosted by CGAP with financial industry leaders attending CGAP's learning event in Dar es Salaam, was part of a series of online chats on innovative financial solutions to reach low-income customers. Guest speakers Joseph Ndoboli, agricultural head of Uganda Telecom (UTL)'s mobile money M-Sente, and Howard Miller, senior consultant on financial inclusion at Nathan Associates, answered questions about their practical and research experience in serving smallholder families.

Ndoboli shared UTL’s experience in reaching the rural poor through its mobile money platform to handle bulk payments to smallholders who are producing coffee and sugarcane, while Miller discussed emerging lessons from the unique dataset collected by CGAP from interviewing smallholders in Tanzania, Mozambique and Pakistan to better understand their financial lives.  

Source: CGAP Financial Diaries of Smallholder Families

If you missed the online chat, here are the main highlights from the smallholder session: 

1. New research on financial behavior provides insights into the diverse financial needs of smallholder families.

A unique dataset developed by CGAP, based on interviews carried out with a sample of approximately 270 smallholder families in Tanzania, Mozambique, and Pakistan, provides a new way to segment smallholder farmers based on their financial behavior. Traditional approaches have offered a limited understanding of the complex financial needs of smallholder families.

Miller spoke about the possibility of using this new dataset to build an index of smallholder commercialization that would measure the relative importance of agriculture as an income generating activity within a given household. This commercialization index could in turn be used to segment smallholder households and to analyze the differences in financial behaviors between more and less commercialized households. Given that financial needs may vary across households with different degrees of commercialization, the index will enable financial service providers (FSPs) to design financial tools that are better suited to the specific needs of their clients.

2. Applying a gender lens to the financial behaviors of smallholders can help FSPs to work better with both sexes.

The data from the smallholder diaries provides important insights into the different ways in which men and women use financial services, Miller pointed out. For example, women in the sample were found to borrow smaller amounts than men, but women made more frequent and regular financial transactions, and were also generally more interested in savings products. Understanding the reasons behind these gender differences will better inform the financial services offered to male and female smallholders.

Miller further noted that the gender gap is not uniform across all countries. Data from the CGAP National Surveys of Smallholder Households indicates that the gender gap is less pronounced in Mozambique, Tanzania, and Uganda than in Bangladesh and Côte d’Ivoire, for example, where men are more likely to use financial services than women. A deeper look at the data reveals additional differences in types of transactions. For example, in Tanzania the types of transactions carried out by men and women are similar, whereas in Bangladesh, women play an active and vital role in household money management but have very few transactions with financial service providers.

Source: CGAP - Through the Lens of a Smallholder 

3. Smallholder families rely on different financial tools to smooth consumption across agricultural seasons

Seasonal variation of smallholders’ income is a key challenge for smallholder families. Data from the smallholder financial diaries is providing a greater understanding of the tools available for smallholder families to help smooth consumption. Miller highlighted the data from the sample in Pakistan which shows that even when household income is negative for two months during the year, families still manage to consume as much as they do in better months. They are able to do so by relying on credit, savings, family and friends, and even sale of liquid assets.

4.  Insurance linked to loan products could help providers deal with covariant risks.

When financial service providers work with smallholder families, they face covariant risks. These are risks that arise when most households within a region are adversely affected by a major weather event or other market shocks (such as unexpected price shocks affecting particular crops that are predominant in a region).

Could insurance play a role in managing covariant risks in agriculture? According to Miller, there appears to be latent demand for insurance which could offer opportunities for providers to link insurance with loan products. For example, a company is working on a microinsurance product that would allow financial service providers to accept lower loan repayments in case of adverse shocks and receive compensation from the insurance company.

Participants also stressed the importance of good portfolio management to limit the overall exposure to agriculture, robust loan origination and monitoring systems, and well trained loan officers who understand smallholders’ cash flows.

5.  An important step in financing agricultural value chains is choosing the right value chain.

According to Ndoboli, one of Uganda Telecom’s (UTL) key considerations in choosing to focus on coffee and sugar farmers was the annual volume of production and the large number of farmers engaged in the value chain. Operational considerations were also important in the decision-making process. For example, UTL was interested in working with value chains that were well-organized and had administrative structures in place, making it easier to forge partnerships. UTL also saw the opportunity to introduce digital financial services given that the payment system of the value chain was predominately cash-based and there was an interest among value chain actors to digitize.

6. Partnerships and additional products can help manage the liquidity challenge in rural areas.

In order to mitigate the liquidity challenge, UTL has partnered with an agent financing entity that extends credit to rural agents during the bulk payment season. The institution also offers additional products to bulk payment beneficiaries enabling them to use the e-value for savings and payments, including insurance premium payments, school fees, airtime top-up, and bill payments.  

Source: CGAP - Digital Rails: How Providers Can Unlock Innovation in DFS Ecosystems Through Open APIs

7. Open APIs (application programming interfaces) and knowledge sharing can drive future innovations and growth.

In their final remarks, the guests responded to a question by moderator, Stella Dawson: “What was your 'Aha!' moment during this CGAP event that is changing your approach?” The guests emphasized two things: the opportunity for open APIs to drive innovation and the importance of learning from the experiences of others. Open APIs are contracts that make it possible for different companies' software programs to interact with each other.

“I think the real 'Aha' moment for me,” said Miller, “was hearing about the potential for open APIs in financial inclusion. We've been doing a lot of work around fintech in India, and are starting to see the shoots of what an open API ecosystem can achieve in terms of innovation and competition. But speaking to people here, it's clear just how big the opportunity is for a paradigm shift in how banks, telcos, fintechs and others could work better together if their technologies were better able to talk to each other.”

“With my commercial background,” Ndoboli added, “I was very excited by the fact that it is possible to create a relevant business case for my organization around smallholder farmers that has both social and economic benefits for all players. As a business, the goal is to create sustainable business models that have a positive impact on the lives of smallholder farmers given that 80% of Uganda's population is involved in agriculture. It was also very fulfilling to learn from all the participants that traveled from different parts of the world each bringing a unique but very compelling experience that can inform my business decisions going forward.”

Learn more about Smallholder Diaries:

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