Farmers in the Philippines. Photo by Froi Rivera, 2017 CGAP Photo Contest.
Small family farms are the basis of agricultural production in developing countries, and according to the FAO, 80 percent of these countries’ food comes from smallholders. However, as important as this sector is, it still faces many challenges, especially funding. The financial sector still struggles to find a viable strategy to reach and support small producers. As part of this year’s European Microfinance Week, Hannah Siedek of the European Investment Bank will moderate a session that highlights successful and potentially replicable examples of small farmer financing. Alterfin, CGAP and Ugandan financial services provider Pride Microfinance will share their experiences in this panel.
There is a long list of reasons why supporting smallholder farmers is an imperative if we seek poverty reduction:
There are about 500 million smallholder farming households globally, amounting to upwards of two billion people.
These two billion people comprise a large proportion of the world’s poor living on less than $2 a day.
Estimates show there will be 30 percent more people living—and eating—in the world in 2050 than there are today. With much of that population growth coming in Africa and Southeast Asia, the role of the regions’ 450 million smallholder farmers will be more critical than ever.
Today, even promising approaches to expanding smallholder lending, such as value chain finance, are reaching fewer than 10 percent of smallholders, primarily those in well-established value chains dedicated to higher value cash crops.
The picture is clear: there are many smallholder farmers, they are ubiquitous, they are very poor, and we depend on them for food production in the future. But we have not found a way to lift them out of poverty and support their struggle.
Agriculture has not been an easy nut to crack for the microfinance industry. For years microfinance institutions (MFIs) have tried to develop the right products, put in place the right delivery channels, and find the right kind of loan officers to not only conduct the credit analysis but also advise on farming techniques, the use of chemicals, etc. However, many financial intermediaries in Africa shy away from agriculture since they believe they are not able to cope with the challenges posed by agricultural lending.
So how could funders help to crack this nut?
Find ways to share the risk, not just funds
For many years the microfinance industry has discussed agriculture’s higher risk profile. Funders are often eager to allocate resources for agriculture; however, many MFIs do not actually require funds, but would be much better served with risk-sharing instruments, such as guarantees.
An increasing number of technology applications are being designed to help manage risk in agricultural lending. Some institutions are experimenting with agricultural scoring, which takes into account the farmer’s produce, value chain, land surface and experience. Other institutions have introduced banking agents (retail outlets in rural areas processing deposit and withdrawal transactions on behalf of MFIs), which can help reduce arrears since farmers don’t need to travel far to deposit their loan repayment. Funders could help by seeking out and investing in different technology solutions that address the specific needs and risks of agricultural finance for smallholders.
Fine-tune Environmental and Social Guidelines (ESGs)
Funders also need to better adapt their Environmental and Social Guidelines (ESGs) to the actual conditions in the countries the institutions operate. ESGs are an important tool for ensuring the environmental and social sustainability of funded projects by protecting people and their environment from potential adverse impacts. In agriculture, for example, they aim to keep kids in school instead of working in the fields, ensure proper treatment and conditions for farm animals, promote sustainable irrigation practices, and avoid excessive use of chemicals on fields.
By now, almost all funders have their own ESGs for agriculture, with varying degrees of strictness. However, over the last few years, ESGs have become increasingly stringent, making it very challenging for MFIs to comply with funders’ requirements. Funders should review their standards to make sure they can actually be met in the developing country environments where they will be implemented, since often even here in Europe we are not able to live up to such standards.
Ask the hard questions
The question becomes - What kind of compromises do we need to make between our desired perfect world and the realities we face when supporting agriculture? Do we need to invest more time to accompany institutions to improve their agricultural lending practices? Do we need to provide more technical assistance to help MFIs work on their own ESGs? Or do we need to find alternative ways to support agriculture? Maybe microfinance alone is not the solution. Maybe we need to work with different actors, such as off-takers and input providers, to have a greater impact on smallholders’ quality of life.
These are just some of the difficult questions we need to consider on what kinds of compromises we can accept (if any) on best practices. We look forward to discussing these questions in the panel discussion “Go big by going small: serving the needs of smallholder farmers” at European Microfinance Week.
This panel will also present research by CGAP in Uganda which sheds light on the financial needs and behaviors of smallholder farmers, and we will hear from a Ugandan MFI about how they used the CGAP research in their operations, We will also discuss with a funder the challenges they have encountered supporting smallholder farmers. Join us for what promises to be a very interesting session!
By overlooking investment opportunities in smallholder finance in favor of serving less risky client segments that are easier to reach, investors are missing out on one of the greatest impact opportunities in financial inclusion today. What can financial service providers and investors do about it?