The Missing Middle in Agricultural Finance: Relieving the Capital Constraint on Smallholder Groups and Other Agricultural SMEs

This paper examines reasons for the missing middle finance gap in agriculture, and recommends a multi-track approach to resolve it.

The unmet needs for finance of producer associations and other small and medium enterprises in agriculture requiring mid-sized loans constitute the missing middle. Promising initiatives rely on combinations of actors, playing to their respective strengths. To solve the missing middle gap:

• NGOs with a financial focus can create linkages between financial suppliers, producers and buyers;
• Multilateral donors can sponsor financial sector reform programs;
• Donors and international financial institutions have initiated innovative financing mechanisms;
• Alliances between commercial banks and non-financial distribution networks have been forged;
• Socially responsible investors have been important in fair trade transaction financing, either directly or in conjunction with banks;
• Foundations and socially-oriented banks are offering guarantees to encourage commercial bank confidence in agricultural sector profitability;
• Poverty-focused NGOs have explored possibilities of building capacity in small-scale producer associations and brokering linkages to formal sources of finance.

There is a need to work with the private sector to remove frictions and improve balance between risk, cost and return, in order to achieve scale.