BLOG Category: microfinance
An inflection point in the era of “farmer finance” for the world’s smallholders
New study identifies innovative approaches to dramatically
change growth trajectory in smallholder finance
11, April 2016 - LONDON, UNITED KINGDOM
A new study, “Inflection Point: Unlocking growth in the era of farmer finance,” suggests that while current efforts to expand financial inclusion are not sufficient to meet smallholder demand, concerted efforts around customer centricity, progressive partnerships, and smart subsidy have the potential to change the sector’s growth trajectory to best serve the world’s smallholder farmers.
Currently, over 270 million smallholder farmers in 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. Formal financial institutions and value chain actors meet less than a sixth of this need today. Doubling projected annual growth (from roughly seven percent to 14 percent) would allow these providers to meet more than half the need by 2025. To achieve this, this study presents a bold call to action for financial service providers and other actors to engage closely with customers to design and offer appropriate, desirable products through integrated partnerships, supported by more and smarter subsidy.
The new study, released today by the Initiative for Smallholder Finance (ISF) and the Rural and Agricultural Finance Learning Lab builds on the 2012 Dalberg-conducted study Catalyzing Smallholder Agricultural Finance, which laid a foundation for understanding the size, nature and challenge of global smallholder financing.
In addition to presenting a more sophisticated picture of the state of smallholder finance, “Inflection Point” explains that we are undergoing a significant change in the era of “farmer 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. A wide range of financial service providers, funders, market and research platforms, and technical assistance providers have yielded new approaches to collaboration and greater access to information and technology than ever before.
Matt Shakhovskoy, Executive Director of ISF, commented on the inflection point within the sector: “In the past five years we have seen a new focus and resolve around tackling the smallholder finance challenge; our task now is to work with this momentum to fundamentally shift the current growth trajectory of models that are working.”
The study’s new research was led by Dalberg Global Development Advisors under guidance from ISF, an initiative incubated by the Global Development Incubator (GDI), and the Rural and Agricultural Finance Learning Lab, which is jointly implemented by GDI and Dalberg. The MasterCard Foundation and USAID sponsored the study.
The study emphasizes that meaningful progress will require a concerted effort across the smallholder finance ecosystem to simultaneously resolve a number of constraints hindering smallholder access to finance. Rewa Misra, Senior Programme Manager, Financial Inclusion at The MasterCard Foundation, said, “this report makes visible opportunities for change and will guide our thinking on how we can help unlock financial access for 48 million smallholders in Africa with services centered on their needs and demands. We look forward to continuing to collaborate with an increasing set of public and private sector stakeholders to help achieve the vision set out in this report.”
Drawing on interviews with representatives from nearly 80 different organizations and contributions from the study’s collaborative research group, the study shares insights on opportunities to close the financial inclusion gap in smallholder finance. The study demonstrates that the smallholder finance industry must move towards a future in which financial service providers – including formal financial institutions, value chain actors, and informal or community-based organizations – engage in three main areas of opportunity to unlock smallholder farmers’ access to finance: (1) customer centricity, (2) progressive partnerships, and (3) smart subsidy.
First, the study recommends that 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. Jason Wendle, Director of The Rural and Agricultural Finance Learning Lab, commented, "Financial solutions that do not explicitly account for the distinct needs of smallholder farmers tend to meet limited uptake and usage by those farmers. Customer centered approaches not only increase financial inclusion among rural and agricultural households but will also improve business model sustainability."
Next, the study recommends that 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.
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.
For more information, please contact:
Global Development Incubator, Communications Department
Malia Bachesta: firstname.lastname@example.org
The Initiative for Smallholder Finance is a multi-donor and investor platform for the development of financial services for the smallholder farmer market. The ISF’s primary role is to act as a "design catalyst." The emphasis is on mobilizing additional financing for smallholders and seeding replication of innovative models in new markets.
The Rural and Agricultural Finance Learning Lab fosters knowledge creation, sharing and collaboration that leads to better financial solutions provided to more smallholder farmers and other rural clients. The Lab is an initiative of The MasterCard Foundation pursuing a learning agenda that spans customer, provider, ecosystem and ultimately impact. For more information, please visit www.raflearning.org. Follow the Learning Lab at @RAFLearning on Twitter.
The MasterCard Foundation works with visionary organizations to provide greater access to education, skills training and financial services for people living in poverty, primarily in Africa. As one of the largest, independent foundations, its work is guided by its mission to advance learning and promote financial inclusion to alleviate poverty. Based in Toronto, Canada, its independence was established by MasterCard when the Foundation was created in 2006. For more information and to sign up for the Foundation’s newsletter please visit www.mastercardfdn.org. Follow the Foundation at @MCFoundation on Twitter.
USAID is the lead U.S. Government agency that works to end extreme global poverty and enable resilient, democratic societies to realize their potential. USAID works in several different sectors across global development, including, their agriculture and food security programs which work to combat world hunger and strengthen agricultural growth.
FOR IMMEDIATE RELEASE
PROPAGATE: A COALITION OF SMALLHOLDER FINANCE PRACTITIONERS LAUNCHES TO ADVANCE FINANCIAL INCLUSION OF SMALLHOLDER FARMERS WORLDWIDE
ABU DHABI, United Arab Emirates, March 16, 2016 — Propagate: A Coalition of Smallholder Finance Practitioners, today announced its formation and formal launch of activities at the 18th Microcredit Summit. The coalition includes representatives from some of the largest and most innovative organizations engaged in smallholder finance, including Agora Microfinance, BRAC, Juhudi Kilimo, One Acre Fund, Opportunity International, and VisionFund. The group will collaborate to increase the quality and availability of financial services tailored to meet the unique needs of smallholder farmers.
Smallholder farmers represent more than 70 percent of people living in poverty around the world. Yet only 3 percent of smallholder demand for financing is currently being met, presenting one of the greatest—and most urgent—opportunities for scale and impact in financial inclusion today.
“The sheer magnitude of the existence of poverty amongst smallholder farmers makes it one of the biggest economic challenges of our times. As we know, finance is an integral part of any solution that is attempted,” said Tanmay Chetan, Co-Founder and Managing Partner of Agora Microfinance. “The group comprises institutions with serious responses to the issue. It can bring together diverse approaches and encourage synergy for larger scale solutions to the issue of agrifinance. It can also become a relevant voice on the issue.”
Going forward, coalition members will develop and adopt common principles to enhance financial services accessible to smallholder farmers. Through outreach to key sector stakeholders, they hope to influence the availability and structure of wholesale financing to attract appropriate investment and better support the growth of smallholder financial services. Among their own organizations, coalition members will develop commercial and operational partnerships that drive product development and innovation in smallholder finance and create stronger value chains for farmers.
“We know that when smallholder farmers in sub-Saharan Africa have access to production credit, savings accounts, cash flow management tools, and quality extension services, they can significantly increase their productivity and yields and receive fair prices for their crops,” said Simona Haiduc, Vice President of International Business Development at Opportunity International.
Propagate coalition representatives include:
Tanmay Chetan, Co-Founder and Managing Partner, Agora Microfinance
Shameran Abed, Microfinance Director, BRAC
Bernard Kivava, CEO, Juhudi Kilimo
Mike Warmington, Microfinance Partnerships Manager, One Acre Fund
Simona Haiduc, Vice President of International Business Development at Opportunity International
Scott Brown, President and CEO, VisionFund International
For more information, visit http://www.propagatecoalition.org or email email@example.com.
Press Inquiries: firstname.lastname@example.org
Maximize your potential and help farmers just like Wilbroda access the tools they need to grow their way out of hunger and poverty. Apply today to join our family of leaders!
When you enter Wilbroda Nafula’s living room in rural western Kenya, you might be surprised to see three solar lamps, all charging cell phones. Wilbroda, a Kenyan farmer and mother of three, doesn’t advertise her business with a sign outside her home. She doesn’t even live close to other shops or at the village center. But word has spread among her neighbors that she has a cell phone charging business, and there is plenty of demand for her services.
“I tell you, in this mobile phone business, I eat well!” says Wilbroda, laughing aloud.
Just four years ago, Wilbroda wasn’t eating well, and neither was her family. Her only source of income was the maize she harvested from a half acre of land, and she was never able to harvest enough maize to feed the family through to the next harvest.
In 2011, she decided to take a seed-and-fertilizer loan to try to improve the production on her land. Along with the loan, she received training on correct agriculture practices, including food storage and market price fluctuations. That year, she produced an excellent harvest, stored enough food to feed her family, and started saving money to replace the roof on her house. By 2013, she had replaced her roof, invested in chickens, and purchased her first solar light. By 2014, she had a calf, a second solar light, and enough money to put her children in private primary school. This year she purchased her third solar light, and she’s planning to expand her poultry business.
With access to microfinance, Wilbroda can support her family through agriculture and her solar lamp business.
Wilbroda is like hundreds of millions of smallholder farmers all over the world, with one critical difference: the agriculture loan she received in 2011 changed the trajectory of her life. She is now part of the tiny percentage of smallholder farmers who have access to finance.
Smallholder farmers are the largest group of people living in poverty, and they are also the most financially excluded. Roughly 70 percent of the world’s poor are farmers, and the majority of them are unbanked. These 500 million farmers are in turn supporting as many as 2.5 billion people. Although most smallholder farmers are struggling to produce enough food, they have the potential to produce dramatically more. The Global Yield Gap and Productivity Atlas, developed by the Daugherty Water for Food Institute at the University of Nebraska and Wageningen University in the Netherlands, estimates that crop yields in Sub-Saharan Africa are 70–90 percent below their potential, the largest yield gap in the world.
Reducing the yield gap in Africa will boost global food production, but it will also have a dramatic effect on the continent’s poverty levels. Agriculture growth has been demonstrated to be as much as 3.2 times more effective than non agriculture growth at reducing extreme poverty in low-income countries.When farmers increase their incomes, they spend it locally. Agrodealers, seamstresses, furniture makers, motorbike drivers, and health workers all benefit. These individuals then spend their increased incomes, perpetuating a cycle of consumption that benefits all actors in the rural economy.
If we seek to end hunger by 2030, as articulated in the Sustainable Development Goals, if we seek to reach global financial inclusion by 2020, or if we seek to make significant gains in economic growth in developing countries, we must target smallholder farmers. They sit at the intersection of our ambitious global food security, financial inclusion, and economic growth targets. If smallholder farmers are able to unlock their potential, they will be a “triple threat,” collectively driving progress on global food security, financial inclusion, and economic growth. If they remain neglected, progress will stall. Given the strategic importance of smallholder farmers, the world should be laser-focused on how to provide them with the tools they need to move from subsistence farming to sustainable livelihoods. Therefore, the single most important tool we can offer them is farm finance.
This blog is an excerpt from The Case for Farm Finance, an article written by Stephanie Hanson for the MIT Innovations Journal's issue on financial inclusion. Click here to read the full piece.
With the recent publication of six randomized microcredit evaluations from around the world in the January edition of the American Economic Journal: Applied Economics, diverse actors in the microfinance sector have been weighing in on whether or not microcredit is as impactful as we’ve all thought. While the results of these evaluations seem to show that microcredit alone does not have a transformative impact on poverty, they do illustrate that microcredit can boost financial inclusion for low-income households.
At One Acre Fund, we’ve seen first-hand how access to credit helps smallholder farming households increase their yields and multiply their incomes. Yet we also recognize that when serving rural clients, credit alone is insufficient. It is the combination of several key elements — delivery of loans in the forms of seed and fertilizer directly to farmer villages, along with the provision of agriculture trainings, post-harvest storage support and market facilitation, — that allows farmers to invest in their farms and their futures and grow themselves out of hunger and poverty, permanently.
The microfinance field continues to grow and expand. April has even been designated the official “Month of Microfinance.” Whether you’re a microfinance novice, or have a nuanced understanding of the sector, below is a list of articles and reports (breaking news and existing resources) we think add value to this important, ongoing conversation:
In this new focus note, entitled Early Insights from Financial Diaries of Smallholder Households, Jamie Anderson and Wajiha Ahmed share initial data and information gleaned from CGAP’s Financial Diaries of Smallholder Farmers project. Key takeaway? Smallholder households have financial needs that are unique, complex, and varied across geographies.
Financial inclusion for the young and old! 4 Myths of Ageless Microfinance, by Sonja E. Kelly of Center for Financial Inclusion at Accion, for Month of Microfinance Blog, and this blog by the Center for Financial Inclusion at Accion on MasterCard’s project targeting financial inclusion of youth, discuss financial inclusion challenges and priorities for opposite ends of the age spectrum.
Mobile technologies continue to feature prominently in financial inclusion conversation. In How mobile phones are revolutionizing personal finance in sub-Saharan Africa, Andrew Flowers, digital editor of FiveThirtyEight, discusses the mobile revolution and the democratization of finance across the globe.
In their newly released Global Findex Database 2014, the World Bank reports on the state of financial inclusion around the world. The good news? The number of "unbanked" individuals dropped 20 percent between 2011 and 2014 to 2 billion adults.
In February 2015, One Acre Fund published several original white papers on our online resource library. The papers in the farm finance section offer key learnings on our unique agriculture microfinance model, specifically on our approach to asset financing and flexible repayment.
Did you come across a fantastic microfinance article recently that you think is worth sharing? Let us know via the comments below, or by contacting One Acre Fund on social media.
This blog was co-authored by Mark Adams, One Acre Fund microfinance partnerships analyst, and Hilda Poulson, One Acre Fund policy analyst, and was originally published by the Seep Network. To read the original piece, click here.
Like most entrepreneurs, smallholder farmers in rural Africa need financing to invest in and grow their businesses. However, unlike most entrepreneurs, these farmers lack access to the financing they need to make the business of farming productive.
While the agriculture sector in Africa employs 65 percent of the labor force, farmers have surprisingly limited access to credit. Microfinance institutions, many of which focus on serving urban poor, perceive farmers as high risk. In their assessments, farmer income is irregular and highly susceptible to environmental shocks, and many smallholder farmers have low incomes and low productivity.
After crunching the numbers, most traditional MFIs balk at assuming the increased risks associated with financing farmers. These MFIs should reconsider financing farmers, and deploy strategies to manage those risks. If they do, it will unlock significant market potential.
The Case for Financing Farmers
There is a huge demand for financial services among farmers that is still unaddressed. For example, the total amount of debt financing available to smallholder farmers in the developing world is approximately $9 billion. This amount meets less than 3% of the estimated $450 billion global demand. Additionally, the uniform profession of farmers means that effective solutions are highly replicable and scalable, which is attractive to donors and investors.
Since farmers comprise the largest and poorest group at the bottom of the pyramid, financial tools for farmers also have very high impact potential for MFIs guided by a social mission. Sustained growth in the agriculture sector has proven 2-4 times more effective at reducing poverty and improving livelihoods than growth in other sectors.
If MFIs can mitigate and overcome perceived risks associated with serving farmers, the opportunity—for nonprofits, private sector actors, and governments looking to boost economic growth through agricultural development—is tremendous.
Financing farmers poses risks, but these risks can be mitigated
The unique financial needs of smallholder farmers can mean taking on an increased risk burden for MFIs. Smallholder farmers are highly susceptible to shocks, either from markets or natural disasters. They also tend to be risk-averse and refrain from investing in costly improved inputs, perceiving the risk of crop failure and livelihood loss as too great. Smallholder farmers frequently do not have physical collateral or other sources of income that would help insure the loan.
Yet an increasing number of MFIs, recognizing the market opportunity, are mitigating these risks and finding ways to bring financial services to this market. Some strategies they deploy:
Traditional group lending. Muhammad Yunus’s Grameen Bank pioneered this model, involving the use of social rather than material collateral to hold clients of limited materials means accountable. When loans are made to small groups or cooperatives, peer pressure amongst members ensures payments are made. When an individual is at risk for default, group members agree to voluntarily cover their payments.
Weather index-based insurance. Simpler and less costly than traditional insurance, weather index-based insurance relies on a weather index, most commonly rainfall, to determine payouts. This strategy, deployed by organizations such as MicroEnsure, is best suited for widespread areas affected by similar weather hazards, and where weather is closely correlated to crop yields. Payouts can be made automatically, and a faster payout is mutually beneficial— farmers are more willing to take on risk, and banks are more willing to lend.
Farm yield increases. At One Acre Fund, increasing farm yields is a key component of our microfinance model. As part of their loan package, farmers receive trainings on planting and harvest storage techniques that help them to maximize their post-harvest profits. As a result, farmers who enroll typically experience yield increases of between 50 and 100%. These substantial increases are integrally linked to our 99% loan repayment rate. By dramatically increasing crop yield, farmers have both more food and more profit at the end of the harvest season.
Providing smallholder farmers with credit to invest in their farms isn’t just a good deed, it can also be a good business opportunity. There are risks involved, but there are strategies that can be implemented to reduce risk and to make farm finance a successful product for microfinance institutions.
You're reading this just in time for April's Month of Microfinance! Visit our online library for detailed information on One Acre Fund's agriculture microfinance operations.
This blog was written by Stephanie Hanson, senior vice president of policy and partnerships at One Acre Fund. A version of this blog was originally published by This is Africa, a publication of Financial Times Ltd. Click here to view the original post.
Microfinance is widely known for the incredible speed with which it has scaled to reach hundreds of millions of people, and the positive effect it has had in reducing poverty.
However, what many people do not know is that most of these microfinance institutions are located in urban and suburban areas, and they largely target the urban and suburban poor. As a result, the largest group of poor people in the world - smallholder farmers - are largely financially excluded.
While 55 percent of Africa’s population is engaged in agricultural livelihoods, only approximately 1 percent of bank lending across the continent goes to the agricultural sector. In sub-Saharan Africa, 38 percent of adults living in cities report having a formal bank account, compared with only 21 percent of adults living in rural areas.
Smallholder farmers represent two tremendous opportunities: a market opportunity for any financial institution looking to grow their client base, and an impact opportunity for all financial institutions that have a social mission. The total amount of debt financing available to smallholder farmers in the developing world is approximately $9bn. This amount meets less than 3 percent of the estimated total smallholder financing demand, which is calculated to be $450bn globally.
Farmers comprise the largest and poorest group at the bottom of the pyramid, so financial tools for farmers have very high impact potential. Sustained growth in the agriculture sector has proven 2 to 4 times more effective at reducing poverty and improving livelihoods than growth in other sectors. Recent research shows this can be as high as 11 times in sub-Saharan Africa. The uniform profession of farmers also means that providing financial services to farmers is a highly replicable business.
Perceived risk and lack of expertise are the most significant reasons that more banks and microfinance institutions have not yet started offering agriculture finance products. Compared to urban lending, which microfinance institutions are familiar with and have developed expertise in, rural lending feels quite risky. Most banks and microfinance institutions do not have internal expertise on agriculture, and are unsure how to structure loan products that would both meet the needs of farmers and mitigate the risk they take on by lending to them.
Further, operating in rural areas poses infrastructural and logistical challenges. Margins will be lower than when serving urban clients, and financial institutions will have to build out either physical or human infrastructure to reach remote rural areas. Currently, significant distances between bank branches represent a major barrier to rural financial inclusion. For example, in Tanzania, where there are less than 0.5 bank branches per thousand square kilometers, 47 percent of all unbanked persons cite distance from a bank as a primary reason for not having an account.
There is a small but growing movement of financial institutions that have figured out how to overcome these challenges and lend to smallholder farmers. Institutions like Opportunity International, Vision Fund, Microensure, as well as One Acre Fund, all offer products to smallholder farmers that successfully address their financial needs.
The Initiative for Smallholder Finance recently published a briefing on direct-to-smallholder finance in which they note that over 150 finance providers currently offer direct-to-farmer finance. To help facilitate the entry of more financial institutions into the sector, the Consultative Group to Assist the Poor (CGAP) is conducting research to better understand the financial needs of smallholder farm families.
Through our work at One Acre Fund, we have discovered some basic principles that reduce the risk of lending to smallholder farmers, while increasing the income impact that those farmers realise from their loans. We currently serve 200,000 smallholder farmers in East Africa, and have a repayment rate of 98 percent.
We have found that lending to farmers is most effective when we lend seed and fertiliser instead of cash. Providing assets to farmers ensures that the loan is utilised for the intended purpose, and overcomes the challenge of limited access to seed and fertiliser close to the homes of our clients. We also offer a completely flexible repayment schedule to accommodate the irregular cash flow of most smallholder farmers.
Finally, we pair our loans with agriculture trainings, so that farmers can maximise the income impact of the seed and fertiliser that they use. These principles allow our clients to see at least a 50 percent increase in farm income per acre, as well as ensuring that One Acre Fund is repaid.
One Acre Fund is just one of a small number of organisations that has figured out how to successfully lend to smallholder farmers. With a global financing gap of $441bn, we need thousands of financial institutions to step in and start serving this market. Farmers are 70 percent of the world’s poor. Agriculture microfinance is our best tool to significantly reduce global poverty - and it is also a promising business opportunity.
Did you know that April is the Month of Microfinance? Click here to learn more about how microfinance is creating opportunities for the world's poorest.
For most of Kenya’s smallholder farmers, saving money is very difficult. Access to the financial institutions that help people save is extremely limited. Many rural poor in Kenya live in remote areas – sometimes there can be 100 miles separating them from the nearest bank.
But for farmers in Kenya, and many other countries in East Africa, there is a practical solution to the problem of savings.
A “merry-go-round” is a small social organization where members contribute a small sum of money on a regular basis, often every week. Each time money is collected, the full sum is paid out to one of the members. The members take turns receiving the pay-out, so that after one full cycle, every member of the group has had a turn. By participating, members are essentially putting money away until it comes back to them as a larger sum.
In Ndengelwa village in Western Kenya, fourteen farmers are using the merry-go-round to help each other save. They call themselves Bora Uzima, which means ‘better life’ in Swahili.
The Bora Uzima group (pictured) was formed when they enrolled with One Acre Fund in 2013. As part of the One Acre Fund trainings, field officers taught them the principles of the merry-go-round, and encouraged them to start one.
To decide the order of receipt – whose turn it is to receive the payout first and whose turn is last – the group members wrote the numbers one to fourteen on small pieces of paper, folded them, and then had each member pick one out of a hat. “The number that a member picks depends on luck. We cannot afford divisions in our group, so this method helps keep the process free and fair and leaves every member satisfied,” says Maximilla Nyongesa, leader of Bora Uzima.
Each Bora Uzima member contributes 200 Kenyan Shillings ($2.28 USD) to the pot when they meet every week. With 14 members, that means that each week one person receives 2,800-Kenyan Shillings ($31.71 USD).
The merry-go-round has increased savings dramatically, and cut reliance on costly money lenders. Also, the members have saved significantly on transport costs they might otherwise need to access banking services. For Bora Uzima members, travelling to the nearest bank costs 150 Kenyan Shillings ($1.70 USD), not much less than the 200 Shillings they’re contributing to the merry-go-round.
Since starting the merry-go-round, the farmers in Bora Uzima have seen positive changes in their lives. This year, every member of the group finished repaying their One Acre Fund loan by May, with a full three months to spare before the final deadline.
“When we started the merry-go-round, our goal was to ensure that every member repays their loan on time, but we did not anticipate repaying as early as we did. We were happy and surprised by our success,” Maximilla says.
The group members also used the group lending to pay their children’s school fees. Often farmers end up selling their harvests when the market price is low just to earn money for school fees. This year, most of the group members were able to use some of the money they received from the merry-go-round instead, allowing them to save their harvest until food prices had peaked later in the season.
“My harvest last season was not enough to feed my family and pay school fees as well, so I was worried. If I sold my harvest to pay for school fees, I would risk my family going hungry,” explains Charles Wenani, a member of Bora Uzima. “Luckily for me, the merry-go-round made it possible for me to store my harvest until I could get the best price for my crops.”
After paying for this year’s school fees, the Bora Uzima members decided to invest their savings in a new project. At the start of July, the group agreed to pool their savings and invest it in sheep. A local sheep breeder agreed to sell seven sheep at 4,000 Kenyan Shillings ($45.40 USD) each. Since then, every week the members’ contribution pays for the sheep and reduces the total amount bit by bit. The group expects to receive the sheep at the end of September, with two members sharing ownership of one sheep.
The merry-go-round has not only been about financial gain for Bora Uzima group members. It also offers a platform for face-to-face interaction and building of close interpersonal ties. Apart from contributing money during their weekly meetings, members also share their personal experiences, ask for advice, and have the opportunity to relax and chat. Sometimes, friends in the group will cover each other’s contribution during weeks they have no money.
“When I learned to be comfortable about my financial status with my group members, I also learned that I could trust them. The merry-go-round has helped build good neighborliness in our area,” Charles says. “My fellow group members have become closer friends than before.”
The merry-go-round has been instrumental to the success of Bora Uzima group members this season. They plan to continue for years to come and even invite even more farmers to join.
“Success will be sweeter for me when I can share it with many of my neighbors. We will recruit more members to our group because more members also means more money,” Maximilla laughs.
After such a successful year, completing repayment of One Acre Fund loans on time will again be the top priority for Bora Uzima in 2015. They have high hopes for what they can achieve with their savings, and agree that the merry-go-round will once again be vital to their plans.
This article was originally published on the Financial Access Initiative blog. Click here to view the original post. By Stephanie Hanson and Mike Warmington.
The majority of the world’s poor share one profession: farming. Most of these farmers cultivate less than 10 acres of land, far away from paved roads and with limited access to the improved seed and fertilizer they need to produce good harvests. Most of these farmers also lack access to financial services that could help them buy that seed and fertilizer. If the global microfinance industry seeks to have a long-term impact on global poverty, it must address the needs of smallholder farmers. Most microfinance institutions are focused in urban and peri-urban areas, but a few are starting to offer products specifically targeted at farmers.
We’ve seen fast-growing interest in the farm microfinance sector in the last few years. The books, videos, and papers discussed below helped us understand the market opportunity in farm microfinance, and what needs to happen for the market to take off.
Financing farmers is important
The World Bank estimates that agricultural development is “two to four times more effective in raising incomes among the very poor than growth in other sectors.” Not only is this a high-impact sector, it’s also a large one. Farmers account for more than 30% of the global working-age population, and most of them live in poor countries.
For a vivid portrayal of what happens when smallholder farmers can’t access the resources they need, read The Boy Who Harnessed the Wind. This memoir, written by William Kamkwamba and journalist Bryan Mealer, paints an honest picture of Kamkwamba’s family and their collective anxiety as they struggle to get through a terrible farming season in Malawi. Their “hunger season” that year was not unique. The majority of the country faced the same problem, as did millions of farmers across the region.
What is striking in Kamkwamba’s book is the ripple effect of this problem. Kwamkamba is hungry, so he can’t work a full day in the field and is less productive. At the local market, there are rapid price increases. Through the country, there are rising social tensions, public unrest, and violence.
Fortunately, it’s completely possible for farmers like the Kamkwamba family to significantly increase their agriculture productivity in just one season, creating a ripple effect of income generation throughout rural communities. We’ve experienced firsthand the impact of agriculture development through our work at One Acre Fund. Reading Roger Thurow’s book The Last Hunger Season is the closest thing to spending days out in the field learning from farmers. It follows four Kenyan farmers over the course of a year as they work to increase their incomes and provide for their children (he also speaks passionately on the subject in this TEDx talk). All four farmers are customers of One Acre Fund, which provides them (and 180,000 other smallholder farmers in East Africa) with seed-and-fertilizer loans and training.
Both books illustrate that the challenges faced by smallholder farmers in sub-Saharan Africa are surmountable, and that farm microfinance is essential to catalyzing agriculture development. Perhaps the biggest barrier holding MFIs back from meeting that demand is perceived risk.
Financing farmers poses risk, but it can be mitigated
Agriculture is often perceived as much riskier than other sectors, particularly by financial institutions that lack in-house expertise on agriculture. This lack of understanding leads many MFIs to inflate the risk of farm microfinance. Financing farmers presents risks that vary in both likelihood and severity, but they are identifiable and possible to mitigate effectively.
In a 2005 CGAP paper, Robert Peck Christen and Douglas Pearce outline ten practical strategies that can help reduce the risk of an agricultural finance product. In our experience, the most salient risk-related features they discuss are covariate risk, credit risk, and production risk.
Risk in agricultural lending is often covariate. Weather and crop disease problems can devastate yields, and they generally affect many clients, not just one. The paper proposes diversifying a loan portfolio across geographical areas, crops, and types of livestock. It also suggests pairing loans with index-based insurance to protect against the most extreme cases of weather- or disease-related crop loss.
Loan terms tailored to growing seasons and flexible repayment schedules help manage credit risk. Lenders need to accommodate the “cyclical cash flows and bulky investments” of farmers. Successful models build repayment requirements around the cash needs of farmers without compromising “the essential principle that repayment is expected, regardless of the success or failure” of the farm. For instance, farm microfinance products often have terms that are tailored to the agriculture season and offer flexible repayment schedules instead of strict weekly or monthly payments.
Production risk can be mitigated by bundling lending with access to inputs and training. If a farmer is given a cash loan and uses it to buy low-quality seed or fertilizer, her production will suffer. Lenders can eliminate this risk by bundling loans with access to inputs and training. They can use contractual arrangements with agrodealers and extension workers to guarantee input quality and access to training, or they can provide these services using their own resources and staff.
If financial institutions utilize the strategies above, agriculture risk is manageable.
Farm financing must be bundled with or linked to other services
Examples of successful farm microfinance invariably do more than just provide finance. If a farmer doesn’t know the proper planting technique for a crop, a cash loan is useless. If a farmer produces a great harvest, but can’t store it correctly or sell it for a good price at the market, she can’t generate increased income. Smallholder farmers need access to all parts of the value chain—farm inputs, financing, training, and markets. Successful farm microfinance products address the entire value chain for a smallholder farmer.
This principle is best articulated by Ugandan grain trader (turned agriculture financier) John Magnay in this Opportunity International white paper. He argues that MFIs must have a “clear understanding that microfinance is just one of the stakeholders within the rural model.” He acknowledges the interdependence of the agriculture model and recommends a two-pronged strategy: monitor household cash flow, and manage the value chain.
If an MFI takes more control of the value chain, it puts more at stake for the organization, and acts as a strong incentive to “get the approach right.” Magnay recommends linking into agribusiness and providing agriculture trainings to maximize yield. One Acre Fund has found that it’s especially important to provide farmers with high-quality seed and fertilizer.
The channels for delivering this strong control over a value chain vary significantly, and the extent to which a specific MFI controls or partners with others in the value chain will differ. This is a very different way of doing business for most MFIs, and for the farm microfinance sector to grow, MFIs will need to adapt. Are there structures in place to facilitate this?
Farm finance needs to crowd-in key players
There is an enormous market of customers for farm microfinance products, and only a handful of institutions serving them. This Dalberg report sizes the market demand for smallholder agriculture finance at $450 billion, most of which is unmet. To meet even a fraction of this demand, we need lots of MFIs to develop new products and deliver them to their customer bases at scale.
In this presentation, Willy Foote, founder and CEO of Root Capital, speaks about their inspiring approach of “Finance, Advise, Catalyze.” Root Capital is an agriculture finance lender, but they also provide financial training to their clients so that they can grow their businesses. Finally, they seek to grow the entire market for agriculture finance by collaborating with peer organizations. They recently helped launch the Council on Smallholder Agriculture Finance, an alliance of social lending businesses that targets “the missing middle,” businesses that require financing of $25,000-$2 million.
Key players in farm microfinance need to share more knowledge with other practitioners to establish best practices that others can follow. Much like Root Capital is actively trying to crowd-in more competition to the “missing middle,” One Acre Fund seeks to attract more players to farm microfinance, the sector that serves the poorest smallholder farmers in the world. Collaborating with other practitioners, we aim to help MFIs develop farm microfinance products that can address some of the enormous unmet demand in the sector. This is our best bet to spur global agriculture development, and to have a long-term impact on global poverty.
Stephanie Hanson is senior vice president of policy and partnerships at One Acre Fund, and Mike Warmington is microfinance partnerships manager at One Acre Fund.
On July 17th, One Acre Fund participated in the Fin4Ag conference in Nairobi, Kenya. The conference, organized by the Technical Centre for Agricultural and Rural Cooperation, brought together over 500 people from the public, private and civic sectors to discuss ways to improve agricultural finance.
George Osure, Program Director at the Syngenta Foundation, and George Waigi, National Projects Officer at the International Labor Organization, joined One Acre Fund in presenting at a session that explored the role of technical assistance in lending products for smallholder agriculture.
Waigi described the importance of business trainings in giving unemployed youth the confidence to take loans for new commercial ventures, and emphasised the importance of a favourable-lending environment that fairly balances the relationship between borrower and lender.
Osure discussed the Syngenta Foundation’s approach to technical assistance by outlining the work he’s been involved with in areas such as rural extension, seed systems, agricultural insurance, and policy development. He stressed the need to take a holistic approach that listened to the needs of smallholder farmers and communicated with them in a language they understood. In particular, Osure commended One Acre Fund’s service bundle as an example of an appropriate vehicle to reach farmers in some of the remotest parts of rural Africa.
One Acre Fund also had the opportunity to present. Nick Daniels, One Acre Fund’s east Africa government relations manager, drew attention to the importance of packaged services for smallholder farmers, exploring how One Acre Fund has managed to grow to serve over 180,000 smallholder farmers in just eight years.
One Acre Fund is committed to disseminating information on its model to enable other financial service providers to better serve Africa’s smallholder farmers. This Fin4Ag conference was a not only a chance to support this goal, but also to learn from our peers, many of whom are doing phenomenal work in the space.
Imagine you’re an entrepreneur, making important decisions in a risky and unstable environment. Now imagine that there is a risk that threatens not only to sink your business, but also to leave you, your family and your entire community starving.
Smallholder farmers are these entrepreneurs, and their business is extremely risky. If business is good, it means that their families and villages have enough to eat. But if the weather turns against them, it means financial ruin, starvation, illness and possibly even death.
Like other small business owners, financial instruments can help smallholders mitigate risk. Credit insurance is a safety net that protects and empowers farmers, and One Acre Fund is working hard to make it available to more farmers.
In early 2012, we introduced insurance to our farmers in the Rwandan district of Huye. In 2013, we expanded to offer insurance to five districts in southern Rwanda. As of 2014, we offer insurance across the entire country.
One Acre Fund was Rwanda’s first successful, large-scale agricultural insurance program. Today, we’re the biggest provider in the country. We partner with Syngenta Foundation and with SORAS, a local insurance company that issues the policies on our behalf.
How exactly does agriculture insurance work? If you’re a farmer, you can expect a payout when both rainfall and yields are low. In Rwanda, the Ministry of Agriculture coordinates with the insurance companies to collect measurements in each district. If the rainfall or yields are much lower than average at the end of the season, the insurance company will pay.
Without insurance, One Acre Fund would be at risk as well. Currently, all of our clients in Rwanda receive insurance as part of our service package. Rwanda is a small country, so if there is a really bad season, a big proportion of our farmers could be affected. With no insurance, a bad season means farmers may not be able to pay back their One Acre Fund loans. We rely on repayments from farmers for our operations, so big default rates due to bad weather could leave us low on funds for the next season. Additionally, if they’ve lost everything the season before, farmers will be extremely hesitant to invest money in their farms (by taking a One Acre Fund loan) the next season.
Insurance allows clients to avoid this loop. It protects them in bad seasons, and allows them to re-invest the next season without worry.
Bernadine (pictured at right) is a One Acre Fund client in Huye, Rwanda. Bernadine is really proud of her insurance. “I was not expecting the insurance to help so much in repaying my loan,” she says, “Farmers in my group are happy too. We are so thankful for this.”
Insurance protects farm families in hard times. It allows them to repay their loans while also meeting basic needs, and encourages them to re-invest in their farms. This means that even after a tough year, farmers are ready to maximize their harvests in the next season.
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