Editor's Choice, July 2016: The world's awash with capital, but not yet for smallholder farmers
The world’s awash with money. So how to get it to farmers who need it?
“Access to … “. These two words are key drivers of so many inclusive agribusiness ventures. Stacks of effort goes into providing smallholder farmers, producer organisations and SME’s with better access to knowledge, markets, inputs and finance, all critical to make farming an attractive proposition, and often critically lacking. My pick for this month’s Editor’s Choice is about a bottleneck that prevents so many good initiatives from implementing what they know is best: access to finance.
The recent publication “INFLECTION POINT: Unlocking growth in the era of farmer finance” is a follow-up to a 2012 report by Dalberg. The authors take a fresh look at a rapidly evolving sector, adding much greater sophistication on the need, availability and build of the smallholder finance sector. They also take on the the ambition of establishing a clear global agenda for future investment and learning, convincingly done in the second part.
So what order of magnitude are we talking about? A detailed breakdown is given of the financing need of smallholders farmers in South and Southeast Asia, sub-Saharan Africa, and Latin America, estimated at US$210 billion, while only $56 billion is available. This table on page 16 makes it glaringly and precisely obvious just how big that gap is.
One of the values of the report is that it has many simple to grasp yet well substantiated tables. For example, the source of those $56 billion is broken down meaningfully into a spectrum of formal and informal financial service provider (FSP) categories. For FSPs it helps them understand how they slot in compared to others, and what additional role they could play. For those needing finance, the authors provide clarity on who could best be approached for what kind of financial need. The report is an excellent example of kind of sophistication that is needed around many aspects of inclusive agribusiness to drive focused action.
Another example of the kind of useful pulling apart is breaking up the “finance gap” into more precise financial product needs. The table below maps out existing financial products against what farmers need. As with all maps, the really interesting parts are the unmapped white parts. These are the areas where there is a lack of existing, proven, essential financial products. An area for necessary innovation and, if cracked, of growth opportunity.
Its also a pleasure to read that insurance is made a natural and explicit part of the financing needs. Risk is such a major barrier for all actors in the agricultural sector, and the authors justifiably also zoom into the insurance gap that exacerbates the problem of getting FSPs to fund this sector.
So why the title? Because the authors calculate that if the smallholder finance sector continues to grow at the current and arguably healthy 7% per annum, by 2020 the finance gap will hardly have changes. Hence the need, and well-argued opportunity, to globally create an inflection point for growth in this finance sector.
For that the authors present a global strategy of the most critical issues to address over the next 5 years, and key focus for each. Its nicely summarised in the following diagram.
The right-hand column summarise three key strategies:
- Customer centricity: providing solutions based on a deep understanding of customer needs, preferences, and behaviors.
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Progressive partnerships: creating and scaling more and deeper partnerships designed to strengthen business model sustainability and increase reach in the smallholder finance sector.
- Smart subsidies: increasing capital availability in the sector by nuanced use of subsidy within blended finance models.
The second half of the report then breaks up this agenda into priority activities and five key actor groups summarised as follows:
- Financial service providers: product and service design pioneers
- Funders: smart subsidy champions
- Market and research platforms: connected savants
- Technical assistance providers: specialized educators
- Policy makers: ecosystem enablers
The annexes are much more than data for nerds. They include region specific ‘finance gap’ tables, detailed comparison of nine different FSPs, subsidy dependence as well as methodological underpinning. I really like the way that its fully transaparent about its information sources, assumptions and methodology. Its so easy to bandy about large figures that are hard to corroborate. Providing sources and precision is essential to a sector that lives by calculating risk as precisely as possible, and is shying away from smallholder finance because of too much uncertainty.
I would recommend this publication to anyone who understands ‘Yield Gap’ better than ‘Finance Gap’, yet who knows they must get to grips with a major limiting factor for any inclusive enterprise. I would equally recommend it to FSPs that are considering or struggling with their product development and how to benefit from the potential market. Aligning individual effort with a global agenda like this will make the kind of system change possible that 450 million smallholder farmers worldwide are desperate for.
The 70 page publication, including 40 core analysis and 37 detailed annexes is a joint production of the Initiative for Smallholder Finance (ISF) and the Rural and Agricultural Finance Learning Lab. Both in content and in style it reflects the combined strengths of the ISF transactional focus with the Learning Lab’s open learning focus.
Finally, oh joy, it’s a very pleasant read. It can be skimmed, browsed or read in depth equally well. I look forward to a 2020 update.
You can download the full report here.
This blog is part of the July 2016 series from the Practitioner Hub and Seas of Change on Inclusive Agribusiness.
Don't miss many more of the latest inclusive business publications reviewed in our Editors Choice series.