Two ways to get farm loans where they’re needed most: the boonies
March 7, 2013 Editor 0
To get small staple-crop farmers the loans they need, lenders must use new approaches tailored to the 90 percent of smallholders not in farmer organizations.
A recent conference in London hosted by Business Fights Poverty discussed how smallholder farmers, those with less than two hectares, are becoming increasingly important for multinational agriculture buyers within the global food market. Buyers rely on these natural resource stewards more than ever to accrue agriculture supply as consumer demand increases with income level and population growth.
But the world’s 450 million smallholder farmers lack access to affordable financial resources, especially long-term credit. A 2012 study by Dalberg Global Development Advisors puts the global demand for smallholder agricultural finance at $450 billion–money that could increase global productivity by letting smallholder farmers buy higher-performing seeds, fertilizer, irrigation and machinery.
Of the Dalberg study’s five growth plans, three apply to cash-crop farms. The last two focus specifically on local staples, which make up 90 percent of the smallholder farmer market.
One of the two local staple growth plans is for organized staple crops, which are gathered at warehouses or with local traders. The other plan deals with unorganized local staples, in which farmers process their crops at various detached mills and sell to small traders.
Growth pathway 1: Financing alternate points of aggregation
When farmers can’t get loans from traditional banks and microfinance companies, they can look for loans from other participants along the value chain with whom they have an existing relationship: input suppliers, producers, producer organizations, processors, local traders or exporters. For example, a seed seller might give member farmers the seed they need for the promise of payment at a later date, or a farmer could use inventory deposited in warehouses as collateral for a loan.
In one program by the Kenyan storage facility Lesiolo, for example, “groups of smallholders can deposit maize in a Lesiolo warehouse after harvest and receive approximately 60 percent of its cash value as a loan,” says the Dalberg report. “When prices rise later in the season, smallholders can retrieve the remaining maize and sell it on the market.”
There are still several bugs to be worked out for the Lesiolo model. Its minimum deposit requirement for maize is so large that it requires around 10 smallholders to deposit at once. There is no legal protection if a partner farmer withdraws his deposit early. Also, due to high transportation costs for maize, many smallholders choose to stockpile their maize on their farm or locally.
Growth pathway 2: Financing farmers directly
It is difficult to provide financing, a formal process, for isolated, dispersed smallholder farmers who often make money through informal and variable channels.
But if the most isolated farmers are to be included in the financial system at all, lenders have no choice but to modify microfinance models to allow for more direct contact with rural farmers who may live a significant distance away from a microfinance institution.
A microfinance institution in sub-Saharan Africa, Opportunity International (OI) is working to ease smallholder farmers’s access to financing by bringing it straight to their doorstep. Currently, OI sends loan officers out to rural farms to map the farmer’s land with GPS and create household and crop client profiles. Using the client profiles, OI then generates an analysis of the cost of production and constructs a loan accordingly. This provides more flexibility for smallholder farmers as they don’t have to make multiple trips to town to access loan representatives, which may turn them off from setting up loans in the first place. OI is also experimenting with linking their rural clients to mobile banking in another attempt to bring financial services closer to the farms. This way, smallholder farmers can connect more easily to their lenders despite the physical distance.
If providing direct contact between lenders and the smallholder borrowers is still not effective for some of the most isolated farmers, an extremely flexible financing plan tailored to rural farmers may be the last hope.
One Acre Fund, a nonprofit, has created an easygoing microfinance model proven to be effective in Kenya. Farmers have flexibility to repay the loan at their own convenience, with the only stipulation that they must repay it fully at the time of harvest. This accounts for seasonal fluctuations in income. With a 97 percent repayment rate on its loans in fall 2012, One Acre Fund’s flexible financing seems to work well even for the most dispersed farmers.
The main concern for these models is cost. There is a high research and development cost for new finance models, as well as high risk in financing smaller businesses. The next step for Business Fights Poverty, and nonprofits hoping to link farmers with the tools they need to be more productive, will be encouraging donors and investors to invest in microfinance institutions that address the unique needs of smallholder farmers.Kenyan farmers can increase profits if they store their maize after harvest and sell it later in the season once prices escalate. Photo: CIMMYT (flickr).Related articles:Resources:
- Financial Inclusion Up Close in Rwanda
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- Seeking Effective Policies to Promote Financial Inclusion
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- Cash cows: Why making bank accounts function like livestock will help the poor
- Microfinance in Africa
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