Responsible Finance Forum

Access to Finance for Smallholder Farmers

Panos Varangis, Makanda Kioko, Martin Spahr, Gaamaa Hishigsuren and Heather Miller
02 November 2014
Source:  International Finance Corporation

Agriculture remains the main economic activity and employs the majority of the people in most low income countries. Globally, there are approximately 450 million households whose main activity is agriculture. Agricultural producers in developing countries, particularly those in low income countries, face a number of hurdles including low productivity, limited access to markets for their products, lack of adequate risk management products and services and limited access to finance. While agriculture remains a key economic activity in Africa employing about 55% of the population, only approximately 1% of bank lending goes to the agricultural sector. Furthermore, only 4.7% of adults in rural areas in developing countries globally have a loan from a formal financial institution and only 5.9% a bank account, according to Findex data.

Access to financial services, while not a means to an end, is critical to provide funds for farm investments in productivity, improve post harvest practices, smooth household cash flow, enable better access to markets and promote better management of risks. Access to finance can also play an important role in climate adaptation and increase the resilience of agriculture to climate change, thus contributing to longer term food security. Access to a comprehensive range of financial services is a significant challenge for smallholders, who constitute the vast majority of farmers in developing countries.

Smallholder farmers are quite a heterogeneous group, differing in their resource base and choice of crops and livestock, links to markets, the relative importance of agricultural income, and other dimensions. As such, solutions regarding access to finance need to better understand the various profiles of smallholder families and the conditions and market context where they operate. While the majority of studies so far have focused on commercial smallholder farmers in value chains served primarily by banks or through value chain firms, this is a relatively narrow part of the market, representing only an estimated 7% of smallholder farmers. Research to date has said little about how smallholder farmers outside value chains and less commercially-oriented farmers access financial services of any kind, or the kinds of products and services they demand. At the same time, there is a recognition of a missing middle in agrifinance in that there is limited understanding of what happens outside the commercial farmer and tight value chain segment when it comes to financing models for farmers.

Microfinance institutions and other financial service providers with presence in rural areas could be part of solving this puzzle, and organizations like CGAP and IFC are making important contributions to this changing market. This IFC study looks into selected microfinance institutions in Latin America to gain a better understanding of the market environment in which these microfinance institutions operate and the types of clients they serve. The report comes up with lessons learned from their experience that could potentially apply to other microfinance institutions wanting to focus more on the agricultural sector and address the access to finance gap facing smallholder farmers.