Financial inclusion has made considerable progress in recent years. There are now a wide range of financial products which can help small farmers: debt financing, short term working capital to finance purchasing of inputs, long term working capital to finance machinery, equity and factoring. Whereas banks used not to want to go the ‘last mile’, ICT innovations have made it possible and profitable to do so. Vision Fund, for example, has over 1.2 million customers.
There is nonetheless still a large financing gap for smallholders: $50billion is being offered, but over $200 billion is needed. This means that smallholders often have to resort to loan sharks. In India for example 37% of loans are still from the informal sector with interest rates of 20-40%.
At the “Future of Small Farms” conference, organised by CABI and the Syngenta Foundation on 24-25 January in Basel, four bottlenecks were identified which constrain the growth of financial services to small farmers:
- Little interest in agriculture shown by banks and formal lenders. This is due in part because they do not fully understand the sector, its needs and cycles.
- Poor financial planning by small farmers. Organisations like Fast International try to address this problem by working with famers to prepare them and connect them to financial institutions
- A lack of capital to invest from financial institutions. This is compounded by poor links to international sources of capital (i.e. international investment banks and re-insurers).
- Inappropriate products; for example where interest rates are too high, there is no collateral or the payback cycle is not aligned to cash flow.
While microfinance has made some strides, insurance lags somewhat behind. Part of the reason is that smallholder farmers have difficulty in understanding the products due to their complexity. Just like in the microfinance market in the recent past, a paradigm shift is needed in the insurance market. The harnessing of ICT tools, an improved regulatory environment and innovations such as psychometric testing (in order to predict the likelihood that loans will be repaid) could facilitate the further development of insurance offerings.
Some organisations are already working hard to plug this gap. The first index-based weather insurance was piloted by the Syngenta Foundation in 2004. ACRE works with GAFCO, UAP and Swiss Re to identify local insurers, connecting them to international re-insurers and working through aggregators in order to provide insurance for smallholder farmers. ACRE now serves 800,000 farmers in Africa and has launched four pilots in Asia.
This article is the last in a series covering the issues raised at the “The Future of Small Farms” conference hosted by CABI and the Syngenta Foundation, compiled by Jonathan Shoham. Subscribe to the Plantwise blog to receive notifications of new articles by email.