Closing the Smallholder Financing Gap

The ‘Africa rising’ story prevails: Why Inflection Point matters to Africa’s smallholder farmers

Using insights from Inflection Point and deep sector knowledge, Lab Director Jason Wendle outlines the landscape of smallholder finance in Africa and details opportunities ahead for closing the notable – and largely unmet –  smallholder financing gap.  

By Jason Wendle, Director of the RAF Learning Lab 

Today, there are an estimated 48 million smallholders in Africa alone, with 450 million smallholders across the world living on farms smaller than 5 hectares. In Africa, agriculture accounts for 32% of GDP and 65% of the continent’s labor force. Investment in smallholder farmers marks an immense opportunity for economic development across the continent. Stronger smallholder farmers will lead to better food security, economic growth, and notable reduction in poverty. 

However, despite this substantial opportunity, without access to finance, smallholders cannot contribute toward the anticipated economic growth we hope to see from Africa. Smallholder productivity will continue to be constrained due to lack of financial services including credit, savings, insurance, and payment solutions. In fact, only 20% of the $33B need for smallholder borrowing in sub-Saharan Africa is met today from any source.

Our study, "Inflection Point: Unlocking growth in the era of farmer finance," finds that formal providers need to double projected annual growth rates (from 7% to 14%) in order to meet half the need for smallholder finance by 2025.

The good news is that sub-Saharan Africa may be very well positioned to unlock this kind of growth. The continent has a few major advantages:

Firstly, we're seeing financial institutions that are hungry to reach this market, and willing to partner with value chain actors (agro-dealers, produce buyers) that have relationships with smallholders, and currently provide them with the majority of agricultural finance. Progressive partnerships like APA-ACRE and M-Pesa are critical to reaching smallholders cost-effectively. ACRE is is a service provider that works with local insurers and other stakeholders in the agricultural insurance value chain. ACRE undertakes risk assessment, product development, and risk monitoring to facilitate access to insurance products for smallholders through extensive distribution channels and a robust partnership with M-Pesa. ACRE allows farmers to instantly pay premiums and receive payouts via mobile banking with M-Pesa. As a result of their collaborative network and partnerships, ACRE reaches thousands of remote farmers while maintaining low transaction and delivery costs.

Secondly, the penetration of mobile money, especially in sub-Saharan Africa (see chart to right), provides a potential game changing platform for a product whose success has been constrained by the high cost of serving customers in rural areas. Digital technologies can reduce the cost of customer acquisition and transactions. For example:

  • Mobile money and mobile wallets used for fund disbursements and repayments, can help financial services providers effectively address the high costs to distribute funds and collect repayments in rural areas. Mobile money and mobile wallets also reduce the risk of holding and transporting cash. The increased access to mobile phones in some countries means that even the highest touch financial service providers, who have traditionally relied on human interaction to serve smallholders, are now introducing digital repayments.
  • Alternative credit scoring leverages the increasing penetration of smartphones and improved rural connectivity to gather data on smallholder farmers. Providers, such as First Access, are using this method to not only lower risk across their portfolio but, more importantly, to increase the addressable market of credit providers. The ability to collect alternative data and to analyze this data through new methodologies allows providers to identify creditworthy customers they would have otherwise been unable to reach.
  • Pay-as-you-go solar home systems (SHS), like M-KOPA, provide rural users access to energy while also offering an easy and inexpensive way for M-KOPA to collect payments. Customers make an initial deposit followed by daily mobile payments for one year, after which users own the product and have free energy. The use of mobile payments minimizes the costs and increases product convenience and overall uptake.

Mobile penetration

Thirdly, we’re seeing a renewal of the complementary investments in agricultural development needed for smallholder financial solutions to be profitable. For example, CAADP, a program of the African Union, includes many African governments including Malawi, Burundi, Rwanda and others, who have committed to allocate 10% of their budget to the agricultural sector. Additionally, The MasterCard Foundation Fund for Rural Prosperity (FRP) – one of a number of funds focused on African ag development – uses their seven-year USD 50 million fund to invest in agricultural development.

Wambui Chege, Director for FRP explains that the fund “supports the private sector in Sub-Saharan Africa to get into the agricultural space by providing catalytic financing that helps de-risk the agricultural sector and provide access to financial services to smallholder farmers.”

The world needs Africa's smallholders to achieve a productivity revolution, and Africa's smallholders need financial solutions that are up to the challenge. With a concerted effort by capital providers, financial institutions, and the businesses and knowledge-providers already reaching smallholders, the continent can take the lead in unlocking growth in a largely untapped market.