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From Idea to Action: How Far We’ve Come in Catalyzing Smallholder Finance

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If you work in inclusive business, you see a lot of big numbers. Trillions of dollars in demand…billions in required investment. The sheer size of the population at the base of the pyramid drives those numbers. And while these big numbers can help raise awareness around issues that might otherwise fly under the radar, it is what you do to realize the opportunity in those numbers that matters most.

Our 2012 report Catalyzing Smallholder Agricultural Finance presented a number that demanded action – $450 billion – or, the estimated global demand for smallholder farmer financing. Our challenge? Turning the report’s findings into something concrete.

In May of 2013, we launched the Initiative for Smallholder Finance (ISF) in an effort to do just that. Working with a dedicated steering and advisory committee consisting of members from across the smallholder agriculture ecosystem, we set out with the goal of making marked progress toward closing the gap between the $450 billion in smallholder financing demand and the current $10-20 billion supply.

Since launch, we’ve focused on three areas: developing original research, facilitating connections among market participants, and scoping investable opportunities for capital providers targeting this market.

We are driving a better understanding of the state of the market through our briefing note series, webinars, and infographics that cover key areas in smallholder finance from local bank lending to innovation spaces to technical assistance. We aim to keep our publications short and insightful—the kind of thing you can read during lunch break—as we know that executives and managers in this space rarely have the time to digest long-winded reports and analyses.

We’ve complemented our research by facilitating connections among market participants, including investors, donors, banks, and agribusinesses. A case in point: the ISF has supported the formation of pre-competitive alliances, including the Council on Smallholder Agricultural Finance (CSAF) – a group of impact-first agricultural lenders seeking to establish standard lending practices in the smallholder industry.

Our efforts include scoping specific investable opportunities for investors and donors. From specific commodity markets (East African specialty coffee) to product class extensions (smallholder-related SME equipment financing), we seek to find effective channels to drive allocation of additional capital into the sector.

The past two years of ISF have shown us that the opportunity is ripe for continued growth of this market. The macro economic factors and related policy imperatives in many emerging markets are aligned to accelerate agricultural market growth. The “smallholder finance industry” in support of these markets is no longer nascent – it’s evolving, as financial and adjacent market providers are finding each other and increasingly collaborating and sharing information in a transparent way. We’ve seen very interesting, early-stage experimentation in new or adapted models for reaching smallholders that decrease operating costs of reaching rural areas, reduce risks associated with cash transactions, increase information flow, and improve credit decision-making. For example, MyAgro, based in Mali, enables local village stores to sell agricultural inputs on layaway through a mobile enabled transaction platform.

Philanthropic and commercial capital markets are organizing to support these innovations. Both new and participating organizations in the market are launching new projects that will fund smallholder finance opportunities. For example, the MasterCard Foundation recently launched a $50 million Fund for Rural Prosperity (FRP) that will invest in opportunities that promote financial services in rural areas. Danone and Mars also have announced a 120 million euro Livelihood Fund for Family Farming that will support sustainable sourcing from smallholder farmers. These are but illustrations of the larger trend. Most importantly, from the beginning of our initiative, we knew that local market actors, such as large food companies, agro-processors, or commodity trading and export companies, who have a long-term stake in the viability of the local agricultural market, would need to recognize the incentives to participate in efforts to improve smallholder access to finance. We’ve been pleased to see that more and more are getting involved.

So what’s next in our quest to shrink the big financing gap we started with and improve the livelihoods of smallholder farmers around the world? In the next phase of ISF, we will transition towards acting as a “design catalyst,” or in other words, sourcing and developing programs that prove new, potentially replicable models for providing financial services to smallholders. Drawing on our large body of knowledge and network, we can help identify and structure opportunities with market actors that have the most potential to be successful. And importantly, ISF can play the neutral third-party role, working across markets and between actors, where many of the most promising opportunities in this frontier market exist.

We think the time is right – and the need urgent – for significantly improving smallholders’ access to finance. It can be difficult for market actors to develop products and services if they lack a refined business concept, an engaged set of investors, or local partners interested in moving forward – but we hope that with knowledge and guidance, these high-potential investments can get off the ground and make progress towards closing the smallholder financing gap. We invite you to join us by following our work or reaching out directly if you see investable opportunities in need of collaborative design support.

Tom Carroll is the Director of the Initiative for Smallholder Finance.

This blog is a part of our March 2015 series on inclusive business in the agriculture sector. To view all the articles in this series click here.

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