Not All Smallholder Farmers are the Same; Many Require Specialized Financial Services

From Our Friends at CGAP:

With an estimated 2.5 billion people living in 500 million smallholder farm households in the developing world, agricultural production plays a powerful role in poverty reduction. A new paper by CGAP,  Segmentation of Smallholder Households, differentiates this large and diverse population of smallholder farmers into three segments determined by commonalities in how they engage with markets and how those markets are organized.

“Not all smallholders are the same and this paper signifies renewed momentum behind understanding the financial needs of various smallholder segments,” notes Michael Tarazi of CGAP. “The segments identified in the paper aren’t meant to be iron-clad divisions, but rather a starting point for recognizing common financial needs and goals and matching them with appropriate financial products.”

Smallholder households have complex financial needs that include achieving specific agricultural goals in addition to other objectives such as consumption smoothing and off-farm businesses. The relatively low population density of rural areas, the small size of most transactions, and the natural volatility of agriculture has made providing financial services to smallholder farmers challenging.

“Agriculture is by nature seasonal,” says Robert Peck Christen, co-author of the report. “Farmers in the same area generally want to borrow at the same time and are often undertaking the same activities. They are therefore exposed to the same risks, which creates challenges for financial service providers.”

Providing financial services for specific agricultural activities has proven challenging thus far, but the paper notes some promising opportunities that can fill the gaps between demand of smallholder households and the supply from financial service providers. Commitment savings accounts, for example, are practical ways to limit the accessibility of funds and target their use. Mobile phones are a powerful delivery channel for reaching large numbers of clients with a range of information at a low cost. More information is needed to better understand what products agricultural households find useful, but these models suggest potential offerings relevant to each of the three main segments CGAP identifies.

Access to finance remains a necessary – but insufficient – condition for improvements in agricultural production and reduction in poverty, according to the CGAP paper. To improve supply, a more precise understanding of how agricultural households differ and what is working in agricultural finance is a necessary first step.

About CGAP

The Consultative Group to Assist the Poor works toward a world in which everyone has access to the financial services they need to improve their lives.

CGAP develops innovative solutions for financial inclusion through practical research and active engagement with financial service providers, policy makers, and funders. Established in 1995 and housed at the World Bank, CGAP combines a pragmatic approach to market development with an evidence-based advocacy platform to advance poor people’s access to finance. Our global network of members includes over 35 development agencies, private foundations, and national governments that share a common vision of improving the lives of poor people with better access to finance.

Topics: 

Market Segmentation

Mobile Money Africa Conference and Expo!

Watch for SBI's very own Deb Watkins and Gerald Rasugu at the Mobile Money Pre-Conference Workshop on May 27th in Johannesburg, South Africa!

Motivated and effective agents are a key element of a successful mobile money service. If agent performance isn’t consistent over time or between locations, it can be very difficult to understand why – and even more difficult to rectify and ensure the situation doesn’t repeat itself in the future. With a large, geographically spread agent network that may be in very rural locations or managed by a third party, it can be a challenge to really understand what’s going on in the field and how that may be affecting agent transaction volumes.

SBI’s hands-on experience of working with our clients to implement agent networks has guided the development of a number of practical “agent health” approaches, aimed at keeping organizations in touch with what we call the key “agent CCM factors”: circumstance, capacity and motivation. Attendees of the workshop will be able to learn about practical real-world examples of the ways in which our clients monitor and improve their agent CCM; try a few things out for themselves; and share thoughts and ideas with our team on how to adapt these tools for their own environment.

Impact Investing in Latin America

At the 2013 Sustainatopia conference in Miami, Jose Mantilla spoke on a panel about global impact investment trends in the Latin America region. Here, he discusses the challenges and opportunities in Latin America for impact investing.

The outlook for impact investing in the region is bright, as the desire and interest, the entrepreneurs and the money are all there.  However, the stakeholders  are not working together in  in a concerted way, and that is making it difficult for the asset class to grow.  Before impact investing can go mainstream, three issues need to be solved:

1. Accessing Professional Investors.  Much of the impact community doesn’t know how to speak the language of the institutional investor. Consequently,  their arguments to institutional investors often fall flat. [Tweet this!] The desire from the investment community is there, but until a good business case is laid before them, in language they understand, they will not invest.
2. Inadequate investment vehicles. In addition to the lack of a common language, the funds being raised are not serving the needs of impact entrepreneurs well.  This is because venture capital funds, the most common impact investment vehicle, are not lending consistently. Their limited investment time horizon represents a problem as  small to mid-sized firms require more consistent access to funding  throughout their growth.  Limited investment horizons with large amounts of funding, often in equity form, is not what growing business need most. What they need are vehicles that can finance companies throughout their lifetimes, providing debt financing when and how it is needed.   As an example, if there were only VC funds and no banks or other funding mechanisms in the economy at large, growth would be severely constrained.   

While clear exit strategies are essential for VC investors, the markets are just not there to provide for them. A lot of the social enterprises seeking funding are likely to remain mid-sized, as there may never be a public market for their shares. But that doesn’t mean they aren’t strong, viable companies.

1. Reaching the entrepreneur. Many of the target entrepreneurs don’t know how to find investors, or in some cases even know they are available. The small to mid-sized business owner is typically more preoccupied with the day-to-day running of his or her business than figuring out long-term investment or funding strategies. Moreover, they often don’t know how to present a strategy or business plan to potential investors. And while help in the form of accelerators and business development service companies exists, most of these haven’t developed sustainable business models of their own. They need some type of recurrent revenue  to be sustainable. Entrepreneurs often have to nurse their cash reserves carefully, which limits what they are willing to pay to an accelerator which does not guarantee access to funding. So here again there’s a mismatch between needs and offerings on support of the impact enterprise.

Nonetheless, there is hope for impact investing, and I heard a  lot of interesting ideas during our panel discussion at Sustainatopia. One answer is to look beyond equity models and toward debt financing - to include banks in the equation. [Tweet this!]

Banks are present and actively lending in the Latin American region. They’ve built up significant data and contacts, and know their markets. They provide the debt financing that small to mid-sized firms need. But up to now, they have not been widely engaged in impact investing, and this is for two reasons.

First, the impact investing community hasn’t reached out to banks. Banks simply haven’t been seen as a potential channel for investments.

Second, particularly in Latin America, banks are making sizable profits lending in the consumer segment, so they’re not strongly motivated to look for new revenue sources. Banks might say why should they take the risk of impact investing?

This is the case that needs to be made, and it isn’t always an easy sell. But that doesn’t mean banks don’t have a role to play. Impact investing needs to find a way to bring them to the table.

Jose Mantilla is an International Management/Corporate Development Consultant at ShoreBank International.

Building SMEs Along the Value Chain: Biouniversal, Armenia

As the demand for organic products grows, one Armenian company, Biouniversal, is riding the wave, thanks in part to a loan it accessed with help from USAID’s Enterprise Development and Market Competitiveness (EDMC) program and SBI. In partnership with Pragma Corporation, SBI is implementing USAID’s value chain development program. We’re taking a two-pronged approach, working with companies in the target value chains and with financial institutions such as Biouniversal’s lender, Unibank, to identify potential SMEs for lending and effectively utilize their Development Credit Authority (DCA) guarantee.

BioUniversal, with its brand Manana, it is owned by Tigran Sahakyan. Tigran salvaged the business and the incomes of over a thousand Armenian farmers by re-opening it after government support collapsed. He changed the scope of the company to focus on Armenia’s rich array of ecologically pure herbs.

The Unibank loan enabled Biouniversal to renovate its warehouse, bringing it up to international standards. The company then qualified for an ecological license certifying its products as organic. It was also able to purchase state-of-the-art equipment, revolutionizing its production capabilities and expanding the array of products it can produce. The loan also allowed it to buy its materials in bulk, as opposed to importing them bit-by-bit, which is much more expensive.

The EDMC Project identified BioUniversal as a promising Armenia-based company, sponsoring it to attend the BioFach world organic trade fair. What BioUniversal learned at BioFach about the latest in organic product marketing has helped the company to better promote its products to international vendors.

At the fair, BioUniversal unveiled its latest product; a line of oils extracted from the herbs, and signed pre-agreement contracts with new potential buyers. BioUniversal’s order volume has doubled for the coming year and the company is on track to exceed its target sales goal.

Now, BioUniversal finds itself faced with a new challenge. Doubled orders means they need to double the raw materials they purchase from Armenian farmers. They also need more space for storage.

BioUniversal is already investigating a second loan to finance the additional materials purchase, renovate a second warehouse space, and perform marketing development. It also plans to expand its product offerings to herbal dishwashing liquid and organic natural food seasonings.

For more information about SBI and the EDMC program in Armenia, check out this blog article here. And if you’d like to learn more about SBI’s value chain approach, contact Phil Beavers  at +1-202-822-9100 or at: pbeavers@sbksbi.com.

Meet the Practitioner: Savings in Pakistan

Did you miss the SEEP Network's live video stream of Aban Haq, Chief Operating Officer of the Pakistan Microfinance Network and Jesse Fripp, Vice President of Shorebank International reflected on savings in Pakistan? It's not too late! You can watch it here.

Meet the Practitioner: Savings in Pakistan from SEEP Network on Vimeo.