Catalyzing Smallholder Agricultural Finance

Catalyzing_Smallholder_Ag_Finance.pdf

Smallholder farmers occupy an increasingly important segment of the global agricultural value chain. 

multinational buyers increasingly will rely on smallholders to secure their supply of agricultural commodities and to help satisfy consumer sustainability preferences. 

Donors consider the world’s 450 million smallholders a linchpin in poverty-reduction strategies because more than two billion of the world’s poorest live in households that depend on agriculture for their livelihood. 

these smallholders also represent stewards of natural resources that are in need of sustainable management to prevent deforestation and degradation of ecosystems.

but smallholder production, which generally occurs on plots of less than two hectares, is characterized by low yields, low quality, poor linkages, and little access to finance. At an estimated size of $450 billion, the global demand for smallholder agricultural finance is large—and largely unmet. Impact driven smallholder agricultural lenders such as root Capital, Oikocredit, and triodos (referred to in this report as “social lenders”) and local state sources currently satisfy less than two percent of the demand. With $350 million in isbursements, social lenders are small, but they play a catalytic role in driving financing into untapped markets. 

Where deployed, the social lender model has proven successful in meeting smallholder financing needs, improving production, building local markets, and encouraging sustainable management of natural resources. Furthermore, there is evidence that the model can catalyze lending from other sources, such as commercial lenders. the social lender model works through cooperatives or producer organizations, making it an efficient channel for supplying finance to smallholder farmers. However, because only about 10 percent of the world’s smallholders participate in farmers’ organizations, social lenders can currently address a small portion of 

global smallholder demand. meeting the broader demand will require other approaches tailored to the specific characteristics of each market.

this report identifies five primary growth pathways for deploying investment to address smallholder finance demand: (i) replicate and scale existing financing models, such as the one proven by social lenders; (ii) innovate new financial products beyond short-term export trade finance; (iii) finance out-grower schemes of multinational buyers in captive value chains; (iv) finance through alternate points of aggregation in the value chain; and (v) finance directly to farmers. 

each of the five growth pathways above is discrete and can be pursued independently of the others. However, within each pathway different actors are interdependent, so collaboration is required. Donors and impact investors (including bi-lateral and multi-lateral agencies) provide the foundational capital for all five pathways, but their role depends on whether they are focused on scaling 

proven models or innovating new models. Multinational buyers can work with lenders to facilitate financing using purchase contracts as collateral or use their relationships with farmers to originate loans, assess risk, and collect payments. Commercial lenders and social lenders must decide where to apply resources in order to match their capabilities with the most relevant need and opportunity. 

this report helps to frame that decision.

Catalyzing_Smallholder_Ag_Finance.pdf

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