The majority of the food production in Asia and Sub-Saharan Africa is taken up by Smallholder farmers. Smallholder productivity and profitability are critical in ensuring global food security, especially in emerging countries.
Timely access to finance plays an important role in improving the productivity of smallholder farmers. But most of the time, their financial needs are being served by informal sources at exorbitant interest rates, which has further negative implications on their commercial viability. These informal sources could be local money lenders, traders, aggregators, input retailers, etc.
The challenge here is two-folded
1. Lack of commercial viability for the smallholders
The loan repayment capacity of any business is dependent on its commercial viability. Financial institutions find it comfortable to finance businesses, which are formal and commercially viable. In the case of smallholders, they are primarily informal. Their commercial viability depends on several factors such as timely access to the right inputs, right advisory, harvest, and post-harvest solutions, right markets, etc. Thus smallholder positioning in the value chain plays a critical role in defining their commercial viability.
2. Inefficient financial product design
Many financial institutions are dependent on collateral (Gold, land, etc) based financing mechanisms. This has made it challenging for many smallholders to access formal financing. Most of the time informal players better understand the financial needs of the smallholders throughout the crop cycle.
The way forward
Digital Financing
Improved internet penetration and gadget access provide the opportunities to improve the accessibility of finance to the remotest parts of the world. Accessibility to data through digital technologies can enable the risk assessment of the client while providing finance. Also, digital payment solutions can reduce the non-financial costs involved while disbursing and recollecting the loans.
Cash flow financing
A cash flow analysis provides required insights into the financial health of a smallholder. Cash flow analysis helps in the flexible design of a financial product that captures effectively the seasonal nature of agribusiness. Basically, the financial product design includes the elements like the Start and end date of the loan, timing and size of disbursement amounts, timing and size of repayment amounts, method of payment and collection (For example in the form of inputs and harvest rather than in the form of cash), terms of the loan, etc.,
Value Chain Financing
Different actors in the value chain have to play their roles effectively for the well functioning of a value chain. The interdependency and alignment of the actors define the value chain viability.
These relationships can be of various types; formal or informal, contractual or arms-length based, short term or long term. Financial institutions can leverage these relationships in defining smallholder viability and make the financing process more efficient, unlike collateral-based lending.
A mixed approach of the above three can help in providing innovative ways to finance the smallholders.
Keep learning
To understand more about the dynamics of the agribusiness value chain financing, opportunities for increasing access to finance for smallholder farmers and the innovations that are taking place in this space you might want to access following courses on this platform:
Very insightful post Pavan Siva.
Good points – very well articulated.
Let us also look into the issue holistically as financing is only a part and the rest has influence. Yes with finance as the focus.
-Risk analysis all along the process should be weaved into the solution.