Research: Financing of African smallholder farmers offers solutions for worldwide food security
The Dutch Platform for Inclusive Finance (NpM), AgriProFocus and the Food & Business Knowledge Platform (F&BKP) have investigated the bottlenecks that exist to finance smallholder farmers. The research provides insight into how food production systems work and how they can be strengthened with improved financial services. The research report, which was published on May 13, 2015, shows that linking financial institutions and producer organizations together offers new finance opportunities because risks are reduced.
‘It is known worldwide that the lack of access to financial services is an obstacle for farmers to produce food for the local market. The potential of smallholder farmers, especially in Africa, plays an important role in increasing local food security,’ says Josien Sluijs, director of NpM. Lilianne Ploumen, Minister for Foreign Trade and Development Cooperation, also states that financing is one of the bottlenecks in the food chain.
Collaboration and risk management
In the research, coordinated by ICCO Terrafina Microfinance, the success factors of 14 projects in four African countries – Ethiopia, Mali, Uganda and Rwanda – have been analyzed. In addition to specific financing mechanisms, the cooperation between financial institutions, producer organizations and investors has also been examined and specific risk mitigation strategies have been investigated. Traditionally, producer organizations (POs) were focused on supporting functions in the areas of farming and marketing. Their new role also includes being the bridge to financial institutions. The financiers have recently experienced there is less risk when farmers are organized, which means they are now more willing to grant financing.
Lisette van Benthum (AgriProFocus): ‘By analysing these projects, a wealth of interesting financial instruments have been compared and described. We have noticed that you do not only need financial products, but that it is also important to deal with the root causes of risk in agriculture, such as poor farming practices, non-access to inputs and the extremely weak negotiating position of individual smallholders.’
In the months of April and May, the extensive report was presented in the four countries during expert meetings with financial institutions, producer organizations, donors, the Dutch embassies and local central banks.
Conclusions and recommendations for better financing
NpM and AgriProFocus will present the conclusions and recommendations to policy makers in the Netherlands and in the countries where the study was carried out.
Two of these recommendations are:
- Financiers need to assume their new role and work on:
- Building up expertise to deal with risk management in agricultural finance;
- Developing tailor-made financial products for the specific crop and market concerned;
- Engaging in financing in various levels of the food chain (mix of microfinance, agricultural finance and SME finance);
- Playing a pro-active role in the development of farm finance programmes in collaboration with the various actors.
- Microfinance and Small and Medium-Sized Enterprise (SME) finance are linked.
Smallholder farmers need (micro) finance to purchase seeds and pesticides. These farmers also benefit from the fact that buyers of the produce can get loans to buy their products. Otherwise the farmers often experience severe delays in payment for their products. Additionally, larger working capital loans are needed, for example, in the processing industry.
The report has been realized in coordination with other stakeholders who are active in this field on an international level: Agriterra, the European Microfinance Platform (e-MFP), the Consultative Group to Assist the Poor (CGAP) and the Wageningen University and Research centre (Wageningen UR).