Smallholder Finance: Digital Solutions to Traditional Challenges?

In anticipation of a just-released CGAP Focus Note, "Serving Smallholder Farmers: Recent Developments in Digital Finance," we asked three experts who use digital channels to improve smallholder access to financial services for an inside look at how their work is faring and what others can learn from it.

The Focus Note, part of CGAP’s initiative on Financial Innovation for Smallholder Families, takes a look at how digital financial services, or DFS, can help overcome the traditional "pain points"—including higher cost and risk—of serving smallholder farmers.

Much of the enthusiasm around DFS, of course, derives from the impact mobile banking has had in extending financial services to the traditionally unbanked. But evidence compiled in the Focus Note suggests that going the "last mile" to serve smallholder farmers with DFS will hinge on those farmers' willingness to adopt—and trust—the technologies driving these services.

The number of pilots (including those summarized in this blog series) is certainly cause for optimism, but limited financial capability among smallholder farmers, coupled with poor to nonexistent mobile network infrastructure in many rural areas, means that DFS will likely not be a panacea in the near-term.

In addition, early evidence suggests that DFS innovations tailored to the agricultural context –while benefitting smallholders - often are driven by the interests not of smallholders but of other parties such as governments seeking to reduce costs of cash subsidies or commodity buyers seeking to reduce costs and risk associated with cash payments. Future efforts should focus on complementing current DFS innovations with other innovations based more solidly on the financial needs, behaviors and aspirations of smallholder families.

Bolaji Akinboro of Cellulant kicks off the series with a promising look at how his organization has brought mobile wallets to Nigerian farmers, helping up to eight million of them receive much-needed fertilizer inputs at roughly half their usual cost. “With more than 40 million transactions through the mobile wallet system in just two years,” writes Akinboro, it’s clear that smallholder farmers in Nigeria are poised to adopt digital financial systems more broadly.”

Lending a note of caution, Stephanie Hanson of One Acre Fund writes that, while mobile money solutions have shown promise among smallholder farmers in Kenya, a lack of hardware and too-high transaction fees are likely to limit the reach of DFS in the immediate term: “Mobile money might be a powerful tool in the future to improve the efficiency of delivering financial services to smallholder farmers, but for now, reaching the last mile of farmers still requires good old-fashioned legwork.”

Finally, Bennett Wetch of Fair Trade USA breaks down the barriers to linking smallholder farmers—who often lack digitized, analyzable data on harvest trends—with financial service providers that can help them weather the time between harvests. Wetch introduces one solution to this challenge, Acopio, “a data collection tool for computers and mobile devices” that is helping track coffee growers’ yields and, in turn, empowering “smallholders and the organizations that serve them with the means to analyze and share information that can help incentivize the wider provision of financial services.”