Segmentation of Smallholder Households
There are an estimated 500 million smallholder farmers in low- and middle-income countries. And, despite some improvement in their access to general financial services, relatively little progress has been made in financial services specific to their agricultural activities. Rural households and their demand for financial services have not been well understood, and the risk of extending them credit seems higher, due in part to the inherent risks of agriculture, the axis on which much of the rural economy turns. The relatively low population density of rural areas and the small size of most transactions have also made it very difficult to capture savings, channel remittances, build money transfer systems, and offer individual microinsurance products. Expanding the access of poor households to general financial services has already proven difficult. Meeting their additional needs for financial services related to agriculture seems even more daunting.
But opportunities in agricultural finance do exist, as demonstrated by positive experiences across a range of delivery channels, products, and financial service providers. Simple yet powerful innovations in the use of mobile phones, for example, are aggregating farmers and driving down transaction costs to levels that could pave the way for financial products and applications that had been previously unprofitable. Savings products have been modified to allow users to accumulate toward specific household goals in practical ways that fit with their cash flows and future spending needs. Financial service providers have learned a great deal about how to manage microloans to poor families and get them repaid—profitably. Private-sector agricultural businesses have also been steadily expanding their role in financial services, embedding access to credit in the production chain within a bundle of other goods and services (e.g., seeds, inputs, weather information, insurance) to secure steady supplies of raw materials and higher-value crops.
This paper examines the challenge of providing financial services that support the multiple goals of rural households, including those related to their more universal, general household needs and those linked to their agricultural activities. Following an overview of the policy and business case for attention to smallholders and their agricultural activities, this paper proposes a segmentation framework for the 500 million smallholders in low- and middle-income countries to more precisely characterize their demand for financial services related to agricultural activities. These three segments—(i) noncommercial smallholders, (ii) commercial smallholders in loose value chains, and (iii) commercial smallholders in tight value chains—are differentiated by what they grow, how they engage with markets as buyers and/or sellers, and how those markets are organized. These segments are not meant to be fixed, iron-clad divisions, but rather categories based on common traits that can begin to illuminate the financial mechanisms that might best fit the given financial goals and cash flows. This paper then outlines the demand for and current supply of financial services within each segment, and it concludes with some initial ideas on opportunities to better meet their financial needs.