Serving Smallholder Farmers: Recent Developments in Digital Finance
This Focus Note introduces some recent developments in digital financial services for smallholder farmers. The featured case studies (i) identify traditional pain points in serving smallholder farmers (such as the cost and risk of making payments to farmers and delivering subsidized credit), (ii) discuss how DFS are being used to overcome these pain points, and (iii) highlight some initial obstacles and successes.
Given the embryonic and rapidly developing state of DFS for smallholders, it is too early to draw clear conclusions from the examples to date. Initial evidence suggests, however, that while DFS via mobile channels offer great promise for improving the lives of smallholders and their families, significant challenges remain. One key obstacle is the lack of mobile phone penetration and network coverage, suggesting that different forms of technology also should be considered. Furthermore, smallholders’ receptiveness to DFS via mobile channels in the case study countries appears to vary depending on their experience with mobile phones in general and with mobile money services in particular. This suggests that the success of mobile-enabled DFS may depend in large part on factors such as nationwide mobile money adoption and smallholders’ experience using mobile phones for services such as voice, messaging, and agricultural information.
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 risks associated with cash payments. Future efforts should focus on complementing current DFS innovations with other innovations that are based more solidly on the financial needs, behaviors, and aspirations of smallholder families.
Many smallholder farmers around the world have relationships with buyers who provide credit to purchase inputs (and sometimes labor) in exchange for a promise to sell their crops upon harvest. Since most smallholders lack access to formal financial accounts and services, they are typically paid in cash. This system has a number of weaknesses. From the perspective of the buyer, distributing cash payments to thousands of unbanked farmers is costly and dangerous. Cash disbursement also poses security and liquidity management problems for the farmers. They typically receive several months’ worth of income (and possibly more) in one day. Since these funds often are stored at home, farmers run the risk of being robbed or losing the money in the event of a fire or other disaster. In many rural communities cash payments are typically made publicly in front of the entire community, so everyone knows how much each family has earned. This lack of privacy makes it even more difficult for low-income farmers to smooth consconsumption and save, since an expectation to lend financial support to relatives may be part of the local culture.
Efforts at digitizing financing for inputs are being tested around the world, including in Ghana where migrating low-income farmers to traditional bank accounts has proven challenging. With only five commercial bank branches per 100,000 Ghanaians, access to banking institutions is limited, particularly in rural areas. As of 2011, only about 25 percent of rural Ghanaians and 15 percent of low-income Ghanaians maintained accounts in formal financial institutions, according to the World Bank Global Findex.