Digitizing Smallholder Finance for the 93 Percent

In developed economies, some experts blame new technologies for contributing to inequality between the rich and the poor. But for the 93 percent of smallholder farming households that lack a clearly defined buyer for their crops, advances in technology — and digital finance in particular — could drive a new era of more equitable gains in agricultural livelihoods.

Globally, a small minority (approximately 7 percent) of smallholders are estimated to be engaged in what CGAP refers to as “tight” value chain relationships with a predetermined buyer for their agricultural outputs. Commercial smallholders in tight value chains often receive financing directly from buyers, who can in turn deduct repayment from the crops delivered. They are also more likely to access services from financial institutions, which can lower costs and reduce risk by using buyers to aggregate demand and ensure debt repayment. Access to “value chain finance” — financial services that flow to or through any point in a value chain — enables smallholders to reduce risk, improve crop yields, manage liquidity, and transact with markets.

Yet the vast majority of the world’s smallholders — an estimated 465 million households — have only loose or no connections to value chains, and this has implications for their ability to access and use financial services to improve their livelihoods. Lacking contracts with buyers, these smallholders may find it difficult to secure financing for the high-quality inputs and working capital required to boost agricultural production. They may struggle to obtain affordable insurance policies that help to manage risk and encourage greater investments in their farms. And faced with liquidity constraints and market failures, they are often unable to seek out the best price for their crops.

But as CGAP notes in a recently released publication, "Digitizing Value Chain Finance for Smallholders," innovations in digital financial services offer an unprecedented opportunity to extend the reach of value chain finance. By increasing the information available on smallholders’ financial and agricultural lives and reducing transaction costs, these services have the potential to provide excluded smallholder segments with a range of products and services designed to increase productivity, manage risk, and access new markets. For example, aggregation and analysis of digital data related to sales, payments, and seasonality of cash flows among value chain actors promise to overcome barriers to providing credit not only to smallholders, but also to the traders, processors, and retailers that serve them. At the same time, branchless banking and the rise of mobile devices are making payments to and from smallholders more efficient, while reducing barriers to collecting deposits and offering affordable insurance products.

While many early offerings — like the digitization of bulk payments — tend to favor farmers who already have strong connections to value chain actors, a number of innovative digital initiatives are targeting non-commercial farmers and those with loose connections to value chains in an effort to increase their capacity and productivity. Digital credit and savings products can help excluded smallholders to access improved inputs that boost yields and overall crop quality, allowing these farmers to sell more of what they produce at a higher price. Low-cost digital insurance, perhaps bundled with or tied to the purchase of inputs, can reduce the risk of making such a significant investment. And new digital services that offer smallholders access to post-harvest financing and the ability to shop around for the best price for their crops hold the promise to tightly integrate millions of smallholders into value chains.

In one example, Kenyan technology start-up FarmDrive is using agronomic, behavioral, and demographic data to develop credit scores on smallholders and connect them to financial institutions. Other emerging initiatives like Esoko’s Fasiba offer layaway services for smallholders who cannot access credit or prefer not to take on debt to save in advance for a package of inputs using their mobile wallets. Still others, such as TruTrade Africa, are working to more tightly integrate smallholders into value chains by brokering deals and connecting them to buyers of agricultural commodities. Technology, and its ability to break down barriers to entry into value chains for both smallholders and financial service providers, is the common thread that runs through each of these examples.

As population growth, urbanization, and rising incomes continue to drive demand for agricultural commodities, smallholder agricultural production can play an important role in supplying the world’s food. Already, the United Nations Food and Agriculture Organization estimates that smallholder farmers account for at least 70 percent of global food production, and many agribusinesses have turned to smallholders as suppliers in an effort to exploit newly emerging market opportunities. Digital value chain finance has the potential to boost smallholder productivity — not just among those already tightly connected to value chains, but for the 93 percent of smallholder households that need it most.