Inclusive Finance and Segmenting Smallholder Farmers

An estimated 500 million smallholder farmers live in low- and middle-income countries. Despite some improvements to their access to broad financial services, relatively little progress has been made to advance services that cater specifically to their agricultural activities. These 500 million agricultural families, all engaged in some kind of crop, livestock, and/or fisheries production, are the largest single group, by livelihood, of financially underserved people in the world.

But opportunities in agricultural finance do exist, as demonstrated by positive experience across a range of delivery channels, products, and financial service providers. Simple yet powerful innovations in the use of mobile phones, for example, are driving down transaction costs, while commitment savings products are also proving effective. Financial service providers have learned a great deal about managing microloans to poor families and getting them profitably repaid. Private-sector agricultural businesses have also been expanding their role in financial services, embedding a bundle of goods and services that includes credit in the production chain.

Building on these successes in a widespread, meaningful way – and particularly to reach underserved smallholders -requires a better understanding of their demand for financial services related to agricultural activities. Along these lines, a new CGAP paper proposes a segmentation framework for smallholder households based on based on what they grow, how they engage with markets (as buyers and/or sellers), how those markets are organized. The paper identifies three broad segments as a starting point for understanding the financial needs of smallholder farmers.

  1. Non-commercial smallholders, an estimated 300 million smallholders, are primarily subsistence farmers who tend to produce staple crops for household consumption and only engage in local, informal markets as sellers in the rare event of a surplus;
  2. Commercial smallholders in loose value chains, an estimated 165 million smallholders, tend to produce a mix of staple and high-value crops and engage in local or regional spot markets as both sellers and buyers; and,
  3. Commercial smallholders in tight value chains, an estimated 35 million smallholders, tend to derive a sizeable portion of their agricultural income from higher-value specialty crops sold to regional and international buyers on a contract basis.

These three segments are not meant to be unbending divisions, but rather categories based on common traits that can begin to illuminate the financial products that might best fit their shared financial goals and cash flows. As with any segmentation framework, there are important exceptions and nuances to bear in mind.

The results of this analysis emphasize that different kinds of households have different kinds of financial needs, and that this variety in demand cannot be met by the same suite of financial products, terms of service, or even formal financial service providers.

Moreover, general household finance and specific agricultural finance do not exist in isolation. Money is fungible, and many existing financial services can meet a range of household goals, including some related to agriculture.

Beyond what general financial services can offer, there seem to be a few additional cases in which new delivery channels, products, or business models may be needed to address the specific risks and cash flows of agriculture:

  • When agricultural households are almost entirely dependent on farming for their income and face cash constraints during lean agricultural periods.
  • When larger investments over longer terms are needed
  • When the crop is relatively riskier
  • When production must be restarted following a catastrophic harvest

More work is needed, however, to better understand how agricultural households differ, what is working and what is not in agricultural finance, and why that is. Refining the broad segmentation of agricultural households presented here, as well as encouraging increased transparency of the products and service providers already reaching them, are important steps toward answering fundamental market questions.

Illuminating the financial lives of these families could also help align general forms of finance with products tailored to their agricultural activities, and add greater value to the financial portfolios of the world’s 500 million smallholder households.



This paper examines the challenge of providing financial services that support the multiple goals of rural households.


09 May 2013 Submitted by Samuel Okelo Deya (not verified)

I highly commend the write up herein.
I am a micro finance practitioner and was the CEO for a rural focused micro finance institution from January 2006 to September 2012.
Smallholder farming has been my passionate interest and support when i worked towards developing a product known as "NON CASH BANKING" that focused on agricultural products being produced by smallholder farmers but not able to reach the market easily and at the same time they are perishable and lack of preservative facilities with poor or none existence infrasructures notwithstanding!
I came up with a concept and subsequent applicability where such agricultural products once ready found their way to consumers immediately with payment arrangements in place.
Transformation of these rural areas have been in place and,farming viewed and embraced as viable business.
We had been visited by Unitus,a development agency based in Seattle in the USA to learn and understand the concept and practice and i was also sponsored by Ford Foundation for an exchange visit to India via SA-DHAN(The national micro finace association) in 2009 which gave me the opportnunity to understand the success of SHGs(Self Help Groups). I had the ever memorable opportunity to share my thoughts with the global evergreen Father of Microfinance and Nobel Prize Winner,Professor Mohamed Yunus. I was in Delhi,Utter Pradesh and Hyderebad.
I was equally priviledge to share the same thoughts in terms of progress when we met again with Professor Yunus in Nairobi during the Global Microcredit Summit in 2010 while still serving as AMFI Treasurer with powerful words of professional encouragement.
I have been keen to upscale the same since we also have a wing that do focused capacity building initiatives to the smallholder farmers on areas of group formations,improvised farming techniques,appropriate implements and seedlings,basic management and financial literacy,market linkages,lobbying strategies,storage and warehousing,profiling goverment policies and strategies in support of smallholder farming aspart of self sufficiency in household food and possibly for market among others.
We have since recently liased with IFDC (An International Centre For Soil Fertility And Agricultural Development-2SCALE) on the theme of "Toward Sustainable Clusters in Agribusiness through Learning in Enterpreneurship" for the East and Southern Africa Division-Kenya Chapter based at ICIPE Duduville Campus,Nairobi
We are currently awaiting for their final feedback to us since we had forwarded our detailed write up,completing their detailed quetionnaire inncluding Budget estimates. They have also visited our offices based in Kisumu city on the shores of Lake Victoria in Western Kenya.
We are ready to furnish you with the related activity summary details but above all the keeness to collaborate/partner with you since we are relevantly on the ground.
Iam a past Board member and Treasurer of the Kenyan Association of Micro Finance Institutions(AMFI) during the years 2009-2011(
Sam Deya

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