Understanding Smallholder Demand for Financial Services

Smallholder families represent the largest global segment (by livelihood) of those living on less than $2 a day. With an estimated 500 million smallholder farming households, representing more than 2.5 billion people, understanding how best to support their “growth out of poverty” is an imperative for governments and development practitioners worldwide.

Yet when it comes to serving the needs of smallholder families—especially those in rural areas—one challenge emerges consistently: a lack of information. In this blog series, we’ve explored why deeper understanding of smallholder demand for financial services is so critical: author Roger Thurow gave us a snapshot of smallholder families’ precarious life between harvests; Dan Zook of Dalberg Global Development Advisors outlined how financial service providers can begin to learn more about these lives and the unpredictable income flows that destabilize them; and Lesley Denyes of MercyCorps looked at how smallholder farmers access market and financial information that can help them improve their yields and, with them, their lives.

Rice harvest Rice harvest

Photo Credit: Ha Tran Bao

For its part, CGAP is prioritizing targeted demand research on poor smallholder households, working to accurately identify the full spectrum of their financial needs. After all, smallholder families are not only agricultural producers. They are also consumers who have diverse financial needs. We also know that most smallholder families typically earn income from a variety of nonagricultural sources, including the sale of labor and off-farm enterprising, for example. It is in part this diversity that calls for a deeper understanding of what smallholder families experience—from their perspective.

Enter the CGAP financial diaries project, which aims to understand how poor smallholder farmers manage their cash flows at a fine-grained level. It also aims to understand farmer preferences, attitudes, and behaviors.

The project, which will begin in the coming months, will test a range of hypotheses about the financial behavior of smallholder farmers, including whether diversifying income sources may be a more effective path out of poverty than a narrower focus on simply increasing agricultural yields. Related to this are questions around the value proposition of financial services currently available to smallholder farmers as well as the effectiveness of various organizations—from MFIs to funeral societies and cooperatives—in delivering those services. The results of the research will be publically available and disseminated to policymakers, industry, researchers, and others—all to inform the development of financial markets for smallholder farmers.

Throughout, our goals will be to: (i) provide hard, quantitative evidence for a range of potential hypotheses with a number of potential answers; (ii) identify questions that might not have been envisioned in advance; and (iii) challenge long-held assumptions of behavior.

The project, which will be conducted among a sampling of 90 smallholder households in each of Tanzania, Pakistan, and Mozambique will yield new insights into what works—and what doesn’t—when trying to reach smallholder families. As important, though, we hope that these insights will serve as the foundation of informed client-centric financial products, future research, and impact-driven development programs.

Michael Tarazi is a Senior Financial Sector Specialist with CGAP, where he coordinates the organization’s initiative on financial innovation for smallholder families.

This blog post is part of a series on understanding demand for smallholder financing, which brings together a range of perspectives on farming households' array of financial services needs. Read the rest of the posts in the series on the CGAP Blog.


17 February 2014 Submitted by Petro Mattaba (not verified)

In Tanzania more than 70% of the population live in rural areas and majority of them are employed in the agriculture sector. The type of farming they practice is subsistence farming.
These smallholder farmers usually suffer from agriculture related risks, weather, pests, price fluctuations, lack/poor storage facilities, political risks etc.

Understanding how smallholder farmers manage their cash flows is a challenging topic. In Tanzania this market segment is mostly served by semi formal MFIs. These MFIs are SACCOS(Saving and Credit Cooperative Society) also known as Credit Unions and AMCOS (Agricultural Marketing Cooperative Society). However, some of these MFIs have been facing challenges in loan recovery for loans granted for farming activities.

The lack of adequate irrigation schemes means that these smallholder farmers mostly depend on rainfall when making farming decision. Unfortunate the rain seasons are no longer predictable due to climate change effects and even the weather stations does not make accurate predictions due to lack of modern facilities. This means the smallholder farmer will farm without assurance of harvesting.

When it happens that there is enough rainfall another challenges comes in, lack of storage and fall in price. Since there was adequate rainfall then the harvest was good and because there are no good storage facilities then many farmers are forced to sell during harvest season a situation which pushes the price down because supply is high than demand.

The range of financial services offered by Cooperatives is limited and does not meet the needs of their clients. Majority of smallholder farmers would need a bridging loan during farming and harvest season when the price is still low and repay the loan after selling their produce when the price is good. Few MFIs are doing the warehouse receipt system which accommodates this need.

Diversifying sources of income has been one of the solutions for smallholder farmers in Tanzania to cope with agricultural related risks.
Increasing agricultural yields is also a good strategy but it can only be effective when supported with other infrastructures. You need to have good storage facilities, reliable market and a stable prices

25 March 2014 Submitted by Kura Murwisi (not verified)

I did a study which looked at the potential for using branchless banking driven solutions to enhance access to finance for value chain finance delivered services to farmers. My observation was that value chain finance and branchless banking services are both potential tools that can increase access to finance for smallholder farmers. However, independently these two tools have failed to adequately address the small farmer finance challenge. Therefore my research was based on investigating whether a combined approach that amalgamates the two can be a potential solution.

To do this the study was centered on building the business case for branchless banking services within a selected smallholder value chain finance mechanism, contract farming. The business case for branchless banking was believed to be existent along the chain if there was a market opportunity for branchless banking services where financial transactions along the chain can be shifted to branchless banking driven transactions. Secondly, branchless banking services had to show that they offer the least cost platform for completing financial transactions along the chain when compared to competing alternative platforms. Thirdly, there should be a market for scalable adoption of branchless banking along the chain.

The end results of this study showed that there is a strong case for incorporating branchless banking services into smallholder value chain finance mechanisms where they will significantly contribute towards reduction of transaction costs which are the biggest challenge to lending to smallholder farmers.

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