How are smallholder families managing their money? What challenges do they face? And what financial solutions can help?
Getting answers to these questions called for a year of data collection and thousands of conversations with farming families in three distinct markets. Researchers with CGAP’s "Financial Diaries with Smallholder Families" ("Smallholder Diaries”) visited with 270 farming families in Mozambique, Tanzania, and Pakistan every two weeks from June 2014 to July 2015 to track their how they were earning money, how they were spending it, and their agricultural activities. They also recorded all the ups and downs these families faced, from births and deaths to droughts and floods, offering a unique window onto their financial and agricultural lives.
So what did we learn? And how can these insights shape financial solutions for smallholder families? Five fresh facts emerge from the Smallholder Diaries.
1. Mobile money was nearly absent.
Expectations are high for digital financial solutions, but our research indicates that this technology may not be an easy solution for the financial challenges facing many smallholder families.
We found that awareness of mobile money was high, but use was low. Over the entire year of data collection, only 19% of the families in the Tanzania sample actually used mobile money. No one in all of the Smallholder Diaries households in either Pakistan or Mozambique used it at all.
While digital financial solutions are appealing, they need to be more tailored to specific profiles of smallholder households and overcome basic barriers like access to a mobile phone and the capability to use it.
2. Informal financial tools weren’t as prevalent as expected.
The use of informal financial tools – such as local savings clubs, ROSCAS or ASCAS - didn’t emerge in the Smallholder Diaries data as strongly as expected. Even ROSCAS, the simplest and most accessible of these savings and credit groups, were used by only a tenth of the sample in Mozambique and a third in Tanzania. There remains a lot of work to do in increasing access to even these entry-level financial tools.
3. Smallholder households rely on a lot more than agriculture to support their families.
Surprisingly, while the Smallholder Diaries households in all three countries identified as “farmers,” they actually relied on many non-agricultural endeavors for their net cash income. In fact, in the Mozambique sample, 93% of the families’ net cash income came from sources other than agricultural production. This was also true for 74% of the families in the Tanzania sample and 58% of the families in the Pakistan sample. But cash income is far from the whole story. In-kind income – a household’s own consumption of what it grows – is also vital for these families. This was most striking in the sample in Mozambique, where families consumed nearly all of what they produced. Taking in-kind income into account, the proportion of household income from crop production jumped from just 7 percent to 49 percent.
4. Weather shocks hit hard, and smallholder families have few tools to cope.
Weather-related shocks dealt major hardships to families in each of the three samples. Within the last five years, for example, 72% of Smallholder Diaries families in Pakistan lost at least one-quarter of one of their crops to a weather shock. And often they had very few tools at hand to cope. When their crops were destroyed by weather, three-quarters of the Tanzanian households in the Smallholder Diaries did nothing specific in response – they didn’t borrow money, they didn’t have crop insurance, they didn’t pick up an odd job to make extra money. They didn’t have fallback options. They had no tools to cope.
5. Tailored solutions for distinct markets.
Smallholder farmers often have a few things in common: Their income from agriculture can be volatile, their agricultural expenses can be high, and their risks are wide-ranging, and often difficult to manage. But beyond that, there is tremendous diversity in what they grow, the techniques and technology they use, and where they sell their crops and livestock, if they sell anything at all.
The needs and struggles of each profile of smallholder households should be thoroughly understood and any approach tailored accordingly, whether it’s government policies, or agricultural extension, or financial products. There is not one cookie cutter solution to financial inclusion for smallholder households. Rather, there are as many distinct solutions—and opportunities—as there are major profiles of smallholder families.
Thank you for sharing the highlights, Jamie! Quite interesting and no big surprises. Findings backed by solid data will definitely help the Digital Financial Services providers to customise their offerings and design new smallholder centric products and channels to reach out to this very huge still underserved segment. Referring to point no.4 above, when the crops were destroyed, most of the families in Tanzania did nothing? They must have done something at least for their consumption. Tapping into their savings? social capital? borrowing?
Thanks for your comment, Sachin, and glad you find the research useful. Like you said, it's exciting to have some data to back up our sense of what's been happening in the financial lives of smallholder households, and to use that as a solid foundation for product design.
On your question about the Smallholder Diaries sample in Tanzania and the coping mechanisms that families used when crops were destroyed by weather, yes, 72% of households said that they did "nothing special" in response. This was by far the largest response. Otherwise, 10% worked more, 3% sold crops, 7% sold other assets, 3% reduced consumption, and 3% drew on their savings (multiple responses allowed, see Figure 29 in the full paper).
So what does this tell us? It could mean that families didn't have many tools in the toolbox with which to cope, and it could also indicate that some of the weather-related shocks they experienced had a relatively lower impact, and didn't warrant a specific response. A good example of when research raises as many questions as it answers.