For the world’s 500 million smallholder farming households, agriculture is a risky and complicated business. Investments in improving productivity are expensive. Pests and adverse weather are constant threats. Finding a fair price for your crops is far from ensured.
The digitization of value chain finance—financial services that flow to or through any point in a value chain—is changing the way smallholders access the financial tools necessary to invest in their farms, manage risk, and transact with markets. In this Focus Note, CGAP explores opportunities and emerging models in digital value chain finance (DVCF), particularly new technologies that can break down barriers to delivering financial services to a greater number of smallholder farmers. CGAP identifies three key use cases for digital financial services in agricultural value chains:
- Improving the efficiency of financial transactions. From bulk payments between buyers of agricultural commodities and their suppliers to digitized loan disbursements and repayments, digital payments offer some advantages over cash—while also posing new challenges of their own.
- Overcoming barriers to providing financial services. Branchless banking and new data on customers allow for digitizing savings, credit, and insurance products—making them more affordable and accessible to a greater number of smallholders.
- Improving market opportunities. Digital trading platforms, digital warehouse receipts, and digital invoice discounting help smallholders to maximize the price they get for their crops.
Several barriers to digitization remain, including poor mobile network and agent infrastructure in rural areas, and uncertainty surrounding the cost of services and the quality of data collected on smallholder customers. But the potential is also clear.
With a growing recognition of the importance of agricultural development to economic growth, and the emergence of new threats posed by climate change, leveraging financial services to strengthen value chains and boost smallholder production is increasingly a national priority for developing countries. While DVCF offers just one approach to achieving these goals, the potential impact of DVCF means that CGAP and its partners will be watching developments in the space closely in the years to come.