Here’s how the World Bank defines financial inclusion: It means that
“Individuals and businesses [should] have access to useful and affordable financial services and products that meet their needs – transactions, payments, savings, credit and insurance – delivered in a sustainable way”
Considering this, the scale of smallholder farmers who are not financially included is huge. There are an estimated 500 million smallholder farmers in the world, and only 7% of them have access to finance, which farmers mostly use to purchase inputs like improved seeds, fertilizers or tools. There are multiple reasons as to why a majority of smallholder farmers haven’t yet come into the ambit of financial inclusion.
Even from a historical perspective, smallholder farmers are not a segment that typically accesses financial institutions, because the products and services on offer don’t exactly meet their unique needs. Secondly, smallholder farmers have no formal credit profile. Financial institutions, on the other hand, look for historical financial data such as loan repayments, savings deposit activity, other payment activity and behavior in order to assess the creditworthiness of a potential borrower. The lack of this has created a huge gap between the demand for financial services, and it’s supply.
There are also other challenges in lending to smallholder farmers. Unlike other businesses, farmer incomes follow a seasonality, which loan repayments need to align with. Logistic hindrances include factors like loan officers having to make long journeys to reach their clients, leading to higher operating costs. At times, conditions are unpredictable too, with extreme weather and crop pests, which play havoc with the harvest and performance of agricultural loans.
The financial institutions are not all in all to blame, though. For them, the operational cost of servicing small-sized loans to farmers in rural areas is high. There is a cost involved in also accessing remote populations and bringing on staff trained in agricultural lending. It’s understandable that these institutions generally look for loan collaterals.
What we’ve seen so far is that most agricultural payments are cash-based; banks often perceive agricultural loans as high risk and can be reluctant to lend to farmers without understanding their source and frequency of income. The introduction of digital business-to-person (B2P) transactions can reduce the risks in farmer financing. Mobile money payments help farmers build a transaction history that demonstrates regular income to potential lenders. What actually happens is that this digital behavior is converted to a sort of credit score. In some cases, banks have a composite rating based on generated farmers’ mobile usage and their agricultural activities. Overall, evidence points to the fact that mobile money can be an important enabler for these digital agricultural cases, generating financial data that could be used to create economic identities for farmers.
Typically, credit scoring for smallholder farmers has involved analysis of the few available data points, such as historical repayment records and current data, in order to assess future payment risks. But emerging approaches to credit risk analysis envisages the use of new sets of digital agriculture data.
SourceTrace’s Data Green software platform offers comprehensive management of all financial services in the agriculture value chain including credit, crop insurance, collections, and payments. With the use of the software, farmer groups and producer companies can digitize all financial transaction with farmers and thus provide transparency and accuracy of their operations for accessing credit. From the point of view of financial institutions, this minimizes risk while providing crop loans for farmers. This is done by aiding in establishing farmers’ credit worthiness and real-time monitoring of crop growth and yields.
Access to digital financial services can make the agriculture value chain function in a more seamless manner, which is good news at both ends. For example, in the story of TIGO cash’s financial inclusion project, about 10,000 farmers stand to benefit from a more widespread uptake and usage of mobile money payments and such other financial services. The aim of this project is to work with aggregators and agribusiness firms within the rice, soya bean and maize value chains to enable digital financial services among smallholder farmers through the mobile money platform. This will reduce the risk associated with cash transactions.
The GSMA’s survey of digital agricultural tools in Kenya showed a range of approaches to data sharing and data ownership. The good thing is that all digital solutions recognized the importance of data privacy and seeking consent from farmers before sharing their data. In Kenya, a number of agribusinesses and agtech companies and MNOs are already sharing data with a range of organizations, which in turn are offering targeted products and services to farmers.
Studies show that Kenya, for example, has benefited from digital tools that have brought efficiency to the Agri sector, wherein digital agricultural tools are generating farm and farmer data that can be used to create economic identities. These models appear replicable in many other developing countries too. Growth in digital agricultural solutions and initiatives will lead to an increase in the types of data available for analysis. Data sharing through a centralized exchange hub could help to scale financial inclusion and service provision. The number of last mile digital solutions and e-commerce platforms is expected to grow, leading to more data sharing opportunities. Going ahead, the use of technologies such as block chain and centralized exchange hubs could enable data to be stored and shared securely, and ultimately scale financial inclusion for smallholder farmers.
What does the smallholder farmer segment mean for the financial services industry?
For the financial services industry, the reality is that the smallholder farmer represents the single biggest new market segment, with 450 million farmers supporting 2 billion people within their households worldwide.
Going by the research co-authored by the Initiative for Smallholder Finance and Rural and Agricultural Finance (RAF) Learning Lab, the need for financial assistance is estimated to be in excess of 200 billion USD for Latin America, Sub-Saharan Africa and South, and Southeast Asia. The time is ripe for smallholder farmers to come into the domain of financial inclusion.
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