Understanding the impact of inclusive financial services is crucial to closing the USD 150 billion smallholder finance gap. Since the Lab’s 2015 study on impact, new evidence and emerging data from the Mastercard Foundation RAF Learning Lab portfolio – a USD 175M portfolio including 9 partners targeting 10M smallholders across 26 countries – shows a positive impact of smallholder finance on farmer livelihoods.

Traditionally, donors have pushed for a greater understanding of farmer impact to identify which investment opportunities are most effective and also monitor performance overtime. However, private sector actors, including agribusinesses and financial institutions, are increasingly realizing that understanding the impact of their services on farmer livelihoods is fundamental to ensuring product adoption and thus enabling sustainable and scalable business models. This requires providers to understand the drivers of farmer profitability, including productivity and commodity prices, and understanding how these drivers will change overtime as farmers increase the use of capital.

Over the past few years, the sector has come a long way in understanding impact, as seen by an increase in research investments from think tanks and research institutions alike. However, the evidence gap remains significant.

Impact as we know it

As part of the Lab’s Annual Learning Review, an evaluation activity meant to capture emerging learnings from the Lab’s portfolio and identify knowledge gaps, the Lab reviewed external literature on farmer impact and found positive effects of credit and savings on farmers’ yields, income, and consumption. For example, J-PAL’s 2016 policy brief identified that the expansion of agricultural loans led to an increase in the value of agricultural output by USD 32, and an increase in the value of livestock by USD 168.  Additionally, the 2015 IPA policy brief found that agricultural loans increased output and food consumption in Zambia by USD 35 on average, ultimately improving the livelihoods of both women and youth. In regards to savings, IPA’s 2017 policy brief found that with access to formal savings accounts farmers saved more through the planting and harvesting seasons. As a result, they were able to cultivate more land, invest in more agricultural inputs, and increase their consumption

We’re also beginning to see the early stages of positive impact from Lab portfolio partners. In fact, in 2016 One Acre Fund reported an average increase of USD 137 in annual farm profits, boosting farmer income by 55% and increasing total household income by 15% on average. With higher farm profits, farmers can invest in agricultural training and financial education allowing them to reinvest into building out their company.

Acknowledging the knowledge gaps

Despite these positive findings, there remains significant knowledge gaps when it comes to farm level impact of financial services. For instance, most of the evidence today looks at the impact of the digitization of payments and to some extent short term and working capital credit. More broadly, there is little to no evidence on (1) the impact on farmer livelihoods of other financial products; (2) optimal service features for farm level impact, particularly bundled services and digital attributes; (3) the impact on gender-focused outcomes of financial services; and (4) the relationship between farmer returns and business profitability.

To address these knowledge gaps, providers, agribusinesses, and donors need to allocate resources toward improving the sector’s understanding of these four areas.

1. Impact on farmer livelihoods of other financial products: Providers need to invest in understanding how to ensure farmer returns, monitor them over time, and capture some of those returns to increase the sustainability of their business models. For example, this research could help service providers understand how much productivity and farmer income is expected to increase from asset-based loans or insurance.
2. Optimal service features for farm level impact: To date, there is little to no evidence on what service features or attributes are most effective at driving uptake, yields, and income and/or mitigating farmer and therefore business risk. This is particularly true for bundled services and digital attributes, despite the sector hype. Within the Lab’s portfolio, some players are beginning to scratch the surface. Organizations such as Opportunity International and One Acre Fund saw an increase in adoption when transitioning to digital. However, this evidence is still primarily focused on adoption and at most yields ­– with little guidance on what this means for smallholder livelihoods.
3. Gender-focused outcomes of financial services: Providers need to understand how female farmer returns from financial services may be different from that achieved by male farmer, and what service features work best to achieve gender-focused impact outcomes including financial independence and household decision making power.
4. Relationship between farmer returns and business profitability: While we are seeing increasing focus on farm level impact, there is still little evidence on the extent to which enabling higher farmer returns leads to more profitable business models for financial service providers. During the next few years the Lab’s research investment and top priority will be understanding the sustainability of different business models delivering financial services to smallholder farmers. Unpacking key drivers of financial sustainability, including the relationship between farmer and business profitability, will be a core part of this exercise.