Transition Pathways: A Dynamic View of How Rural Households Evolve

2019

Segmenting smallholder farmers: A brief historical context

One of the most exciting evolutions within our field is the evolving ability to better understand the rural households we are seeking to serve and support.

Figure 1: Evolution of smallholder farmer segmentation

Just five years ago, our ability to segment smallholder farmers primarily relied on agriculturally related variables — what they produced, how they sold it, farm size, etc. These variables could describe smallholders’ activity, but could not explain the hows and whys of smallholder households’ engagement with markets. There was little data available to determine what was driving smallholders’ behaviors and attitudes, and by extension, it was difficult to construct programs, services, and products that resonated with their underlying motivations and needs.

In recent years, efforts from a number of actors has allowed us to shift toward a data-led cluster and segmentation, helping us refine our understanding of smallholder households. In 2016-2017, CGAP undertook an extensive data collection effort, using national surveys and financial diaries to develop a deep, data led, understanding of smallholder household livelihood profiles. Based on their research, they identified three segments of smallholder households — Subsisting, Commercializing, and Diversifying — that are summarized in their latest segmentation publication. This research reveals that rural households have rich and complex financial profiles with a range of income sources and choices to make. In this context agriculture is an important, but not the only economic driver of livelihoods and progression.

Even with these advances in our understanding, to date, segmentation has been static — a categorization of smallholder households based on their characteristics at a particular moment in time. But smallholders are dynamic. As they pursue their goals and face challenges over the course of their lives (and across generations) their needs evolve. Accordingly, we have developed a new dynamic model around typical ‘transition pathways’, which describe a number of predictable development trajectories for rural households. These pathways offer micro- and macro-level insights into how smallholders’ needs evolve over time and how that will shape the rural economy. These pathways are not intended to prescribe the path that should be followed but more to layout the universe of possibilities that households could follow as choices are made about how to build resilience and agency within the household.

The new starting point: Smallholder segments

We use CGAP’s data-led segmentation as the starting point to anchor our ‘transition pathways’ model. Their work identified three segments of smallholder households, as explained below:

Subsisting: Farmers in the Subsisting segment are generally rural dwellers whose livelihoods focus on agriculture, primarily in order to feed their own families. These smallholders complement their agricultural activity with income from day labor, also often in agriculture. There is little indication that they will transform their agricultural activities into a sustainable, commercial business. This segment has the lowest use of formal and informal financial services.
Commercializing: In contrast to the other two smallholder segments, Commercializing smallholders consider farming to be a business and estimate that most of their income comes from agriculture. This segment is better connected to value chains, also selling to wholesalers and resellers. While still poor overall, they earn relatively higher incomes than Subsisting farmers and use a combination of formal and informal financial services.
Diversifying: Smallholder households in the Diversifying segment have a multi-dimensional livelihood strategy. These households on average farm smaller plots of land and consume most of their agricultural output. While they may earn some income from agriculture, their primary income source is more likely their own business or regular or casual employment. Their income tends to be as high as or higher than the Commercializing segment, and they may use formal financial tools such as bank accounts and mobile money.

The dynamic extension: Transition pathways

The segments above represent a smallholder household’s current state. To understand how smallholder households are likely to evolve over time, our team has laid out the different pathways they take as they pursue resilience and agency through various livelihood strategies. In general, the transition pathways coalesce around four ‘centers of gravity’— broad categories of livelihoods that rural households may choose to pursue.

Figure 2: The four livelihood ‘centers of gravity’

Within these four centers of gravity, there are seven pathways that smallholder households typically move along as they pursue incremental resilience and agency over time. Within farming, households (1) improve their resilience and (2) intensify their production, with eventual (3) land consolidation and (4) enterprise organization for those that attain high levels of growth and commercial sustainability. For those rural households that choose to transition away from primary agricultural production, they may choose to (5) convert to agricultural services and industries, (6) convert to non-agricultural livelihoods within their rural setting, or (7) migrate to urban areas.

Figure 3: Rural Pathways Model

It is important to note that over the course of a smallholder’s life, there will be both forward and backward movement along these pathways as they experience successes and shocks at different points. Additionally, a single household may change pathways or simultaneously pursue multiple pathways as they adapt to changing priorities and external context.

Why we believe dynamic pathways are a new paradigm of thinking

The goal of a successful financial inclusion strategy is not a single interaction. It is a long-term engagement that allows smallholder farmers to access the financial services and products they require to improve their economic standing over their lifetime. For financial service providers, this is closely tied to the concept of ‘customer lifetime value’, where profitability is greatly helped by a relationship that endures and matures over an extended period of time.

Static segmentation allows donors and financial service providers to craft strategies that meet a smallholder farmer’s current needs, but crafting a strategy for long-term engagement requires us to consider the potential pathways that those customers may travel. By examining the transition points along these pathways, we can begin to understand how a smallholder’s use of financial services (among other services and products) may change over time. This understanding will help financial service providers, practitioners, and donors to tailor products, bundle offerings, and better communicate with rural households.

Perhaps the most striking aspect of our dynamic model is the simple recognition that many smallholder farmers will not remain smallholder farmers at all, and therefore meeting their financial needs over time will require a wide range of non-agricultural products and services as well. This view of the market is much more fluid and broad than agricultural finance has traditionally been defined—a shift that we believe represents a new opportunity to push the boundaries of innovation and inclusion within the market.

We are also hopeful that this new, dynamic view of the range of transitions that rural households may undertake over time will support a new conversation about how inclusive economic development occurs as countries naturally industrialize and transition away from agriculture as the major source of employment.

Building on the framework: What comes next?

Our Rural Pathways Model is just the beginning. Over the next few months, we will continue to develop the model and build out the implications and insights that will help smallholder finance players strengthen their own understanding of these pathways. In particular, the State of the Sector report will include:

Market size estimates for select smallholder segments and associated solutions
Detailed discussion of the typical pathways, with deep-dives in high-priority pathways
Identification of crucial services, strategies, and catalytic investments that can facilitate smallholder and agri-SME transitions along these pathways
Rural household snapshots, with a lens on youth and gender, that personalize the experience of moving along a particular pathway
Insights on how these pathways will impact the rural economy more generally
Perspectives on cross-cutting trends, such as migration and climate, that can have a key impact on how rural households make choices between, and within, different pathways

Over the coming months we will also start to share how this view of rural clients links to the latest intelligence around providers and the capital markets that mobilize to enable them to provide critical services. Building this holistic, global view of the rural finance agenda is the key ambition for the State of the Sector research effort, one that is greatly enriched by our collective experience and perspective.