The broadening and deepening of an increasingly sophisticated capital market

In the past, funding for rural finance was largely the remit of three types of providers of capital: 1) host country governments working through state banks; 2) agribusinesses allocating resources internally to assure sufficient supply; and 3) a small set of donors with a particular interest in expanding access to services through microfinance institutions (MFIs), banks, and a few leading NGOs. This funding ecosystem largely reflected the limited number of agri-finance models that were deployed by providers.

Over the last three years, just as diverse new service delivery models have emerged in the sector, we have also seen the capital market become broader and more sophisticated. In this landscape, ~ USD 9 billion in overseas development assistance, government funding (partially supported through IFAD and others), and targeted contributions by ~20 donors have continued to directly anchor a large part of the market.  However, we have also seen the emergence of a number of funds and facilities that are playing an increasingly important role in the landscape. In 2017, ISF identified ~ USD 19 billion dollars of funding in 80 impact-driven agricultural funds with a range of orientations that are now actively seeking pipeline. Major investments in digital agricultural finance have also been made, including the Mastercard Foundation commitment of ~ USD 200 million, and the entry of new MNOs, such as Safaricom and Econet. Meanwhile the emergence of a number of incubator/accelerator programs, such as Agrifin Accelerate, and aligned angel investor networks/venture capital funds, such as the Savannah Fund, have started to create more infrastructure to support early stage models.

The result of these new funding flows is a more diverse and sophisticated capital market than ever before.

A deeper look at the key market trends influencing the capital flows

To get smarter about this increasingly diverse capital market, it’s important to understand some key trends driving the continued evolution of the rural finance capital market, namely:

  1. Digital innovation: An estimated USD 250 million of subsidy has been channelled into digital innovation for agricultural finance, sparking a fragmented but diverse set of new services with a particular focus on smallholder farmers. Some of this funding has been directly invested in service providers, while other funding has been channelled through intermediary programs such as Mercy Corps Agrifin Accelerate and AGRA FISFAP.
  2. Structured funding: A range of funds and facilities are now structuring their funding for specific pipeline and/or service provider needs—for example, IFC GAFSP private sector window and the African Agriculture Fund
  3. Blended finance: The importance of blended sources of capital was noted in the 2016 Inflection Point report and has only become more popular as a way to mobilize financing for emerging markets. Increasingly sophisticated tools, approaches, and structures are now being developed to offset risks and create ways for more commercial capital to participate in agricultural finance.
  4. Capital advisory intermediaries: A maturing set of intermediaries (many of them multi-sectoral) have emerged to support more efficient capital allocation and structuring, this includes ISF Advisors, Lions Head, and Open Capital Advisors.
  5. Convergence of multiple impact agendas: Capital providers are beginning to align funding around multiple adjacent agendas such as youth, climate, gender, sustainability, and nutrition.
  6. Industry alliances: New consortia, such as the Farm to Market AllianceSmallholder and Agri-SME Finance and Investment Network (SAFIN), and Aceli Africa have enabled funders to more systematically structure and synchronize their investments.

While these trends are playing out on a more global scale, there are national-level ecosystems that have a major impact on the availability of different forms of finance for service providers. The range of government initiatives, investments, policies, and enabling regulations here are vast and demand a more thorough treatment. However, government-backed funds such as NIRSAL in Nigeria, GIRSAL in Ghana, the Ethiopian Diaspora Fund in Ethiopia, and the government funded index-insurance scheme in India are all examples of major initiatives that fundamentally shape rural finance at a national level.

Despite the increasing sophistication of this capital market, there remains significant challenges to ensuring the right capital is going to the right service providers at the right time. Some of these challenges are not new to the agricultural finance sector. For example, many funds still struggle to find investment-ready pipeline aligned to their asset class and/or risk-return expectations. Meanwhile working with currency fluctuations and exchange rate risks are well documented and remain challenging. Other challenges though have emerged hand-in-hand with service delivery innovation, e.g., the struggle of fintechs and other innovators to attract follow-on venture funding to continue scaling their models. What results is a complex capital market that spans a broad set of impact-return intersections, servicing an increasingly complex and fragmented set of service provider needs. In this environment there is a continued need to establish ways to understand and unpack the complexity.

The smart subsidy goal and the “efficient impact frontier”

In the 2016 Inflection Point report, we acknowledged that the vast majority of service delivery models required some form of subsidy. This research called on capital providers to work on unlocking new, more efficient and better-matched sources of capital for providers of services —also known as “smart subsidy.” In the context of directly supporting providers, the objectives of providing subsidy to service providers can be very different and include:

  • Buying long term impact in impact-first provider models that are unlikely to transition to higher levels of financial sustainability. In these “investments,” smart subsidy means the highest possible level of impact per donor dollar, something that is notoriously difficult to assess with credible benchmarks. Recent financial benchmarking analyses by Aceli Africa and Dalberg Advisors is one recent effort working to establish these benchmarks for agri-SME lending.
  • Subsidizing innovation in the short term in provider models with a clear plan to transition to higher levels of financial sustainability. In these “investments,” smart subsidy means identifying high-potential product, distribution, or business model innovations and working with providers to chart an efficient course towards scale and sustainability.
  • Creating capital leverage through using subsidy to enable the participation of more commercially oriented funding (the blended finance approach). In these “investments,” smart subsidy means high levels of capital leverage, a metric where credible benchmarks are beginning to emerge such as the recent Dalberg review of 117 blended finance deals where each dollar of donor capital generated 79 cents of private investment.

With this diversity of approaches to using subsidy, more sophisticated models and benchmarks are needed to credibly manage the impact-return trade-offs involved.

Recent thought leadership by service providers and sector leaders has made important advances to considering these dynamics. For instance, Root Capital developed the “Efficient Impact Frontier” concept to analyze and optimize the performance of their portfolio such that it achieves the highest social and environmental impact while also allocating philanthropic and investment funding efficiently. The Mastercard Foundation RAF Learning Lab has also worked with IDH Sustainable Trade Initiative to publish research and case studies that present a holistic assessment of Service Delivery Models (SDM) to help financial service providers optimize key business model ingredients—including smart subsidy—to serve smallholders profitably and at scale. Meanwhile, Omidyar Network has produced a series of studies about early stage investing for financial returns and social impact in emerging markets.

These approaches enable capital providers to interrogate, with increasing sophistication, the ways in which impact-return trade-offs are navigated within clearly understood service delivery models. The smallholder finance market is far too diverse for the question of “what is smart subsidy?” to be easily answered. However, these new frameworks, tools, and benchmarks are contributing to a more robust conversation.

The next step in sophistication: Considering capital needs through a pathways lens

In our latest research, we have identified another game-changing framework: transition pathways that represent a more dynamic model of rural client needs. In our first blog of this State of the Sector series, we laid out a series of pathways that smallholder households naturally follow as they transition from one livelihood state to another. For example, from resilient subsistence farmer to intensified commercial farmer to rural services entrepreneur.

Aligned with these transition pathways are a series of financial service providers that offer pathway-relevant services through a range of delivery models. The new typology of service delivery models captured in our second State of the Sector Pulse blog showcases how complex service models can be segmented to better meet the needs of smallholders throughout their different transition pathways.

The next question for us to answer is: How does capital provision align with this new pathways framework?

In the capital orientation map above, you can see how different types of provider models align to both profitability profiles (and types of capital) as well as pathways. In this mapping, provider profitability is considered as the current profitability of a provider excluding any subsidy. Capital types are aligned with these profitability profiles on that basis. The prevalence of provider models is depicted as a bell curve of sorts that shows the alignment of demand for different forms of capital based on the underlying profitability of the model. Seen through a pathway lens reveals a stylized global picture of rural finance models, their prevalence, and capital needs.

Viewing the rural finance demand for, and supply of, types of capital in this way creates a capital “map” of sorts, rich with intersections and potential capital gaps that lie at the heart of the global agenda.  While the prevalence mapping is illustrative (based on expert opinion) and may vary from reality, what it does show is that supporting pathway transitions involves capitalizing service delivery models with very different profiles.

With this new model there are a number of new insights that can be visualized in the new capital orientation map below. These insights are core to understanding how the capital market practically works and reveals some areas where more efficient allocation can be achieved.

Why we believe this new view of the capital markets matters

Building on the insights that come from a pathways view of the market, we see a new opportunity for capital need to more effectively and efficiently match capital supply. We are not in a position to be deterministic about these intersections, defining each service provider or capital provider’s profile (which would necessarily only represent a snapshot in time). However, using a common language and the intersections revealed in the capital orientation map, the gaps in the market can become much more apparent.

Said differently, this research presents a new standard for describing market positioning—for service providers and funders—that can help channel the right capital more efficiently to the right service providers at the right time. It can also help the sector as a whole, understand how different forms of capital relate to one another within a given market, ecosystem, or pathway.

To that end, we propose that every service and capital provider should be able to clearly articulate where they sit within the pathway-based capital orientation map, along the lines indicated in the figure below. In doing so, service providers will be better positioned to pursue right-fit capital, while capital providers will ensure that their subsidy is utilized in a “smart” and efficient way.

Getting “smart” on subsidy requires assessing diverse smallholder and service provider needs, ensuring transparency, and sharing data to truly manage a rational allocation of capital relative to the impacts and returns achieved.

What comes next?

Our thinking on the capital markets continues to evolve as the overall State of the Sector picture comes together. Over the next few months, we will continue developing the model and building out the implications and insights to help the industry consider how best to align capital with the financing needs of both service providers and their underlying clients. In particular, we hope to:

  • Further enhance the “capital orientation mapping” model, including clarifying investment pipelines and identifying major capital gaps
  • Deepen and validate research on key capital market trends
  • Enrich the analysis on how global trends are translating to experience at a country level
  • Refine a set of blended finance case studies and examples

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The expanding market for rural finance

In our 2016 Inflection Point report, ISF Advisors and the Lab issued a call for action to close the agricultural finance gap and spur investment in new models to extend financial services to smallholder farmers. While it is difficult to capture an exact picture of the scale of growth in different service delivery models in the past three years, it is clear that the service industry has evolved.

Just five years ago, commercial banks and microfinance institutions were mostly serving large-scale farmers in commercialized value chains, while non-profits were serving subsistence farmers. Meanwhile, state banks in Asia served all segments, but with the exception of a few impact-driven microfinance institutions (MFIs), there was very little activity in the ‘missing middle’, or those serving emerging rural households with more complex financial needs.  Since the Inflection Point report, we have witnessed a fundamental shift in the market. We have started to see a change in how profitability of the smallholder finance market is perceived. Rather than being a beneficiary, the smallholder farmer is increasingly viewed as a potentially valuable customer. And with this change, we have seen a significant influx of private sector, for-profit providers—both innovators and incumbents—who are innovating and expanding the market frontiers.

Key market trends


This market shift has been enabled by a number of trends that have influenced the underlying dynamics of providing financial services to smallholder farmers and agricultural small and medium enterprises (SMEs). Many of these trends interact with and reinforce each other, ultimately combining to create the market shift that has galvanized so many new and established providers into the market.

  1. Key donors, such as the Mastercard Foundation, the Bill and Melinda Gates Foundation, and USAID, as well as niche impact investors, such as Acumen and Accion, have contributed over USD $250M in targeted funding for smallholder and rural finance initiatives. These impact-driven investments have provided the patient capital innovators require to prove their business models and product-market fit. As such, they have enabled a proliferation of new models, services, tools, and products that change how FSPs engage with smallholder households and rural agricultural SMEs.
  2. We have seen a rise in the presence of ecosystem “connectors” — such as CSAF, SAFIN or Propagate Coalition — bringing private, public, and philanthropic actors together to coordinate agendas, share learnings, and mobilize action. At the heart of these collective partnerships and donor funding, is the mutual commitment to agricultural transformation and the acknowledgment of smallholder farmers and agri-SME as crucial players in global food and nutrition security.
  3. There has been an explosion of new digitally-enabled services and approaches to rural finance. These innovations are not only changing what products are being offered, such as new micro-insurance and asset financing options, but are also changing how FSPs conduct their businesses, for example via digitally-based credit scoring, digitally-enabled distribution infrastructure — including e-commerce and interactive farmer training programs. The spread of digitization is impacting both traditional service providers and newcomers, though in slightly different ways, as summarized by CGAP’s latest paper on Fintechs and Financial Inclusion. Traditional players, such as commercial banks and MFIs, tend to leverage digitization to improve their economics and drive operational efficiencies. Meanwhile, the innovators, such as Fintechs and platform players, are leveraging technology to solve pain points that are not addressed by the market incumbents. Underlying this explosion in digital models is a massive expansion in available technologies, alternative data sources, mobile phone ownership, and mobile network infrastructure; providing the basis for digital financial services and digital agriculture solutions that can be layered onto financial services for better risk assessment and service delivery.
  4. We are also seeing more bundled products and services as more providers recognize that to effectively meet farmer needs and achieve sustainability a more holistic approach is required — where finance is no longer an end in and of itself, but rather, an enabler of greater impact and overall profitability. From a service provision standpoint, this insight implies a fundamental shift, from considering service-level profitability to customer-level profitability, often utilizing cross-subsidization of multiple service lines and product types. From a farmer standpoint, it implies the acknowledgment that to translate access to finance into positive impact, finance must enable access to inputs, markets, and other value-added services that can drive farm productivity and income gains.
  5. We have witnessed a renewed and increased focus on agri-SMEs and value chain finance, driven by the recognition of the leading role a strong SME ecosystem plays in delivering services to farmers and, more broadly, in creating jobs, driving innovation, and shifting to higher value-added economies. An increasing number of corporations, foundations, and governments are supporting small and growing businesses. At the same time a stronger ecosystem of incubators, accelerators, technical assistance providers, investors and impact funds is emerging to address the distinct finance and business development needs of ag-SME. African Management Initiative, Enablis, Technoserve Entrepreneurship, and Stawi Africa are some examples of organizations that recently designed programs for agri-SME entrepreneurial and/or capital support.
  6. Finally, we note the emergence of a more sophisticated business-to-business (B2B) market to support the FSPs working in this space. This has taken the form of both B2B products and specialist applications, such as partnership platforms and technology solutions aimed at digitizing specific business processes including, for example, customer registration and data collection, credit risk assessment, or advisory services; as well as business development services (BDS). As business models, product classes, and capital investment structures have become more sophisticated, a specialized set of external consultants (BDS providers) has developed in response, with services ranging from product design, to digitization, to capital restructuring. This strong ecosystem of B2B players has allowed FSPs to focus on their core activitied and outsource risky and time-consuming investments.

A deeper understanding of our market

In addition to trends above, which have reshaped the rural agricultural finance market in the past few years, there has been a significant deepening of the ‘management science’ approach to understanding how actors in this market are functioning. This line of inquiry seeks to gather and synthesize the data of market stakeholders to understand how financial services can be effectively and sustainably provided to smallholder households. In particular, the work of IDH, the Lab, and Mercy Corps have provided significant new information and perspective on the various ‘Service Delivery Models’ used by providers and their potential for both impact and profitability.

Drawing on this intelligence, our State of the Sector report includes a new typology of FSP models. Our segmentation categorizes FSPs according to both their ‘Objective for Service Delivery’ and their ‘Service Delivery Model’.

We have found three distinct types of Primary Goals for Service Delivery, which explain a service provider’s motivation for offering financial and non-financial services to their customers.

  1. Supply security: Service providers offer services to farmers often in exchange for a purchase agreement. They are motivated by ensuring sufficient supply of produce and, as such, their unit of profitability is not the producer of the commodity but a different actor further downstream in the value chain (e.g. wholesaler). The services themselves, although sometimes monetizable, are a means to an end; the ‘end’ being availability of produce at the right time and in the right quantity and quality.
  2. Service profitability: Service providers offer services themselves as the core business objective. Recipients (farmers and SMEs) engaging with the services are the unit of profitability, either as each service offered is monetizable and potentially profitable stand-alone (e.g., earning interest on a loan), or as other, often non-ag or non-financial services, offered to the recipient are profitable. In the latter case, some services may not necessarily be profit-motivated stand-alone, but can be cross-subsidized for an overall positive customer value.
  3. Client outcomes: Service providers offer services to increase the income, wellbeing, independence, and empowerment of the farmer or SME. The services themselves are a means to an end; the ‘end’ being a richer, more resilient farmer or business.

Once we understand why a service provider is offering financial services, we then turn our attention to how they have structured themselves to deliver those services.

There are four types of Service Delivery Models, which describe how the FSP is structured to deliver financial services to clients.

  1. Focused: Service provider offers a single service (e.g., loans, TA, inputs, analysis) to farmers and SMEs, without partnering.
  2. Focused Plus: Service provider offers 1-3 services to farmers and SMEs, often partnering with other providers to create the menu of services.
  3. Holistic: Service provider offers all the services farmers require, without partnering. This is often a very intensive process.
  4. Platform: Service provider acts as a connector between farmers and affiliated service providers, sometimes offering their own services as well.

Figure 1: Service Delivery Models


By mapping over a thousand existing FSPs according to these criteria, we have established 10 segments that each demonstrate a coherent approach to market engagement and organizational structure. In addition, our research indicated that these segments tended to engage with smallholders and agri-SMEs in different proportions, with some models focused exclusively on one client type and some addressing the needs of both. Of the twelve potential segments, one was unpopulated (Indirectly Profit-Driven, Focused Plus) and the other was so nascent (Directly Profit-Driven, Holistic) that is was designated as a ‘Proto-Segment’. It is important to note that these segments are not necessarily static — service providers can have more then one goal and can be experimenting with more than one service delivery model; thereby lying somewhere along the spectrum of different segments or evolving over time as they scale and become more sustainable.

Figure 2: FSP Segmentation by Service Delivery Model and Primary Goal for Service Delivery

Why we believe this new provider segmentation matters

As innovation has spread through the rural agricultural finance market, there has been a corresponding rise in the diversity and complexity of approaches and models for service provision. We believe that it is vitally important to continue cataloguing and refining our understanding of what exists, what is working, and how these innovations can be used to increase the efficacy and sustainability of FSPs around the globe. Our new typology recognizes some of the most important dimensions of underlying service models, including the scope and configuration of services, their underlying objective, and their client base. By establishing this segmentation, we can begin looking for commonalities and lessons that can be applied with more precision. We believe that this segmentation grants a robust basis for drawing out micro and macro-level lessons that can be used to tackle big questions that we are all asking: What is the impact potential of a given model? What drives profitability in financial service provision for smallholder households and agri-SMEs?

Further, moving beyond basic FSP categorizations (such as ‘ag-tech’, ‘MNO’, or ‘non-profit lender’) to look at underlying models is an important step to also understanding the markets in which they operate. The constellations of providers and models in each market create a services ecosystem that is an aggregate of the individual models — necessitating a segmentation that recognizes how an individual FSP links to the broader ecosystem via partnerships and platform arrangements. No FSP will single-handedly address the service gap in financial services for smallholder farmers, so understanding the dynamics that drive a strong ecosystem will be important for the development of the market.

But perhaps most importantly, this segmentation allows us to better investigate and articulate how to align the three levels of the market — clients, providers, and capital. When asking questions such as “What type of service providers are best suited to serve different farmer segments and pathways?” and “What types and amounts of capital flow should be directed to different types of service providers?” we can move beyond superficial categorizations of FSPs to what ultimately matters — What does the farmer and agri-SME need? How can those needs be met, given the objectives of the FSP? And consequentially, what sources of capital are required given the financial and impact returns we can realistically expect within those circumstances?

What comes next?

Over the next few months we will continue to fine-tune the providers segmentation model to better understand trends and links to farmer pathways and capital market flows. In particular, we hope to:

  • Update Inflection Point’s supply-side sizing, adding a new “innovators” sizing that was not considered back in 2016
  • Consolidate an updated global database of profiled providers that allows us to stress test the relevance of the new segmentation
  • Refine analysis of current and likely future trends
  • Articulate how the providers segmentation model links to farmer pathways and to capital market needs, flows, and trends
  • Conduct select case studies to help readers visualize how farmer pathways, providers delivery models, and capital flows come together as holistic investment theses

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