Going far, together: Breaking silos to unlock smallholder finance

Sector actors are increasingly aware that progressive partnerships are one of the most promising ways to feasibly structure finance and financial services for smallholder farmers. As our recent state of the sector report Inflection Point pointed out, these partnerships allow providers of finance to strengthen business models and increase reach. As partners align on pre-competitive or symbiotic goals to develop inclusive markets, we are learning lessons about how best to facilitate them and how to make them highly productive.

Progressive partnerships: Broad sector trends

At a pre-competitive level, actors who may compete with one another in the market are forming partnerships based on their common interests to mitigate risk across their value chains. We have seen pre-competitive alliances within different commodity markets through associations such as the African Cashew Initiative, the Cocoa Livelihoods Program, and Compaci, the Competitive African Cotton Initiative. Some, like the Better Cotton Initiative, connect players across the supply chain – from farmers to retailers. Others, like Developing Local Extension Capacity, are working to develop more effective technical assistance models.

There are also symbiotic partnerships at the level of financial service provision, between financial institutions and last mile firms. The term “last mile firms” refers to businesses working directly with farmers, such as off-takers and extension providers, or technology platforms that target and engage smallholders. Agribusinesses like Barry Callebaut subsidiary Biopartenaire in Ivory Coast are partnering with microfinance institutions (MFIs) like Advans to introduce savings products and potentially expand the reach of input loans. Kifiya developed a transaction platform in Ethiopia, through which micro-insurance providers can reach farmers. AGRA is exploring the potential for partnerships between financial institutions and farmer management systems providers, to enable credit underwriting based on farmer data.

And partnerships have emerged across sectors, as we describe in our 2016 briefing note, The Climate Conundrum. Agricultural finance and climate finance sectors are combining forces to invest in climate smart agricultural practices for smallholder farmers. Impact funds like Althelia and the Livelihoods Fund for Family Farming are developing new models that provide market returns by combining revenue from commodity sales with mechanisms like carbon credits. We are also seeing funder / government collaboration, as in the case of the Action Plan to support Brazil’s Forest Code and the Indonesian Tropical Landscapes Finance Facility, which leverages public funding for long-term investments in green growth and rural livelihoods.

Zeroing in on the last mile: Models ready to scale

The new developments in last mile partnership opportunities are particularly promising. Currently, few of these partnerships are operating at capacity in Africa – a situation ripe for change. The Learning Lab’s recent baseline research on Last mile partnerships for smallholder finance looked at last mile firms that want to partner with financial institutions (FIs). At least three models (which are not mutually exclusive) look particularly ready to scale:

• Off-taker (input lender): This is a partnership model with a long history. Agribusinesses that provide inputs on credit are often looking to outsource this financing, and financial institutions can deliver a broader array of other financial services to smallholders. Off-takers can facilitate direct relationships between farmers and FIs, as opposed to just on-lending bank finance. In the Biopartenaire example above, introducing savings accounts is a first step in a longer journey of connecting Advans with farmers.
• Delivery channel partnerships: In these partnerships, FIs can leverage the distribution infrastructure built by last mile firms that already provide products and services to farmers. The well-known ACRE insurance model uses existing agro-dealers to provide bundled seed insurance. Kifiya, cited above, provides a digital platform as a channel for insurance companies who can realize a 60% cost reduction. Agribusinesses like ECA in Mozambique (that want to move away from cash) can be a channel to introduce digital payment products to farmers.
• Data partnerships: Here the key value addition of the last mile partner is data. What AGRA, listed above, is exploring hinges on a data partnership. Similarly, an alternative data approach advanced by Mercy Corps AFA involves data sharing from input providers. In Ghana, off-taker and extension provider Prep-eez is developing a platform over which multiple FIs can access farmer data to provide loans and insurance.

Overall, FIs and last mile partners can share risks and transaction costs, expand offerings, and increase revenue, all of which improves the return on investment in serving smallholders.

Sharing our lessons learned: Working together in partnerships

In our work researching and facilitating partnerships like those outlined above, we have learned a few critical lessons:

• Lesson 1: Effective communication requires structure, openness, and neutrality. Partners need to balance clear and structured channels of communication with transparency and openness. Because there are frequently so many players, a neutral facilitator in the early stages can enhance successful design, facilitation, and management.
• Lesson 2: Flexible agreements are essential. All actors need room to adjust as the partnership evolves. As partners pilot their initiative, each will learn more about their goals and needs. Flexibility allows partners to take advantage of this learning and shift resources as appropriate.
• Lesson 3: The bigger the prize, the greater the complexity. Ambitious goals that require risk, innovation, and scale mean complex partnerships – ones that must be carefully built. For partnerships with big innovation agendas, it’s essential to have realistic expectations about what can be achieved in the short, medium, and long term. The team will need to build trust and get quick wins before building toward a greater mobilization of money and clients.