Onward and upward: Using a systems approach to unlock smallholder finance potential

Our landmark state of the sector report, Inflection Point, makes a bold call to action, asking for a concerted effort from sector actors  – FSPs, funders, TA providers, and others – to cut the smallholder financing gap in half by 2025.  To do this, stakeholders across the sector will need to systematically increase collaboration and break down silos between actors. Now more than ever, players ranging from agribusinesses to fintechs have the opportunity to work together and build new market opportunities to better serve smallholder farmers.

Our understanding of how to approach agricultural finance is much more sophisticated than it was even a year ago, is in part thanks to 2016’s Inflection Point and rigorous research dating back to Dalberg’s 2012 Catalyzing Smallholder Agricultural Finance. We observed that actors were approaching the sector with a “channel-based” framework.  They had the skills and knowledge to serve smallholders within their primary distribution channel and its function, but didn’t have the know-how to design products that could work more effectively through cross-channel collaboration.

Recently, a few companies have started to cross channels and functions with great success. For instance, low customer usage of its mobile app drove Smart Money to cross channels and partner with kiosks and agro dealers to increase awareness and penetration in rural consumers. And solar home system provider and financier M-Kopa has worked to cross functions – recognizing that most of their customers are also farmers, they are collateralizing the solar asset in order to finance agricultural products.  Historically, most actors’ focus on perfecting distribution channels has limited the potential for more, and more appropriate, financial services for smallholder farmers.

Following our findings in Inflection Point, we are working from a whole new model of the sector. Instead of seeing a parallel series of distribution channels, we see a complex and interconnected ecosystem of different stakeholders. The graphic below provides a simple framework for organizing some of the key actors and relationships in this ecosystem.  It does not attempt to capture the critical role of agricultural markets, or details of non-financial services.

Looking at the sector in a holistic way, focusing both on the actors (boxes above) and the relationships (arrows), we identified three key barriers to growth – limited and mismatched capital availability, low business model sustainability, and a shortfall of “demand” relative to “need”. From there we have targeted three key areas needed to unlock progress in the face of these barriers: smart subsidy, progressive partnerships, and customer centricity.

In light of this new systems approach, the sector needs to rethink the ways in which we navigate farmer financing demand and answer big questions on what tools we use to address it. Are we offering the right financial products to the right types of farmers? What constraints need to be resolved together at a country level to unlock services for smallholder farmers locally? How can we facilitate the relationships between funders and investors and financial markets?