Small­holder fi­nanc­ing: a model that works for farm­ers and banks

Africa’s agri­cul­tural po­ten­tial can only be re­alised if small­hold­ers gain ac­cess to fi­nance. But loans can­not be fo­cused on just one as­pect of the value chain at the ex­pense of oth­ers. An­tois van der Westhuizen, man­ag­ing di­rec­tor of John Deere Fi­nan­cial,

Farmer's Weekly (South Africa) - - Contents -

Ac­cess to ad­e­quate fi­nanc­ing is of­ten iden­ti­fied as one of the key in­hibitors to achiev­ing long-term sus­tain­abil­ity for Africa’s agri­cul­tural prac­ti­tion­ers, par­tic­u­larly small­holder and sub­sis­tencelevel farm­ers. These peo­ple typ­i­cally re­sort to bor­row­ing from com­mu­nity mem­bers or pool­ing re­sources to make ends meet. There is a real need to un­lock fi­nanc­ing for small­holder farm­ers to give them ac­cess to mech­a­ni­sa­tion and other tech­nolo­gies, but it is lit­tle use help­ing them buy trac­tors when they don’t have money to buy seed and fer­tiliser. Africa’s farm­ers re­quire a holis­tic fi­nanc­ing so­lu­tion that fo­cuses on the en­tire agri­cul­tural value chain.

be­yond con­ven­tional fi­nanc­ing

Fail­ure to pro­vide in­te­grated fi­nanc­ing mod­els is partly why the tra­di­tional re­liance on grant fund­ing from govern­ment sources or NGOs has not suc­ceeded in cre­at­ing real agri­cul­tural pro­duc­tiv­ity gains on the con­ti­nent. It has sim­ply been too lim­ited in scope.

Re­ly­ing on com­mer­cial banks to solve the prob­lem also has its lim­i­ta­tions, as their reg­u­la­tory and fidu­ciary du­ties re­quire them to adopt a risk mit­i­ga­tion strat­egy. This, by its very na­ture, lim­its the po­ten­tial scope of clients to larger or­gan­i­sa­tions with es­tab­lished track records. While this makes sound com­mer­cial sense, it does not nec­es­sar­ily achieve the broader pol­icy ob­jec­tives of de­vel­op­ing agri­cul­ture for food se­cu­rity, job cre­ation and com­mu­nity wel­fare rea­sons.

For banks, the risk pro­file of a com­mer­cial farmer is vastly dif­fer­ent to that of a small­holder farmer. It makes more sense for them to lend to the end-cus­tomer of a group of small­holder farm­ers than each in­di­vid­ual small­holder. For ex­am­ple, if a com­mu­nity of small­holder farm­ers is grow­ing bar­ley for a brew­ery, it makes more sense for the bank to lend money to the brew­ery, which can, in turn, lend money to the small­hold­ers.

How cell phones can help

South Africa is home to about 32 000 com­mer­cial farm­ers, of whom be­tween 5 000 and 7 000 are re­spon­si­ble for pro­duc­ing roughly 80% of the coun­try’s agri­cul­tural out­put. By con­trast, on the rest of the con­ti­nent, small­holder farm­ers ac­count for be­tween 70% and 80% of agri­cul­tural out­put, which is of­ten in­suf­fi­cient to meet their coun­tries’ nu­tri­tional re­quire­ments. This re­sults in coun­tries hav­ing to im­port food from abroad, of­ten from heav­ily sub­sidised mar­kets such as the EU, mak­ing it dif­fi­cult for do­mes­tic farm­ers to com­pete on price.

As a re­sult of this, Africa, which is home to about 60% of the world’s avail­able arable land, is still re­garded as a food-in­se­cure con­ti­nent. This is partly due to lack of ac­cess to mech­a­nised so­lu­tions, such as ir­ri­ga­tion equip­ment, which means that as much as 90% of the small­holder farm­ers on the con­ti­nent still rely on rain to wa­ter their crops. Im­proved farm­ing tech­niques, mech­a­ni­sa­tion and ac­cess to bet­ter seed could fur­ther boost agri­cul­tural yield.

africa has to look at the en­tire supply chain fi­nanc­ing ar­range­ment

The in­te­gra­tion of dig­i­tal tech­nol­ogy into agri­cul­ture rep­re­sents a ma­jor op­por­tu­nity for Africa. The emer­gence of the cell phone as a pop­u­lar com­mu­ni­ca­tion tool, cou­pled with In­ter­net-based so­lu­tions, could sig­nif­i­cantly boost ac­cess to fi­nanc­ing for agri­cul­tural in­puts across the value chain.

Ac­cord­ing to John Deere Fi­nan­cial’s es­ti­mates, Africans op­er­ate about 122 mil­lion elec­tronic bank­ing ac­counts, and these are hosted mainly by cell phone op­er­a­tors or home-grown pay­ment and trans­fer so­lu­tions such as Kenya’s M-Pesa. The elec­tronic pay­ment and re­ceipt records of these ac­counts can be lever­aged to har­vest valu­able client in­for­ma­tion, which can then be used to cre­ate more ac­cu­rate risk pro­files of small­holder farm­ers by analysing their cash flow man­age­ment, re­pay­ment his­to­ries and spend­ing habits.

The more ac­cu­rate a pic­ture that can be formed of bor­row­ers, the more pre­cisely their risk can be priced, which boosts the like­li­hood of credit providers be­ing will­ing to lend money to them.

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