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,

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.