The third in the Learning Brief series, "Understanding profitability in smallholder finance", intends to (1) bring clarity to  efforts currently undertaken by financial service providers (FSPs) to reach financial sustainability and (2) set the stage for future research. Drawing from a review of Mastercard Foundation rural and agricultural finance (RAF) partner experiences – including documentation, interviews a survey of 17 financial service providers, and secondary research from external sources – this brief provides FSPs with evidence to guide their journey in achieving financial sustainability. 

A number of financial services providers (FSPs) serving smallholder farmers affirm they have already achieved profitability. Despite this, providers affiliated with the Lab’s partners overwhelmingly agreed that cost to serve – and not farmer risk as often mentioned – is the most important cross-cutting barrier to business model sustainability. Efforts to achieve this long-term profitability can be sorted into five major pathways: unit economics, scale, cross-subsidizing, shared costs, and long term subsidies.

However, according to new research by the Mastercard Foundation Rural and Agricultural Finance Learning Lab (‘the Lab’), many still face significant challenges to developing and consolidating sustainable business models. Even after overcoming the difficulty of understanding the agricultural sector and smallholders’ unique financial needs, FSPs face high costs and risks of serving this segment. Although the pathways of scale and cross-subsidy appear to be preferred, there is a need for more research. For example, there is little to no publicly available analysis of the return on investment (ROI) for financial institutions serving smallholders. New learning around ROI and profitability levers (like technology and partnerships) is required to understand what works best for each institution type and how.