Pulse 10

The business case of smallholder finance

Introducing the SDM Case Study Series

Published on

November 26, 2018
Authorship: Clara Colina, Program Manager, Mastercard Foundation RAF Learning Lab; Iris van der Velden, IDH, the Sustainable Trade Initiative

Two-thirds of the world’s 450 million smallholder farmers live on less than USD 2 a day and remain stuck in cycles of poverty. But this pattern doesn’t need to be the norm. Smallholder farmers produce 70% of the worlds food, and economic growth in agriculture is up to 11 times as effective at reducing poverty compared to other sectors. With better access to financial services – such as credit, insurance, and savings – smallholders can invest in the critical inputs, technology and services they need to increase their productivity and ultimately improve their livelihoods to rise out of poverty.

To ensure smallholders have access to finance, and to close the USD 150 billion smallholder finance gap, financial institutions at all levels have a critical role to play.

Download full ECLOF case study


All capital on deck

Historically, donors and government institutions have played a key role in smallholder finance, committing over USD 1 billion annually. And while their commitments are notable, the reality is that their capital alone is not enough to close the gap in smallholder finance. Private capital will need to play a catalytic role in piloting and supporting new financial businesses that serve smallholders.

While the need for private capital is evident, investors have traditionally been reluctant to engage, given smallholders’ perceived cost and risk. And you can’t really blame them, after all, most smallholders lack credit history or collateral, don’t have access to well-defined markets, are exposed to climate shocks and price fluctuations, and tend to be located in rural and low density populated areas that are difficult to reach.

Long story short, private investors would rather put their money in sectors where they know they can make higher returns to counter their high perceived risk.   

Inflection Point flow of capital


A new awakening of smallholder investments

But here’s the good news: with Africa’s population growing rapidly and a new generation of technologies reaching smallholder farmers, we’re starting to see a new awakening across investor classes. Take Safaricom for instance. Their investment in Digifarm, which builds on their experience with MPesa, is helping thousands of smallholders gain access to inputs, training services and markets to sell their produce. Investments from big banks, such as Kenya Commercial Bank’s Mobigrow program that provides finance and training to smallholders, are also making waves. These initiatives demonstrate an increasing interest from traditional banks and corporations in agriculture and technology innovations. On the flipside, we’re also seeing non-traditional businesses enter the playing field, as evidenced by venture capital investments in innovative tech startups such as Tulaa and Apollo.

So what does this all really mean for smallholder finance? Based on recent investment trends, we now know that the barrier to private investment is less about generating interest, and more about getting investors to turn talk into action. But for investors to really start engaging, they need proof-points. Proof points that show a risky investment in smallholders can translate into meaningful financial returns and impact.

In many ways this is a fair concern: informed investment decisions require high quality and reliable data. In other markets and sectors, investors can open their Bloomberg terminal or access a wealth of private industry reports to inform investment decision. But in the case of smallholder finance and other early stage and developing sectors, lack of market and business level data means there is little visibility on the risks and expected returns of private capital.

We’re working to change this.   


Bringing transparency to smallholder financial services

The Mastercard Foundation Rural and Agricultural Finance Learning Lab (the Lab) and IDH Sustainable Trade Initiative (IDH) have joined forces to bring transparency to the USD 150 billion smallholder finance market. We are doing this by looking at the profitability of smallholder finance business models using a holistic Service Delivery Model approach that brings together the financial institution, their value chain partners and the farmer. Service Delivery Models (SDM) are supply chain structures that provide services to farmers – including finance, inputs, training and access to markets – that can improve smallholder profitability. The “SDM approach” applies a holistic and data driven methodology to evaluate supply chains and business models.

IDH originally developed the approach to evaluate SDM’s of agribusinesses working with smallholders, and have published 40 case studies since 2017. The Lab and IDH are building on this work to evaluate the SDM’s of financial service providers (FSPs) that are providing credit to smallholders. The insights developed through these case studies will help FSPs holistically assess how they operate their SDM, and identify opportunities to optimize key business model ingredients to serve smallholders profitably and at scale. In practice, the SDM assessment of the financial institution involve three key levels of analysis:

  1. Business case assessment of the financial institution’s smallholder finance portfolio, including the extent to which the financial institution relies on donor funding and what their sustainability would look like without this support.
  2. Profitability assessment of the farmers served by that financial institution, to understand the extent to which farmers are able to generate positive returns from their loan and improve their livelihoods.
  3. Business case assessment of the value chain actors (e.g. off takers, training providers) that financial institutions collaborate with in the SDM to facilitate access to non-financial services, including the extent to which these value chain actors are benefiting from the partnership with the FSP.

To date, the Lab and IDH have worked with three FSPs to pilot the SDM approach – ECLOF in Kenya, Opportunity Savings and Loans in Ghana, and Advans in Cote D’Ivoire – with promising results. For ECLOF Kenya, bringing transparency to key revenue and cost drivers and quantifying returns across the value chain proved to be a breakthrough exercise.

“The service delivery model analysis has been critical in informing
 how to best engage with farmers, cooperatives and funders.”

– Mary Munyuri, CEO of ECLOF Kenya

Today, Mary and her team are able to leverage the SDM analysis to inform investment decisions based on key profitability levers for their smallholder portfolio, prove their customer value proposition, better target their marketing efforts, and reshape negotiations with value chain partners. Ultimately, the SDM analysis will also help ECLOF share the costs and risks of serving smallholders with its partners, and quantify their profitability and impact for their investors.



What's next?

The Lab and IDH are working together over the next year to improve on the SDM approach for analyzing smallholder finance business models, and will continue to engage with FSPs to develop additional case studies. As we publish more case studies, we will begin to share insights on sector-level trends, key success factors and common pitfalls in smallholder finance.

IDH will publish the case studies and aggregated data on Farmfit, a growing marketplace for service providers with smallholder farmers as clients. Farmfit offers data, insights, and de-risking finance to businesses and banks, feeding the demand for viable business models that deliver finance and other services to smallholder farmers. Farmfit has three key components: Farmfit Intelligence, which helps all stakeholders that engage with smallholders get access to data on the returns of smallholder business models, and benchmarks individual business model performance against peers. Farmfit Business Support, which helps businesses and banks use these insights to better design smallholder business models, that can be scaled through the Farmfit Fund. The 30 M EUR Farmfit Business Support facility and Farmfit Intelligence center are funded by DFID and the Bill and Melinda Gates Foundation. The 100 M EUR Farmfit Fund is initially funded by four leading companies–Jacobs DE, Mondelez, Unilever and Rabobank—and the Dutch government, with additional de-risking guarantees from the US government.

Interested in learning more?

Sign up to stay tuned for more blog posts on specific case studies from our partner FSP and news on upcoming events focused on business model sustainability.

Get in touch if you’re an FSP interested in knowing more about engaging on a service delivery model assessment.


About the Author(s)

Original Content

The Learning Lab works to identify and share knowledge relevant to our learning agenda and our users, but also to create new knowledge through research and facilitated learning. Original content from the Learning Lab includes news about the Lab, analyses we've conducted, knowledge products we've created, and posts we've written about other relevant initiatives.

Learning Lab Contributor

IDH drives sustainability from niche to norm; by convening companies, civil society organizations, governments and others in public-private partnerships. Together with our partners, we design, co-fund and prototype new economically viable approaches to realize green & inclusive growth at scale. Our approaches are designed to drive sustainability in commodity sectors and sourcing areas, while delivering impact on the Sustainable Development Goals. IDH is supported by multiple European governments, and works together with over 500 companies, 35 civil society organizations and 40 governments, in 11 sectors and 11 landscapes, worldwide.


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