In a series of blogs, ISF Advisors and the Mastercard Foundation Rural and Agricultural Finance Learning Lab (the Lab) will introduce major concepts and frameworks that will anchor our upcoming State of the Sector report for rural finance. Building on the “industry model” developed in our 2016 Inflection Point report, these frameworks aim to bring further clarity and insight to the three layers of the market: Rural clients [1], financial service providers (FSPs), and the capital markets. We hope that by sharing early versions of this thinking we can stimulate debate and discussion across the sector about what is needed to continue to enhance access to rural, agricultural financial services.
In this second blog, we discuss some of the major shifts and trends that have shaped the FSP market since the ‘innovation inflection point.’ Further, we present a new segmentation of FSPs, that goes beyond type of FSP to create segments based on organizations’ underlying ‘Primary Goal for Service Delivery’ and ‘Service Delivery Model.’
[1] Rural clients include smallholder households and rural, agricultural service enterprises.
In our 2016 Inflection Point report, ISF Advisors and the Lab issued a call for action to close the agricultural finance gap and spur investment in new models to extend financial services to smallholder farmers. While it is difficult to capture an exact picture of the scale of growth in different service delivery models in the past three years, it is clear that the service industry has evolved.
Just five years ago, commercial banks and microfinance institutions were mostly serving large-scale farmers in commercialized value chains, while non-profits were serving subsistence farmers. Meanwhile, state banks in Asia served all segments, but with the exception of a few impact-driven microfinance institutions (MFIs), there was very little activity in the ‘missing middle’, or those serving emerging rural households with more complex financial needs. Since the Inflection Point report, we have witnessed a fundamental shift in the market. We have started to see a change in how profitability of the smallholder finance market is perceived. Rather than being a beneficiary, the smallholder farmer is increasingly viewed as a potentially valuable customer. And with this change, we have seen a significant influx of private sector, for-profit providers—both innovators and incumbents—who are innovating and expanding the market frontiers.
This market shift has been enabled by a number of trends that have influenced the underlying dynamics of providing financial services to smallholder farmers and agricultural small and medium enterprises (SMEs). Many of these trends interact with and reinforce each other, ultimately combining to create the market shift that has galvanized so many new and established providers into the market.
[2] Refer to “Getting smarter on subsidy: the role of grant funding in smallholder finance”, ISF Advisors
In addition to trends above, which have reshaped the rural agricultural finance market in the past few years, there has been a significant deepening of the ‘management science’ approach to understanding how actors in this market are functioning. This line of inquiry seeks to gather and synthesize the data of market stakeholders to understand how financial services can be effectively and sustainably provided to smallholder households. In particular, the work of IDH, the Lab, and Mercy Corps have provided significant new information and perspective on the various ‘Service Delivery Models’ used by providers and their potential for both impact and profitability.
Drawing on this intelligence, our State of the Sector report includes a new typology of FSP models. Our segmentation categorizes FSPs according to both their ‘Objective for Service Delivery’ and their ‘Service Delivery Model’.
We have found three distinct types of Primary Goals for Service Delivery, which explain a service provider’s motivation for offering financial and non-financial services to their customers.
Once we understand why a service provider is offering financial services, we then turn our attention to how they have structured themselves to deliver those services.
There are four types of Service Delivery Models, which describe how the FSP is structured to deliver financial services to clients.
By mapping over a thousand existing FSPs according to these criteria, we have established 10 segments that each demonstrate a coherent approach to market engagement and organizational structure. In addition, our research indicated that these segments tended to engage with smallholders and agri-SMEs in different proportions, with some models focused exclusively on one client type and some addressing the needs of both. Of the twelve potential segments, one was unpopulated (Indirectly Profit-Driven, Focused Plus) and the other was so nascent (Directly Profit-Driven, Holistic) that is was designated as a ‘Proto-Segment’. It is important to note that these segments are not necessarily static — service providers can have more then one goal and can be experimenting with more than one service delivery model; thereby lying somewhere along the spectrum of different segments or evolving over time as they scale and become more sustainable.
As innovation has spread through the rural agricultural finance market, there has been a corresponding rise in the diversity and complexity of approaches and models for service provision. We believe that it is vitally important to continue cataloguing and refining our understanding of what exists, what is working, and how these innovations can be used to increase the efficacy and sustainability of FSPs around the globe. Our new typology recognizes some of the most important dimensions of underlying service models, including the scope and configuration of services, their underlying objective, and their client base. By establishing this segmentation, we can begin looking for commonalities and lessons that can be applied with more precision. We believe that this segmentation grants a robust basis for drawing out micro and macro-level lessons that can be used to tackle big questions that we are all asking: What is the impact potential of a given model? What drives profitability in financial service provision for smallholder households and agri-SMEs?
Further, moving beyond basic FSP categorizations (such as ‘ag-tech’, ‘MNO’, or ‘non-profit lender’) to look at underlying models is an important step to also understanding the markets in which they operate. The constellations of providers and models in each market create a services ecosystem that is an aggregate of the individual models — necessitating a segmentation that recognizes how an individual FSP links to the broader ecosystem via partnerships and platform arrangements. No FSP will single-handedly address the service gap in financial services for smallholder farmers, so understanding the dynamics that drive a strong ecosystem will be important for the development of the market.
But perhaps most importantly, this segmentation allows us to better investigate and articulate how to align the three levels of the market — clients, providers, and capital. When asking questions such as “What type of service providers are best suited to serve different farmer segments and pathways?” and “What types and amounts of capital flow should be directed to different types of service providers?” we can move beyond superficial categorizations of FSPs to what ultimately matters — What does the farmer and agri-SME need? How can those needs be met, given the objectives of the FSP? And consequentially, what sources of capital are required given the financial and impact returns we can realistically expect within those circumstances?
Over the next few months we will continue to fine-tune the providers segmentation model to better understand trends and links to farmer pathways and capital market flows. In particular, we hope to:
For reference, in our recent discussions with industry leaders [3] we captured the following questions and reactions:
[3] The State of the Sector report has an intentionally different governance and delivery structure from many similar reports. ISF and RAF Learning Lab see the research process as an opportunity for industry reflection. As such, the research process is participatory by design, drawing together key industry players to actively advise in content development and dissemination. This reference group includes representatives from Bill and Melinda Gates Foundation, Consultative Group to Assist the Poor (CGAP), Council on Smallholder Agricultural Finance (CSAF), IDH The Sustainable Trade Initiative, Mastercard Foundation, Mercy Corps AgriFin Accelerate, One Acre Fund, Opportunity International, Syngenta Foundation, The World Bank, and USAID.
Please email Matt Shakhovskoy, from ISF Advisors ([email protected]) or Clara Colina, from the RAF Learning Lab ([email protected]) to share your views.
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.
ISF is an advisory group committed to transforming rural economies by delivering partnerships and investment structures that promote financial inclusion for rural enterprises and smallholder farmers. Combining industry-leading research with hands-on technical expertise, ISF develops practical, profitable, and sustainable financial solutions.
This research was made possible through support from the U.S. Government's Feed the Future initiative.
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