Financial
Inclusion Matters for Africa’s Smallholder Farmers
Agriculture
forms the backbone of African economies, accounting for 32 percent of gross
domestic product (GDP). A majority of the continent’s farmers earn their living
on small plots of less than two hectares, which represent 80 percent of all
farms across sub-Saharan Africa. But these smallholder farmers are largely
excluded from financial services and are therefore constrained from improving
their wellbeing and transforming their farms into economically viable
businesses. Although smallholder farmers face a number of challenges to raising
productivity, bridging the financial access gap must be a priority.
There
is much literature on expanding financial inclusion among the world’s poor. The
issue has been a development priority since Group of Twenty (G20) leaders
launched the Financial Inclusion Action Plan in 2010. But Africa’s smallholder
farmers have received little attention, and women farmers—who make up half of
the continent’s agricultural labor force—have received even less.
Being
excluded from financial services has negative consequences for smallholder
farmers. Access to credit can help raise farm productivity by expanding access
to inputs as well as better storage, marketing, and processing. Access to
savings instruments at harvest enables families to put money aside and helps
smooth consumption at other times of the year. Access to payment platforms can
offer a secure and efficient way to make transactions. And access to insurance
products can protect against illness and weather-related shocks. In the absence
of these formal mechanisms, smallholder households often rely on informal
instruments. Although they are accessible and flexible, informal financial
services can also be inefficient and costly in the short term, and they do not
always offer the services needed to help transform subsistence farming into a
profitable business.
Understanding
farmers’ needs, and the range of financial services they rely on to meet those
needs, must be the first step. But translating this knowledge into tailored
products will be even more critical. While evidence is still emerging, digital
solutions are at the forefront of these efforts.
Smallholder
Farmers Are Excluded From Financial Services
Large
gaps remain in meeting the financial needs of smallholder farmers across
sub-Saharan Africa. The Global Financial Index, or Global Findex, underscores
the extent of their exclusion from the formal financial sector. Across
forty-two African countries in 2014, only 29 percent of adults in rural areas
had a mobile money account or an account at a bank or microfinance institution
(MFI), compared to 34 percent at the national level. Although access to bank
accounts in rural areas remains low, this represents an increase from 24
percent in 2011. Poor households and women are even more excluded than the
rural population generally. Poorer households are much less likely than richer
households to have a formal account (25 percent compared to 41 percent), and
there is also a significant gap between women and men (30 percent compared to
39 percent).
While
more than half of all rural households saved and borrowed money over the past
year, only a small percentage used the formal sector. Among those who reported
saving, 13 percent saved at a bank or an MFI, and 25 percent saved with a
community savings group. The majority saved money under the mattress or in
tangible assets such as livestock. Rural households are also excluded from
formal sources of credit; only 6 percent borrowed from a formal institution.
Forty-two percent of those who reported borrowing turned to family and friends,
and 5 percent borrowed from an informal lender, such as a trader or processor.
Because they are borrowing informally, the interest rates are usually between
two and ten times higher than commercial rates. Furthermore, only slightly over
6 percent of farmers reported purchasing crop or livestock insurance. Finally,
a majority of farming households received payments from agricultural sales in
cash; only 8 percent received payments via mobile phone, and 7 percent received
money directly to a bank or MFI account.
Demand and
Supply Barriers Limit Access to Formal Financial Services
A
number of demand- and supply-side constraints explain why smallholder farmers
are excluded from formal financial services. On the demand side, smallholder
households cannot always afford fees or minimum balance requirements to keep
accounts active. In Uganda, for example, annual account maintenance fees are
almost 25 percent of GDP per capita. Rural clients must travel long distances
to reach bank branches; to do so, they have to pay for transportation and
forego daily wages. In addition, farmers do not always have the formal
documentation, such as identification cards and land titles, required to open
an account. There is also evidence of a lack of trust in financial institutions
and low financial knowledge among the poor. For smallholder farmers in
particular, the repayment cycles for standard bank and MFI loans often do not
align with seasonal cash flows. Finally, gender dynamics further constrain
women’s access: Given multiple household responsibilities, women are often time
constrained, which limits their ability to engage with formal financial
services. Women also lack formal land titles, even more so than men.
On
the supply side, smallholder households are expensive to serve because a
majority live in rural areas. And because agriculture is highly susceptible to
weather shocks, financial providers perceive farmers as too risky to lend to.
In addition, formal financial institutions often lack information about the
credit histories of poor rural farmers, as well as the knowledge and capacity
to serve agricultural households. Lenders sometimes fail to see farmers as a
substantial source of savings and have therefore not traditionally marketed
specific products to them.
Digital Innovations
Are Helping to Bridge the Gap
Digital
technology has the potential to address multiple demand and supply barriers by
offering a new delivery platform to reach underserved clients. Mobile
connectivity is rapidly expanding across sub-Saharan Africa; a 2014 Pew
Research Center survey in seven African countries found that roughly 80 percent
of people own mobile phones. Mobile platforms can allow clients to access bank
accounts more easily, and also reduce delivery costs for service providers.
To
effectively close the gap in the availability of financial services, it is
essential that digital products meet the unique financial needs of smallholder
farmers. Digital by itself is not enough. Therefore, a complete understanding
of these households’ financial needs must be a priority. The Consultative Group
to Assist the Poor (CGAP), housed at the World Bank, has focused much-needed
attention on smallholder farmers. Through its Financial Diaries of Smallholder
Households project, CGAP aims to better understand how farmers in Mozambique,
Tanzania, and Pakistan use financial services. Initial findings show that while
smallholder households rely on multiple sources of income, including wage labor
and off-farm businesses, agriculture accounts for 40 percent of earnings.
However,
findings also suggest that income from agriculture is seasonal, creating unique
cash-flow challenges. Farmers receive a bulk of their income at harvest, making
it difficult to cover expenses for school fees, health care, and religious
celebrations throughout the year. Farmers require capital at the start of the
planting season to purchase seed and fertilizer. During the growing season,
households must stretch available resources until the next harvest. Income from
agriculture can also be risky; crops are susceptible to weather fluctuations,
pests, and disease. Considering these diverse needs, financial services for
smallholder farmers must move beyond credit for agriculture and include
insurance, savings, and transfers to smooth consumption. This approach can help
ensure financial instruments have a transformative role on the lives of
smallholder farmers.
A
suite of digital financial innovations for smallholder farmers has cropped up
across the continent. These examples are neither exhaustive nor fully proven in
their impact. But they nevertheless highlight the tremendous potential to
connect Africa’s smallholder farmers to financial services by addressing both
demand- and supply- side barriers.
In
one model that addresses demand-side constraints, financial institutions are
rolling out branchless banking to serve rural clients. For example, Opportunity
International hires agents who drive to rural areas and use mobile phones to
register new clients, deposit savings, and collect loan payments. In addition,
mobile bank accounts are expanding across the continent, most rapidly in East
Africa. M -Shwari in Kenya and M-Pawa in Tanzania allow M-Pesa clients to take
out loans and make interest-earning savings deposits. Using a secure and familiar
platform, rural clients do not have to travel to access accounts, pay fees, or
meet minimum balance requirements. These are all important factors that can
underpin widespread adoption.
But
there are still challenges in reaching the rural poor, including limited
network coverage and low financial literacy. Furthermore, recent evidence shows
that although account ownership has increased, regular use has lagged.
Therefore, products should be designed to meet smallholder farmers’ needs to
help ensure that that they adopt and use them. To address low financial
literacy, for example, the nongovernmental organization TechnoServe trains
smallholder farmers in Tanzania on how M-Pawa accounts work in order to
encourage the farmers to use them.
Other
programs are using mobile platforms to deliver credit and savings products
specifically designed for smallholder farmers. For example, One Acre Fund has
developed an asset-finance model with a flexible repayment schedule that helps
over two hundred thousand farmers in Kenya, Rwanda, Burundi, and Tanzania
purchase high-quality inputs at the start of the planting season. Farmers make
a prepayment (10 percent of the loan) prior to receiving inputs and have the
flexibility to repay the remaining loan amount in any increment on any
schedule, as long as they repay fully by harvest time. In countries like Kenya,
where the mobile money infrastructure is well developed, farmers make
repayments via M-Pesa. This loan product has helped farmers increase their
earnings per acre by 50 percent.
In
addition, access to savings can play an important role. MyAgro, a mobile
platform, offers a commitment savings device to farmers in Mali and Senegal.
Rather than paying a lump sum to purchase seeds and fertilizer at the start of
the planting season, farmers save small amounts throughout the year. Clients
buy MyAgro scratch cards from local stores and make deposits into their savings
accounts, just like buying credit for a mobile phone. Clients of MyAgro have
increased their harvests, and raised their incomes by more than 70 percent
compared to non-client farmers. Both these uniquely tailored products could
serve as effective models for financial service providers.
Digital
technology can also be leveraged for payment transfers. Nigeria’s mobile wallet
program, established in 2012 by the Central Bank and Ministry of Agriculture,
has digitized voucher distribution for subsidized fertilizer. The platform’s
fourteen million subscribers can use electronic vouchers to buy subsidized
fertilizer from local agro-dealers. This platform is playing a critical role in
connecting farmers to the formal banking system, and it has helped reduce
corruption in fertilizer distribution by wiping out middlemen. Between 2013 and
2014, Nigeria’s Ministry of Finance also provided additional budgetary
incentives that enabled the Ministry of Agriculture to scale up the mobile
wallet program’s reach to an additional 2.5 million women farmers.
According
to CGAP, the mobile wallet platform reaches twice as many farmers as the
previous distribution system at one-sixth of the cost. The Nigerian government
has also established a mechanism to encourage financial institutions to lend to
the agriculture sector. The Nigerian Incentive-Based Risk Sharing System for
Agricultural Lending (NIRSAL) addresses an important supply-side constraint by
providing a credit risk guarantee that covers between 30 and 75 percent of
incurred losses on loans. NIRSAL enables the financial sector to expand its
client base, and smallholder farmers and small and medium-sized agribusinesses
gain access to financial services.
Keeping Up
the Momentum
Promising
innovations across the continent are leveraging the broad reach of digital
technology to connect farmers to the formal financial sector. Ongoing research
is providing rigorous evidence to better understand how these services are
affecting smallholder households. There is no silver bullet and the gaps are
still large, but there is tremendous international momentum around the issue of
financial inclusion. Bringing Africa’s smallholder farmers into the spotlight
and expanding their access to financial services will be critical to achieving
universal financial inclusion and accelerating smallholder farmers’
contribution to the continent’s economic growth.
Author's
Personal Story
As
a child, I spent Saturdays accompanying my widowed grandmother on the very long
trek to her farming plots. We would set out before sunrise, me carrying water
and her carrying food and implements, like small hoes and machetes. The main
job was weeding between the mounds of yam. If they were in good shape, we would
turn to the adjoining maize and vegetable plots. Lunch was roasted yam or
plantain with palm oil and red pepper, which is still one of my favorite meals.
I’d overhear my grandmother talking with other farmers about something called
fertilizer or about new varieties of cassava and maize that could double
output. But they had neither the money nor the know-how to make use of these
tools.
From
the time I left Nigeria to study economics, I was always trying to figure out
what could be done to make farmers’ lives better.
For
my doctoral thesis I chose the topic of "Rural Financial Markets in
Nigeria" and spent months living with rural households all over the
country to understand their savings, borrowing, and consumption patterns. That
was from 1979 to 1981. While numerous experiments in recent years have yielded
promising solutions, the work won’t be done until we’ve revolutionized the
lives of African smallholders.
SOURCE:
www.cgdev.org
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