Was the year 2016 an Inflection Point?

Smallholder financial services have continued to evolve since the 1950s, when the first government-led agricultural development banks were formed. In the 1970s, the next phase of smallholder financial services shifted focus to microfinance. In Inflection Point, we documented the evolution of farmer finance, involving a growing community of practitioners collaborating across sectors to develop new financial products. Now, three years later, we are at another point of transition. We have seen an unmistakable acceleration in technology-driven innovation, which has powered changes in existing rural finance models and facilitated the bundling of services in new ways.

But technology is not the only thing that’s changed. In 2019, there is a more expansive landscape of agendas, programs, and investments related to rural agricultural finance than ever before. This includes more diverse finance offerings and the recognition of the ways that rural agricultural finance intersects with critical global agendas, such as climate change, food security and nutrition, gender equality, and youth. The capital market for rural agricultural finance has also expanded, from a relatively small set of host country governments, agribusinesses, and donors to a larger ecosystem of capital providers with differing objectives and investment philosophies.

There are a total of ~270 million smallholder farmers and pastoralists across Latin America, sub-Saharan Africa and South and Southeast Asia. These smallholder households produce crops or raise livestock on up to five hectares of land, relying primarily on household members for labor. They generally pursue multiple economic activities in addition to farming, often in the informal economy.

The financing need of these ~270 million smallholder farmers and pastoralists is estimated at approximately USD 240 billion annually in agricultural and non-agricultural finance. This capital would not only help them optimize their farm operations by investing in high-quality agricultural inputs or increasing mechanization — it could also finance non-agricultural expenditures, such as school fees, home improvements, or life events.

The latest data suggests financial service providers — including formal financial institutions, value chain actors, and informal or community-based institutions — supply an estimated ~USD 70 billion to rural households annually.

Despite the progress made in the rural and agricultural finance sector, around USD 170 billion – or 70% – of the demand for smallholder finance goes unmet. This gap cuts across all geographic regions and financing types, but is particularly concentrated on long-term agricultural finance, where 98% of the demand for this type of financing remains unmet. Regionally, sub-Saharan Africa and South and Southeast Asia continue to lag behind Latin America, where the prevalence of cash crops and government financing schemes lead to a larger influx of finance to rural households.

Agricultural small and medium enterprises (SMEs) — including producer organizations, input providers, storage and transportation facilities, traders and offtakers, processors, and distribution service providers — play a key role in driving economic prosperity for rural areas. SMEs aggregate otherwise dispersed smallholder farmers; provide inputs, training, credit, and access to markets; and create formal employment opportunities. In Africa alone, agricultural SMEs generate 25% of rural employment and are responsible for processing and selling 80% of food produced for local consumption.

Despite a growing number of financial service providers focused specifically on agricultural SMEs over the last decades, most enterprises still lack access to the capital needed to grow and reach their potential. Financial institutions perceive high risk in lending to these enterprises—both because of external factors such as climate change and price volatility, as well as internal factors such as poor management capacity and record keeping.

While there is no comprehensive global sizing of the demand and supply for lending to agricultural SMEs, there is an estimated annual USD 100 billion agricultural SME lending gap in sub-Saharan Africa alone. This gap cuts across all sizes of agricultural enterprises, but is especially prevalent for micro-SMEs as well as mezzanine and equity investments to small- and medium-sized enterprises.

While it is not possible to capture the full range of dynamics influencing the rural finance market we have identified eight key trends that have shaped the smallholder finance market in the last three years.