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Was the year 2016 an Inflection Point?

Today, the rural and agricultural finance landscape is more expansive than ever before. Yet despite this progress, around 170 billion — or 70% — of the demand for smallholder finance remains unmet.
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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.

Historical evolution of rural finance


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 global market for smallholder finance

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.

Supply of agri-MSME finance in sub-Saharan Africa


In addition to finance, smallholder households demand access to payments, insurance, and savings to transact more effectively, manage risk, and smooth cashflows. 

  • Insurance: The majority of smallholder farmers, particularly in sub-Saharan Africa, have limited access to risk management options. In South and Southeast Asia, insurance coverage is primarily driven by large government-subsidized programs in India, Indonesia, and Vietnam. Access to insurance is even more prevalent in Latin America where countries with strong history of social welfare programs have enabled broader penetration of agricultural insurance.
  • Payments: Penetration of digital payments has increased exponentially, thanks to the widespread accessibility and use of mobile technology. In sub-Saharan Africa, more than 30% of rural adults made or received a digital payment in 2017, up from 24% three years earlier. Mobile money accounts have almost doubled. Other regions including South and Southeast Asia, and Latin America have experienced similar overall increases.
  • Savings: The use of savings accounts has also increased in rural areas. At least 68% of rural adults in South and Southeast Asia have an account at a financial institution. In Latin America, more than half of the adult population living in rural areas has an account. Sub-Saharan Africa continues to lag behind — but even there, use of savings accounts has increased. However, actual saving behavior remains low. This data suggests that many accounts are dormant or are being used primarily for transactions.

Penetration of agricultural insurance, digital payments, and savings accounts


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.

Service Delivery Trends

  • Providers have begun to shift risk adjusted return expectations of smallholder farmers and the investment opportunity they represent, driven by more efficient operating models and a recognition of the lifetime customer value of rural households.
  • The explosion of new digitally-enabled services and approaches is changing what products are being offered and how financial service providers conduct their business.
  • An increasing number of financial service providers are offering bundled services, recognizing that to meet farmer needs requires a more holistic approach — one where finance is not an end in and of itself, but rather an enabler of greater impact and profitability.

Capital Market Trends

  • New thought leadership and research into impact-return trade-offs is enabling more effective capital allocation. For example, Root Capital’s “Efficient Impact Frontier” concept, research by RAFLL and IDH Sustainable Trade Initiative on Service Delivery Models, and Omidyar Network’s studies on early-stage investing in emerging markets.
  • Blended finance has only become more popular as a way to mobilize financing for emerging markets. Increasingly sophisticated tools and structures are now being developed to offset risks and create ways for more commercial capital to participate in agricultural finance.
  • There is an increasing number of structured funds and facilities. In 2017, ISF identified USD 19 billion dollars of funding in 80 impact-driven agricultural funds with a range of orientations that are now actively seeking pipeline.

Enabling Ecosystem Trends

  • The sector has seen an increase in pre-competitive networks and ecosystem connectors such as CSAF or Propagate Coalition. There are also a growing number of intermediaries —such as ISF Advisors or Lions Head, —which are supporting providers with capital allocation and strategic planning.
  • Beyond the explosion of digital financial services, we have seen the proliferation of ag-tech for a variety of agricultural use cases, including digitally enabled advisory services and market linkages, supply chain management and macro-level decision making.
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