This document offers an analysis of how microfinance institutions (MFIs) can successfully serve smallholder farmers in Latin America, particularly those in loose value chains and subsistence farming. It outlines practices and lessons learned from successful MFI agricultural lending operations. The findings are particularly useful for MFIs considering entering or expanding their presence in agricultural finance, and for donors supporting these efforts.
Key Insights
Knowledge of the Client
Understanding the differences between urban and rural clientele, and smallholder farmers in particular, is crucial. This includes understanding the irregular cash flows of agriculture and adapting product terms accordingly.
Flexible Products
Smallholder lending is not a one-size-fits-all solution. Loan tenor, disbursement, and payment terms need to be adaptable to the diverse profiles of smallholder borrowers.
Cash Flow Analysis
Analyzing the household production unit allows for matching payment terms to cash flow and provides a more accurate analysis of the payment capacity and true risk of lending to the smallholder.
Diversified Risk Management Tactics
Agricultural lending risks need to be mitigated in a variety of ways, including close client monitoring, portfolio diversification, and conservative cash flow analysis. The document suggests that an MFI’s collateral should be commensurate with loan sizes and other risk factors (e.g., repayment history).
Specialized Credit Officers
Hiring credit officers with a background in agriculture is generally considered critical.
Customized Marketing
Incorporate images of target clientele in marketing materials to help overcome the mistrust that smallholders may have of financial institutions.
High-Level Buy-In
Successful smallholder lending requires strong institutional commitment and support from senior management.
Customer Service Orientation
Providing rapid loan processing, personal attention to clients, and customization of products allows MFIs to compete effectively with subsidized credit from agricultural development banks.
Risk-Based Loan Pricing
Consider risk-based loan pricing for crops and products. In some cases, this might lead to lower rates for certain combinations of clients, crops, geographies, or financial products. In other cases, this might lead to higher rates as the probability of loss increases.
Product Costing
Improved costing could better inform discussions around product design, lending methodologies, and sales and risk management strategies, and lead to additional innovation.
Cross-Selling
A focus on the broader financial needs of smallholder clients could help reduce client vulnerability and contribute to the economic advancement of low-income clients, while improving profitability at the individual client level.
Implications for Donor Involvement
The study findings underscore areas of technical assistance and other forms of donor support that may affect MFIs’ effectiveness in reaching smallholders. Technical assistance and training:
- Design and implementation of market research
- Product design and piloting
- Systems improvements to adapt MIS/core banking systems and use technology solutions
- Design of staff incentive plans
- Introduction of product-costing practices
- Design and piloting of new delivery channels
- Support for non-financial services (financial education or technical assistance programs)
Key Statistics & Data
- Approximately 450 million households globally depend on agriculture.
- In Africa, about 55% of the population is employed in agriculture, yet only ~1% of bank lending goes to the sector.
- Only 4.7% of adults in rural areas in developing countries globally have a loan from a formal financial institution, and 5.9% have a bank account (per Findex data).
- Value chain finance reaches fewer than 10% of smallholders, primarily those with well-established value chains.
- Dalberg Development Advisors (2012) estimated demand for agricultural finance may be as high as $450 billion.
Methodology
The IFC Access to Finance team worked with Chemonics International to carry out this study, using three research methods in sequence: desk research; a survey of LAC MFIs; and in-depth case studies. The desk research entailed a review of the existing literature on the provision of financial services to smallholder farmers worldwide, including broad survey reports and desk-review of 40 studies of specific innovations and products (see Annex 1 for a list of these), in order to establish what is known about serving this market and identify where knowledge gaps remain to be filled. The LAC survey was sent to 19 MFIs in LAC and covered a wide range of questions on the operational models used by MFIs to reach smallholders. Finally in-depth case studies were done including field visits to four MFIs: ADOPEM (Dominican Republic), Financiera Confianza and Caja Huancayo (Perú), and Bancamía (Colombia).
Implications and Conclusions
The study underscores that introducing agricultural lending in an MFI requires careful planning, high-level commitment, and realistic growth targets. Key implications include the need to understand client cash flow, offer flexible products, manage risks through diverse strategies, and provide staff with specialized training. The success factors and best practices identified in this study can inform MFIs in Latin America and other regions that are looking to better serve smallholder farmers and promote financial inclusion. Donor involvement remains crucial for technical assistance, market research, product design, system improvements, and staff incentive plans. This support can help MFIs overcome barriers and create sustainable, scalable agricultural lending programs.
Key Points
- Agricultural lending through MFIs requires careful planning, preparation, and adaptation of systems beyond introducing a new product; it requires strong institutional commitment.
- Success in smallholder lending depends on understanding the differences between urban and rural clientele, especially regarding cash flow and adapting product terms to suit diverse borrower profiles.
- Risk management tactics should be diversified, including close client monitoring, portfolio diversification, conservative cash flow analysis, and use of credit bureaus.
- Hiring specialized credit officers with agricultural backgrounds or providing specialized training to existing officers is generally considered critical.
- Good practices include customizing marketing materials, automating data capture for credit analysis, and providing a strong customer service orientation.
- Opportunities to expand smallholder agricultural portfolios include risk-based loan pricing, improved product costing, evaluating cross-selling, and using longer-term financing.
- Donor involvement is important for technical assistance, market research, product design, system improvements, and staff incentive plans.