Microfinance and sustainable agriculture:
The SDG agenda
Smallholder farmers comprise 74% of the world’s poor and supply food to 70% of the developing world. They are a crucial stakeholder in a process that is focused on making the world more food secure. In September 2015, the UN identified 17 sustainability development goals to be achieved by the end of 2030. Goal No. 2 is to end hunger by promoting sustainable agriculture and enhancing food security. This article examines the global food insecurity problem and the role that MFIs and non-profits are playing in empowering smallholder farmers to achieve crop productivity while maintaining the vitality of ecosystems. Four key strategies that financial inclusion initiatives are deploying to help smallholder farmers around the world are identified herein.
Food insecurity and population explosion trends: How bad is it?
One in nine people in the world today (795 million) are undernourished. The food insecurity problem is further compounded by the impending population explosion. Recent trends indicate a spurt in population growth; the UN estimates that the world will add 2.3 billion people to its existing population of 7 billion by 2030, with most of the increase happening in countries with populations vulnerable to food insecurity and hunger. If these trends are to be trusted and if current dietary patterns continue, we will need to produce as much in the next 40 years as we did in the last 8,000-10,000 years to feed 9 billion people on the planet.
A snapshot of smallholder farmers and the role of microfinance institutions.
Rising populations increasingly put pressure on smallholder farmers who comprise 74% of the world’s extremely poor population of 1.1 billion people. Smallholder farmers, farmers who own small plots of land to grow subsistence or cash crops and reliant on family labor alone, manage 80% of the farmland in Africa and Asia, providing 80% of the food supply in most of the developing world. Their position as suppliers of agricultural commodities and as linkages in the global supply chain is therefore, crucial. In addition to being producers and suppliers of food to the world, smallholder farmers are also stewards of our natural resources. Therefore, in order to address the problem of food insecurity, we will need to empower smallholder farmers by enabling them to not just produce more but also produce more sustainably.
Smallholder farmers face many obstacles: low yields and quality, weak to no access to formal finance, low access to markets and inadequate infrastructure among others. Combating these obstacles has proven to be a rather difficult task. Many microfinance institutions have come forward to offer financing to smallholder farmers by providing them with not just credit but also other financial services such as microinsurance and savings products. In the past decade or so, MFIs have gone through a paradigm shift in their approach to lending to the small-scale agriculture sector. David Roodman, in his book “Due diligence”, examines the role microfinance institutions have played over the decades and how current challenges warrant a more inclusive and comprehensive methodology. According to Roodman, financing to the poor needs to move beyond just basic savings and credit facilities. Additional services such as technical assistance to improve farming practices, linkages to value chains and producer organizations and even entrepreneurial training and community building must form part of the whole package.
The key strategies
As part of their strategy to enable smallholder farmers to enhance crop productivity and achieve food security, microfinance institutions have applied a four-pronged strategy: Access to finance, partnerships, agroecological approaches and market linkages.
- Access to finance: Access to financial resources is vital to a smallholder farmer to achieve crop productivity, manage post-harvest losses, create safe storage for crops, gain better access to markets and improve revenues. Smallholder farmers face obstacles in obtaining the finance they need; in Africa, for example, 55% of the population is employed in agriculture, yet only 1% of bank lending is directed to this sector.
Banks and microfinance institutions face numerous challenges in lending to the agricultural sector owing to the sector’s specific characteristics such as irregular cash flows, susceptibility to climate change, droughts and floods, loose value chains and higher transaction costs. However, as some microfinance institutions in Latin America have shown, by carefully studying the market of smallholder farmers, its segmentation and value-chain mechanisms, financial institutions can tailor their products to benefit the smallholder farmer without affecting their bottom lines.
In Peru, for instance, farmers have formed co-operatives or producer organizations. Harnessing the power of the collective, they are able to scale up operations and therefore receive pre-harvest credit assistance, technical training and also access to markets. Farmers’ costs increase as they buy high-quality inputs but their yields and profits rise too. Dalberg Global Development Advisors, a global consulting firm estimates that an aggregated farmer increases yield by 67% and overall profitability by 16% in comparison with a non-aggregated farmer. Being an aggregated farmer has other benefits too. Access to markets is increasingly heightened with aggregated farmers securing certifications for their produce, attracting big international buyers. Banks and microfinance institutions are more comfortable lending to farmers belonging to producer organizations as they are able to use contracts entered into with global buyers as collateral for the sums lent. However, this model is able to reach only those smallholder farmers that are connected to producer organizations, leaving out those unconnected. In Peru, for instance, only 10% of smallholder farmers are members of a producer organization with the 90% non-aggregated farmers underserved by such a model.
In areas where producer organizations are absent and where access to financial resources and infrastructure is significantly limited, savings groups have come to smallholder farmers’ rescue. In his book “In their own Hands”, Jeffrey Ashe expounds the strategy he deployed to improve the living conditions of smallholders farmers in rural and remote Mali. Ashe designed the “Saving for Change” program that enabled thousands of rural Mali women to save their own money into a fund they could access in times of need. Ashe formed groups of 20 women each and trained them to pool their savings into a group fund which was available for lending to group members. When a group member requested credit, the request was carefully evaluated based on potential end-use of funds and credibility of the borrower. Sums were lent and recovered with an interest charge, helping the fund grow. At the end of the year, savings contributions with dividend were distributed to members.
The Savings for change model had an impact on the food insecurity in the region. An impact evaluation conducted in 2012 by Oxfam America, Freedom from Hunger and Innovations for Poverty Action (IPA) measured the economic and social impact of the model. Severe drought and political violence in rural Mali deteriorated the food insecurity already prevalent in the region; however, the results were different for villages under the Savings for Change program: 47% of households in the treatment group were food insecure as opposed to 51% of the households in the control group. Further, treatment households increased their savings and were able to create funds for potential larger expenditures such as weddings, major illnesses and the like. The study concluded that even marginal benefits such as the 4% rise in households that became food secure in the treatment villages were highly appreciated by those living on the fringes of vulnerability. Women who participated in the program indicated that they were better prepared to sustain themselves in times of economic crisis.
- Partnerships: Cross-collaboration achieved by engaging actors across sectors-local governments, local NGOs, commercial banks and financial institutions, producer organizations, donors, and technical assistance providers- has been proved to be very effective. Exploring inter-organizational relationships, facilitating sharing of resources, knowledge and capabilities in order to achieve a joint outcome has paid off for MFIs. For example, in the Philippines, the MFI, Alalay SaKaunlaranInc (ASKI) has made substantial headway in providing smallholder farmers with essential tools to enhance their farm productivity. A notable aspect of ASKI’s initiative is the partnerships ASKI built in reaching poor smallholder farmers. ASKI had operational agreements with local, national and international stakeholders such as the National Livelihood Development Corporation, Catholic Relief Services, Department of Agriculture and Jollibee Foundation to enable farmers supply their produce to consolidated corporations.
The initiative had sizable implications on the food security situation in the region. ASKI helped farmers improve their farm yields, reduce post-harvest losses and ultimately augment their incomes. It was able to reach 18,856 farmers with a portfolio of USD 7.13 million. It provided water pumps, solar dyers and hanging and foot bridges to 300- 700 families in the region. With the help of this infrastructure, farmers were able to reduce their pre-and post harvest losses by using solar dyes to dry their products and decrease transportation costs incurred from travelling from farm to market by using the hanging bridges. ASKI also conducted satisfaction surveys to assess the participating farmers’ response to the initiative. They found that most clients were able to increase their savings and use them for additional investments for farming. Some farmers purchased vehicles, some redeemed their jewelry from the pawn shop and some others built better homes and sent their children to better schools. Farmers also reported a spike in self-confidence- they were better able to speak to authorities and express their concerns.
- Agroecological approaches: Switching from a system of industrialized agriculture to sustainable agriculture is the way forward if we are to address the growing food insecurity problem. Industrialized agriculture is a huge contributor to climate change that further affects the livelihoods of smallholder farmers around the world. A sustainable approach to farming that preserves ecosystems is the need of the hour. Agroecology is an approach to farming that is centered on producing food by making the best use of our natural resources without damaging them. It is an integrated approach to farming that integrates culture, economics, ecology and society to create healthy food systems, a clean environment and strong communities.
One notable technique of agroecological farming widely advocated by MFIs and non- profits working in the sustainable agriculture space is the farmer managed natural regeneration (FMNR) initiative. FMNR is a low-cost sustainable land restoration technique adopted in many developing countries to enable smallholder and poor subsistence farmers overcome hunger and poverty. FMNR involves regeneration of trees and wild vegetation from felled tree stumps and sprouting root systems. Integrating the regrowth of this vegetation into crops and grazing pastures improves soil fertility, arrests soil erosion, prevents soil moisture evaporation , recharges the water table and improves biodiversity. As a result, FMNR has a proven track record of doubling incomes, providing timber and firewood for cooking and fodder for livestock, wild vegetation for medicine and nutrition, and better living conditions for farming communities.
- Market linkages: Linking smallholder farmers to competitive markets that are demand-driven is part of a long-term development strategy to revitalize the agriculture sector. However, a deeper analysis reveals that smallholder farmers have not really caught up with this agricultural revolution. For example, research suggests that 50-70% smallholder farmers in Africa and Asia are not transitioning from subsistence farming to commercial farming.
In order to better link smallholder farmers to informal or formal markets, it is essential to clearly understand several factors that determine the unique category of a particular smallholder farmer. For example, location of the farm, soil fertility, access to financial services, size of land holdings, cost of inputs, level of education and skills, access to roads and linkage to groups are some of the key factors that need careful consideration before assessing what works best for different categories of smallholder farmers. Differentiated extension strategies that cater to specific needs of different types of farmers are more effective in the long-run than strategies that use a one-size-fits-all approach.
For example, Catholic Relief Services has made significant progress in linking smallholder farmers to markets. Their interventions have begun with organizing farmers into savings and loan communities (SILCs). This stage helps build trust, increases financial literacy and social cohesion among group members. Building off of the initial intervention, CRS identified production and marketing opportunities for staple and high-value crops that smallholder farmers could capitalize on. Technologies were delivered to improve crop productivity and efficiency on farms. Promoting diversification of higher-income farm and non-farm activities was important to ensure a steady cash flow to buttress both savings and asset growth. The intervention also supported “value chain” methods to help farmers build micro-enterprises and sell their surplus produce. This intervention raised incomes and had considerable effect on food security.
MFIs are becoming increasingly sensitive to the challenges of our time and are finding innovative ways to empower smallholder farmers. Yet, reaching the most vulnerable populations has not proven to be an easy task. As the world prepares to realize the UN’s SDG to end world hunger, MFIs will be challenged to maintain their triple bottom line – achieving financial viability while furthering the social interests of stakeholders and preserving the environment. By Audrey Marie Misquith
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