It’s hard for a smallholder farmer to get a loan.
According to the Initiative for Smallholder Finance, the $450 billion global demand by smallholders completely outstrips the global supply of $20-$30 billion. A major factor underlying this mismatch is lenders’ perception of the high credit risk associated with farming.
And it’s not just loans that are in short supply. Access to savings accounts, crop insurance and digital payment programs could all make a big difference for farmers, helping to lessen the risks they face or smoothing their cash flows through the “hungry months.”
Grameen Foundation is developing digital solutions to overcome these obstacles.
In Kenya, where smallholder farmers can rarely access loans despite accounting for more than 75 percent of agricultural output, Grameen Foundation worked with the 100% cashless microfinance institution Musoni to develop Kilimo Booster, a mobile-based agricultural loan designed specifically for smallholder farmers.
Unlike other loans, its flexible repayment terms correspond to farmers’ harvest cycles and cash flows. Equally important, funds are disbursed directly into farmers’ mobile money accounts no more than 72 hours after a loan is approved. From its launch in 2013 through May 2016, Musoni had disbursed 6,023 Kilimo Booster loans worth more US$2.2 million, with loan disbursement quadrupling in the most recent nine months.
Kilimo Booster took advantage of two pre-existing systems, including Kenya’s now world-famous m-PESA mobile money platform. Other technology enables Musoni loan officers to digitally process group applications in the field using tablets. It eliminates farmers’ paperwork and relieves them of the burden of travelling to distant service points to apply for loans.
Credit histories and collateral may serve to qualify middle-class customers for loans, but most rural smallholder farmers have neither. The Agricultural Risk Evaluation Tool (ARET) evaluates the ability of a smallholder to repay loans based on who they are and how they farm: concrete information that can be gathered by field agents using a digital app.
ARET uses farm-level data to answer key questions that provide crucial insights into a farmer’s likelihood of defaulting on a loan.
To develop ARET, we partnered with Cooperativa de los Andes (COOPERAN), a large coffee cooperative in Colombia. We surveyed more than 1,500 farmers with questions covering more than 150 variables, ranging from a farmer’s fertilizer use and water access to the certifications achieved. Based on the data, we segmented farmers into eight risk groups that help COOPERAN make decisions on who to serve and how to best serve them with credit and ongoing support.
Data collected by field agents and credit officers are now used to assess risk, and to develop individualized farm management plans that help farmers raise their productivity and their credit-scores.
We are continuing to implement and refine ARET. Ultimately, use of such a tool could enable millions of smallholder farmers to access loans, improve the productivity of their farms, and improve the efficiency of the credit process.
Our work with Opportunity Bank, a commercial lending institution, is extending financial services (both accounts and loans) to 6,000 small-scale coffee farmers so they can purchase the inputs they need to improve their productivity and become preferred suppliers to the Uganda Cooperative Alliance.
Commercially established coffee farmers act as field agents. They train farmers in best practices in growing, bulking, and marketing their beans. Farmers are introduced to self-organized savings associations and learn about the requirements of financial lenders. The data gathered by field agents is fed into a database of farmer profiles, and profile data is shared with Opportunity Bank so it can more readily qualify farmers for loans. Registering farmers also enables the bank to help them build a credit history.
The program does not create a credit rating for individual farmers but instead uses metrics such as the adoption of good agricultural practices and past production to assess credit worthiness. To obtain a loan, farmers must first make a deposit equal to 15 percent of the loan value as collateral. The loan is repaid at harvest time, and the interest charged is modest, averaging 10 to 15 percent over a five-month crop season.