Editor's note: A version of this article was originally published on Impact Alpha on January 25th 2018.
Photo credit: One Acre Fund.
Several years ago, Peter Makasi looked out his window as a neighbour walked by carrying bags of hybrid seeds and fertiliser -- two things he imagined he’d never be able to afford. Peter, a smallholder farmer in Western Kenya, had 10 children to support, and all of his income went towards feeding them and paying their school fees. Peter’s crop yields were hopelessly small, and the family often had to ration meals to survive until the next harvest. He knew that his land could be more productive, and that he could stave off hunger for his family, if only he had access to better-quality inputs. But no one would lend him money for seeds and fertiliser, especially because the 2-acre farm he’d inherited from his father didn’t have a land title and couldn’t be used for collateral.
Then in 2009, Peter joined One Acre Fund, a nonprofit organisation that provides smallholders with high-quality inputs on credit, without the need for collateral, and training on proven farming techniques to increase crop yields. Soon, Peter’s harvest increased sixfold -- enabling his family to have plenty to eat year-round. With his additional income, Peter has been able to pay for school fees for his children and grandchildren, and to buy solar lights for his house and chickens and ducks for his farm.
“Now we’re in paradise,” Peter says with a laugh. “Any time we want to eat, we eat. The food is always there.”
Peter’s story is not unique, and it demonstrates both the great needs and the great opportunities that exist in rural communities. Financial service providers have often shied away from lending to smallholders because the risks are perceived as too great. And yet, Peter has been an ideal client, repaying his asset-based loans year after year. More than 450 million smallholder farmers in Africa, Asia, and Latin America lack access to financial services, with an estimated $200 billion in unmet needs for credit worldwide. It is possible, and often profitable, for financial institutions to reach them. Practitioners just need to tailor their services with farmer-specific risks in mind.
Listening to Farmers
Farmers have complex financial lives. The timing of input purchases doesn’t always line up with when they have the most cash on hand. Families often have to pay fees for their children to attend school, and these bills may come due at inopportune times. Cash-strapped farmers are sometimes forced to sell their crops at harvest time, when prices are lower, instead of storing their grain and timing sales to maximise profits. These problems are complicated, but the solution doesn’t have to be. Farmers have lumpy cash flows, so why shouldn’t their loan products match this?
AMK MFI Plc, part of the Agora Microfinance network and one of Cambodia’s largest microfinance institutions, has been doing this since 2006. Instead of requiring farmers to borrow all at once and repay in regular instalments or lump sums at the end of a loan term, the company listened to feedback from its clients and began offering a flexible disbursement and repayment option, allowing farmers to draw down the loan in parts and also make repayments whenever they had cash on hand. This approach might seem riskier, but in reality, AMK’s repayment rates were always quite high in the flexible system -- and client satisfaction and retention rates also improved. Over many years, this product always showed over 99% repayment rates and was cited by clients as one of the main reasons why they stayed with AMK even in the face of competition. One Acre Fund, which also offers flexible repayment, takes a similar approach to customer engagement. Many great ideas can come from listening to farmers, and One Acre Fund often makes adjustments to its services based on their feedback.
Agora Microfinance and One Acre Fund’s product offerings, service delivery approach, and geographic footprint may vary greatly, but they share the conviction that genuinely listening to their clients is key to managing risk. The two organisations’ combined reach is over 800,000 loan clients. Last year, 98 percent of their clients repaid their loans in full and on time. Despite the success of these models in terms of client retention and repayment rates, the two organisations remain outliers in the financial inclusion sector. Unfortunately, few practitioners offering financial services to the poor have developed loan products with flexible repayment options.
Photo credit: One Acre Fund.
Farmers are often perceived as risky because many factors that influence their productivity and income -- such as weather, crop diseases, and volatile prices -- are out of their control. Climate change threatens to create even more challenges. But that doesn’t mean that investing in farmers isn’t worthwhile. It is possible to offer sustained, long-term investment to smallholder communities, even in difficult years -- the key is to place clients’ needs at the centre of business decisions and respond quickly to problems.
For example, One Acre Fund identified that climate change was threatening to create insurmountable challenges for farmers, so the organisation began offering crop insurance as a response. In 2016, when Kenya was hit by severe drought, farmers received insurance payouts, and the organisation didn’t see a significant decline in loan repayments. AMK has also weathered turbulence by listening to clients -- during the 2008-09 financial crisis in Cambodia, when many lenders were adopting inflexible collection practices, the company instead divided its overdue clients into categories and tailored its responses based on each group’s ability to repay. This flexibility helped AMK keep its good reputation and retain clients after the industry recovered.
Importantly, there is also a business case to be made for developing farmer-centric financial products. The size of the market is huge -- there are more than 450 million smallholder farming households worldwide, supporting more than 2 billion people within their households, and yet it is estimated that only a quarter of the total demand for financial services is currently being met. Farmers are reliable customers when loan products are tailored for them, as AMK and One Acre Fund have learned from experience.
By listening to farmers, we can help ensure that their financial needs are being met. There’s also a lot to learn by listening to each other. Knowledge sharing among financial service providers can facilitate the development of better financial products for smallholders. There are many ways to approach smallholder finance and many successful techniques that we can all learn from. Our hope is that as financial practitioners work more closely with farmers and each other, it will create better outcomes and opportunities for everyone.
Tanmay Chetan is co-found and Chief Executive of the Agora Microfinance Group. Mike Warmington is the director of microfinance partnerships at One Acre Fund.