December 29

Josien Sluijs

10 Developments Shaping Smallholder Finance in Africa

The lack of good financial services is one of the largest obstacles for farmers to improve and increase their productivity. The question is how to reduce the risk of agricultural activities so that financial institutions are prepared to provide loans to farmers. That topic was discussed July 21 – 28, as the Netherlands Platform for Inclusive Finance (NpM, where I work as director), AgriProFocus and the Food & Business Knowledge Platform (F&BKP) organized three expert meetings in Uganda, Tanzania and Kenya to discuss their research “Finance for Smallholders: Opportunities for risk management by linking financial institutions and producer organizations.”

This research includes an analysis of 15 successful projects in four countries (Uganda, Ethiopia, Rwanda and Mali). The 15 cases address 20 different crops, seven types of producer organizations, seven financing models and 14 financial institutions that serve over 500,000 farmers. The meetings included a broad delegation of farming organizations, microfinance institutions, central banks, national and international development organizations, insurance companies, government officials and consultants, and were aimed at disseminating the research and improving financing models for smallholder farmers in various parts of the world. Here are 10 takeaways from the events and the research they discussed. (You can view videos from the meetings here.)


Producer organizations reduce risk

A key point of discussion was that it is important that farmers organize themselves into formal organizations, as this can mitigate a lot of the risks associated with farming. Generally, the quality of the produce increases for members of these organizations, because extension training is coordinated and linkages to the market are established. Depending on the produce, there are several ways in which value chains can successfully be organized. If produce is perishable, and therefore needs to be processed or consumed rapidly, like milk, it is important that the milk be cooled immediately and then transported to the factory for processing. Coffee or grains, on the other hand, can be stored and sold later. These differences demand different financing products and models. In the latter case, for instance, funding is necessary because otherwise the farmers have to wait a long time for the proceeds of their produce. By contrast, farmers who sell their produce, like milk, immediately, need investment in processing and production (packaging, cheese machines, etc.).


An Agriculture Finance Platform in Uganda

In all three countries in which we organized the expert meetings, agriculture represents a large part of the GDP and around 70 percent of the population lives in rural areas. In Uganda, the government is currently working on an agriculture finance policy, which should be up and running in December. Henry Mbaguta of Uganda’s Ministry of Finance, present during the meeting, stressed the perfect timing of this event: “The outcomes of this meeting and the results of the research will be used as an input for our policy formulation. Not often does such a large group of stakeholders with a passion for this topic get together to share thoughts. A lot of things can wait, but not agriculture.” To support this agenda, the Agriculture Finance Platform (AFP) was launched last year by three organizations to create a conducive agriculture finance environment for Ugandan farmers. This platform was established with funding from the Dutch government, and will utilize the NpM research, as well as the outcomes of these meetings, to determine the way forward.


A growing consensus

In Tanzania, the expert meeting also proved timely. The morning of the meeting, an article in the national newspaper Daily News announced, “Smallholder farmers advised to work under formal group.” It quoted research conducted by the Consultative Group to Assist the Poor (CGAP), based on extensive diary surveys of agriculture-dependent households that often have multiple sources of income. NpM’s “Finance for Smallholders” report included the farmers who produce for the market, the segment just above the group targeted by CGAP. NpM and CGAP have aligned their efforts, and this resulted in a broad range of smallholder farmers for which the same advice applies: “Organization of farmers is the key to success.”


A new advisory board and financing facility

The experts at the meeting in Kenya decided that the commitment to work towards solutions for farmers needs follow-up in a structured way. The listed challenges, risks and solutions need to be translated into an action plan feeding into larger programs and national policies. They decided to form an advisory board to follow up on this very important topic. Even more promising: According to CGAP, a facility of 26 million euros will be made available to assist Tanzania, Kenya and Zambia in implementing the approach advised by the experts at these meetings.


banks remain unconvinced

In Tanzania, 74 percent of the farmers are not yet organized in a cooperative or similar entity. One third of the farmers depend on borrowing from friends and family, only 4 percent have a loan at a microfinance institution, 3 percent have a loan at a bank, and 2 percent at a local credit cooperative. During one of the meetings, the farmer representatives indicated that this is because “the financial institutions are so risk averse,” even though “financial services are essential in increasing production.” Salome Mwakigomba, the bank representative, confirmed this view: “There is little knowledge within my institution, and this needs to change in order to understand farming, so that we dare to expand into this segment and structure our products well.” However, she brought up one reason this hasn’t happened: “Our management is not convinced about the business case.” (Mwakigomba promised to take this issue up with management.)



The meeting participants made an inventory of additional challenges and risks, each one based on his/her own background and expertise. These range from the lack of effective links to the market to sell goods, to missing laws and regulations. In the research we have categorized the risks in three main areas:

  1. Risks related to specific crops and how they are cultivated;
  2. Risks related to farmer organizations and marketing, and linkages to the market; and
  3. Risks related to viability and financial proposals submitted by entrepreneurs.


Financial products and innovation

It was often stated at the meetings that financial services should be well-adjusted to the needs of farmers. For example, our study shows that in the most successful financial structures the loan is paid back after the harvest has been sold. Furthermore, insurance for farmers is a product that is not yet easily available, though the demand is high. NpM is currently working to map the possibilities of linking geo-data with financial services (including insurances). Dutch investors and government agencies highly value such innovations, because they contribute to reducing the risk of farming, leading to higher yields and better quality of produce, and ultimately to higher levels of food security. Similarly, CGAP indicates that digital services are important focuses of innovation. I strongly believe that technologically innovative products (even beyond digital services) will be essential in reaching out to rural areas and the agriculture sector. However, to implement this successfully and with the highest impact, it’s essential that the value chains foster well-organized cooperation amongst stakeholders. This leads to increases in bargaining power, because good and consistent quality is guaranteed through trainings, and the market linkages increase manifold. The role of the government as one of these stakeholders should be to provide a good enabling environment: The experts at our meetings indicated that “lack of enforcement of law is an important factor in establishing formal stakeholder relations.”


The role of climate change

In all three countries, these experts mentioned three issues that require special attention: the effects of climate change on farmers, the role of women and the role of youth. Regarding climate change, it has contributed to failed harvests in previous years that have had a disastrous effect on farmers’ lives. And in Uganda, the majority of people cook on charcoal, resulting in rapid deforestation and high CO2 emissions. Because we know that climate change predominantly affects the poorest of the poor, Dutch investors have committed to investing in solutions like energy-efficient cook stoves, solar panels, biogas installations, etc.


The importance of women

In many African countries, women contribute a major proportion – sometimes a majority – of agriculture labor, often producing crops for personal/family usage. A female coffee farmer highlighted the value of optimizing and professionalizing their work, stating that the specific training she received “gave her a much stronger position in her society and her family.” Financial institutions also indicated that “empowerment of women should remain a priority as their repayment rates are higher.” But one consultant raised a concern: “If the chains are professionalized, men will go back to farming and women tend to drop (out), and therefore they have less ownership, since they don’t have a job anymore.”


Reducing youth unemployment

Youth unemployment is a huge problem in many African countries. They have young populations, including Uganda, which has the youngest in the world, with 77 percent of the population 30 years old or younger. Organizations of farmers that are able to produce for the market contribute to job creation. One of the cases we analyzed is NUCAFE, a coffee organization in Uganda. Just over 170,000 farmers have joined NUCAFE – they are organized into regional producer organizations and a national cooperative, and they have their own storage facilities and roasting plant. The roasted coffee they produce is being sold in the local market, while the unroasted beans are exported. These farmers are now able to hire an average of six people each to work in their fields, and if you add the staff who work for the NUCAFE group, the total amount of employment generated is around 1.5 million people.


Photo: Josien Sluijs in her visit to NUCAFE, a coffee organisation in Uganda, together with a farmer named Sanyu Kakoza. Photo credit: NpM


[yop_poll id=”10″]

financial inclusion, smallholder farmers