NB Financial Health
Better Data for Better Products: New Online Resource Aims to Close the $200 Billion Smallholder Finance Gap
Behind every dataset, there’s a story waiting to be told. When it comes to farmer finance, that story centers on the untapped US $200 billion smallholder finance market. The numbers highlight a massive opportunity – if financial service providers (FSPs) and investors have access to transparent and credible market data.
But like all stories, it’s not that cut-and-dried. Globally, there are 450 million smallholder farmers in need of better financial products, which can enable them to rise out of poverty and contribute to feeding the world’s growing population. But while most industries would see 450 million eager consumers as a compelling market opportunity, efforts by FSPs to reach smallholders have had a limited effect, in part due to insufficient market data.
There’s good news though: Earlier this year One Acre Fund and MIX with support from the Mastercard Foundation Rural and Agricultural Finance Learning Lab (the Lab), launched the Smallholder Finance Product Explorer. This online resource – housed on the MIX Market platform – aims to help FSPs design better products and help investors identify new investment opportunities by providing access to operationally useful information on smallholder finance products. With more detailed data, FSPs can inform product development and investors can identify partners to better meet the financing needs of smallholder farmers.
DATA IS POWER
According to a report authored by ISF Advisors and the Lab, FSPs and investors need access to transparent markets and reliable data to make better decisions on smallholder financial solutions and ultimately close the smallholder financing gap. The Product Explorer provides this critical information to help FSPs and investors in a number of ways:
Supporting the design of more customer-centric solutions
FSPs entering rural areas for the first time often find that the basic, inflexible short-term loans they disburse to customers in urban areas are not suited to the seasonality of farmer cash flows. Understanding a customer’s needs, preferences and behaviors is crucial for an FSP’s long-term sustainability – as well as for serving farmers well. While CGAP’s Smallholder National Surveys and their newly released Smallholder Families Data Hub offer granular data on customer needs, the Product Explorer helps FSPs understand what solutions are being offered, where, and with what impact. For instance, the Product Explorer allows users to understand other farmer-centric design features, such as whether the loan or product has a flexible repayment schedule or offers a grace period.
Connecting progressive partnerships
For many FSPs, entering the smallholder finance market alone isn’t an option. To mitigate risk and share costs, FSPs often find themselves forming partnerships across the value chain. For example, some FSPs in the Product Explorer dataset partnered with other organizations to deliver non-financial services, rather than internalizing the costs and risking their bottom line. The Product Explorer makes it easier for FSPs to identify innovative and successful models for delivering these services in partnership with other types of providers. For instance, a commercial bank may enter into a formal partnership with a dairy society, so that their cattle loan clients can receive training on cattle rearing and a guaranteed place to store and sell their milk.
Informing capital investment opportunities
Due to limited availability of appropriately structured capital, FSPs face high resource constraints to develop and deploy financial products that meet the needs of farmers. The price, risk evaluation and structure of investments currently available to FSPs often do not align with the costs and realities of rural expansion, disproportionately excluding smallholder farmers. The Product Explorer aims to address this issue by offering detailed product-level information of smallholder finance products which will enable investors to better align their investments to the realities of agricultural lending.
UNLOCKING GROWTH FOR SMALLHOLDER FINANCE THROUGH MARKET TRANSPARENCY
With more market transparency will come more growth for smallholder finance. The insights and market data from the Product Explorer can help unlock new levels of financial access for the roughly 450 million smallholders throughout the developing world. For this to happen, stakeholders across the sector each have an important role to play:
- FSPs can increase market transparency by contributing their data to relevant databases and tools – such as the Smallholder Finance Product Explorer, CGAP’s Smallholder Families Data Hub, or the GIIN’s Navigating Impact portal. To do this, FSPs need to engage with the data available, build their team’s capacity to make use of these resources and share information on their solutions.
- Investors and social lenders can encourage their portfolio FSPs to contribute data to central repositories and participate in efforts to increase market transparency. These efforts can draw new investors into the agricultural finance space and encourage current investors to increase their existing portfolios and more efficiently allocate resources to the most innovative, scalable and impactful models in the sector.
- Donors can support the creation of market databases to enable data transparency and catalyze market development. By doing so, they can help build data capacity within FSPs and other service providers to ensure on-the-ground actors are able to benefit from greater information transparency.
- Think tanks, researchers and practitioners can analyze this data to make recommendations for policies that promote good product development.
As access to market data grows, the number of viable financial solutions will too, allowing for millions of smallholder farmers to rise out of poverty by building a more economically stable livelihood.
On May 8 at 9:00 AM EDT, MIX, One Acre Fund, CGAP and i2i will be hosting a webinar to show industry actors how to use some of these new online tools. Click here to register for “Illuminated by Data: New Tools to Develop Financial Solutions for Smallholder Families.”
Blaine Stephens is the COO of MIX, the leading global information provider in support of financial inclusion.
Mikael L. Clason Höök is Director of the Mastercard Foundation Rural and Agricultural Finance Learning Lab, and is tasked with providing strategy support, engaging with partners, coordinating research and managing the lab’s day-to-day workstream.
Mike Warmington is currently director of microfinance partnerships for One Acre Fund, a social enterprise working with more than 500,000 smallholder farmers in Eastern and Southern Africa.
Photo by Bioversity International, via Flickr.