Millions to gain, billions to feed: The realities of smallholder finance

  • Michaël DE GROOT, Rabobank Foundation
  • Hugo COUDERĖ, Alterfin 
  • Blaine STEPHENS, MIX


Michaël DE GROOT explained the need for smallholder finance: in the future the earth needs to feed 9 billion people. Social lenders are setting industry standards. CSAF (Council on Smallholder Agricultural Finance) is an alliance of nine of these lenders, including the Rabobank Foundation and Alterfin. CSAF facilitates market entry, aims to reach and support the livelihoods of 450 million small-scale farmers and promotes responsible lending principles. He then introduced the panellists. 

Blaine STEPHENS explained that MIX analysed the 2015 lending portfolio of CSAF members. The alliance disbursed USD 597 million (+5% since 2014), to 672 businesses, across 66 countries, earning a combined revenue of USD 3.7 billion, sourcing from 2.1 million farmers, of which 34% were women. CSAF disbursements are concentrated in South and Central America, but is increasing its disbursements in Africa and Asia where most smallholder farmers are located. The regional distribution is a result of the agricultural products that CSAF invests in. The largest commodities are coffee and cacao. Second tier commodities growing in the portfolio include rice, nuts and quinoa. 

Stephens explained that social lenders like CSAF play a relatively small role in financing smallholders. The Initiative for Smallholder Finance (ISF) published a report with estimates on the current size of smallholder finance. This report estimates that 66% of financing funds come from state banks and 21% from MFIs. Currently, formal financial institutions cover around USD 14 billion to smallholder finance annually. CSAF accounts for almost 5% of that and MFIs account for USD 3 billion. Two other sources of finance are value chain actors (USD 17 billion) and informal sources of lending (over USD 25 billion). 

MFIs mainly reach smallholder farmers in loose value chains, whereas most smallholder farmers are non-commercial. For the latter group, MFIs likely finance the off-farm activities, given the fit of their cash flows for typical MFI products. Most borrowers under CSAF are producer organisations, the remaining third are private SMEs, such as processors and traders. For CSAF, the biggest risk in smallholder finance lies in the capacity of producer organisations to manage extreme weather events, commodity prices and currency depreciation. 

Hugo COUDERÉ presented a borrower’s perspective of smallholder finance. He explained that MFIs fail to finance smallholder farmers and they cannot always account for all financial needs of this target group. He presented an example of a coffee farmer who wanted to invest in a dry mill. This investment is too much for an MFI. In another example, an MFI developed a special product to cover the investment of an extra cow for a Kenyan dairy farmer and includes health insurance for the cow. Couderé explained that smallholders need specialised MFIs, such as SACCOs, that tailor their products to the needs of smallholder farmers. 

Couderé explained that most of the finance for smallholders comes from within the value chain. He stressed the importance of an organised value chain to finance farmers. Often, value chain actors, such as input providers or traders, provide the finance. Typically farmers are small and dispersed and sell their products locally. This makes it very difficult to finance. Couderé shared an example of alpaca farmers, which are scattered over a large area. To produce alpaca wool, the value chain needs to be organised. To organise the value chain, it needs to be demand-driven: we need to start at the market and make the farmer understand how to reach that market. 

Within the value chain, finance does not reach the individual farmer. Couderé described the finance gap between farmers and financial institutions. He explained that agriculture is related to various risks, in production, price and market. At the same time, farmers often lack collateral, operate on a small scale and have limited market information to anticipate changes. Financial institutions have limited access to farmers, make inaccurate risk assessments, offer inadequate loan products and have inefficient lending systems. The costs of securing markets and covering risks cannot be covered by the interest rate of microfinance products. Couderé concluded that a national and international price and subsidy policy is needed to close the gap.


The moderator explained that MFIs can do more for smallholder finance by segmenting their clients in loose, tight and non-commercial value chains and adapt their products accordingly. He asked the audience to share their experiences in interventions for smallholder farmers to solve these problems. A member of the audience from IFAD explained that IFAD shared the risks and costs of an investment with both the farmer and the MFI. The farmer accounted for 20%, the MFI financed 50% of the investment and IFAD the remaining 30%. 

Another participant commented that there are a lot of different types of smallholder farmers, who need different approaches. Half of these farmers are non-commercial, they have an important role in the world food supply in the future, and how do we finance them? The moderator responded that there is a lot of ongoing research on how to do this. Stephens gave an example of innovations with input suppliers. As farmers have incremental income, they acquire seeds for the coming season. This recognises the existing cash flows on a farm. 

A member of the audience asked how the panellists can address the need for diversified products. Couderé explained that most farmers have both on-farm and off-farm activities. The on-farm activities are also diverse. To diversify their risks, Alterfin finances the commercial on-farm activities of a farmer, which is an activity that creates cash flow. He explained that this also has a positive effect on the on and off-farm non-commercial activities. 

Another participant enquired about the gap in finance needed to feed the world in 2050. Stephens explained that currently there is a need for around USD 200 billion for smallholder farmers. Current financing covers about USD 50 billion, which results in a financing gap of USD 150 billion. 

The moderator consequently asked the audience their views on increasing agriculture to feed 9 billion people. Is the future in large-scale agricultural production or in producing according to organic and sustainable production methods? The majority voted for the second option. They gave reasons of social responsibility and environmental sustainability. 

The moderator concluded the session by saying that the panellists cannot answer all questions raised in this session, much input is still needed. He explained that the CSAF network is growing, and there is a growing interest in social lending. Social lending is a relatively new topic, but it can contribute to smallholder finance.