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Perceptions of profitability drive “fundamental shift” in small-farmer finance market

ImpactAlpha, July 15 – Just a few years ago commercial banks and even microfinance institutions mostly served large-scale farmers in commercialized valued chains. Smallholder farmers, and the agri-businesses that serve them, faced at least a $150 billion annual financing gap.

“We have witnessed a fundamental shift in the market,” say the Rural and Agricultural Finance Learning Lab and ISF Advisors, a Dalberg spinoff. In a preview of an update to their landmark “Inflection Point,” the rural finance experts say perceptions around the profitability of lending to small farmers in emerging markets is changing. “Rather than being a beneficiary, the smallholder farmer is increasingly viewed as a potentially valuable customer,” they say.

That change has triggered “a significant influx of private sector, for-profit (financial) providers—both innovators and incumbents—who are innovating and expanding the market frontiers.” Behind the shift:

  • Catalytic capital. Foundations including the Mastercard Foundation and the Bill and Melinda Gates Foundation, development agencies like USAID and niche impact investors, such as Acumen and Accion, have seeded the market with more than $250 million in patient capital to help smallholders prove business models and product-market fit. A flood of new financial service providers now serve smallholder households and agribusinesses with new services, tools, and products.
  • Impact tech. The spread of digital technology is enabling new products, such as micro-insurance and asset financing options. It’s also transforming how financial service providers do everything from credit scoring to delivering products and training (see, for example, “Agtech startups connect Indian farmers to customers). 
  • Agribusiness ecosystem. A stronger ecosystem of incubators, accelerators, technical assistance providers, investors and impact and impact funds is emerging to address the distinct finance and business development needs of ag-based small businesses (see, “Omnivore raises $46 million in second fund for Indian agriculture). Other examples include, African Management Initiative, Enablis, Technoserve Entrepreneurship and Stawi Africa.
  • You heard it on ImpactAlpha: “Smallholder farmers are investable.”

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