European Microfinance Week 2018

PRESENTATIONS

The moderator Hannah SIEDEK introduced the session and its panellists. The session was bound to show the tremendous possible impact by addressing smallholders: “Go big by going small”. Currently, there are around 2 billion people who are part of smallholder families, and most of them are poor. Plus only 10% has access to credit and the financial sector should seek the opportunity to reach the other 90%. This topic was addressed in three presentations: first CGAP presented its national household survey in Uganda, then PRIDE Microfinance Ltd showed us how the data was useful in adapting their products and services for smallholder farmers. Alterfin then presented research conducted by members of CSAF, the Council of Smallholder Agricultural Finance.

In the context of presenting the results of CGAP`s research, Jamie ANDERSON presented CGAP`s Smallholder Families Data Hub. The hub provides data from the six national surveys of smallholder households: Bangladesh, Ivory Coast, Mozambique, Nigeria, Tanzania and Uganda. Each of these national surveys had a sample size of roughly 3,000 households. The surveys show the complexity of household activities, examine the importance of agriculture, credit, youth, mobile phones and other topics, and were used to segment the market. According to the results of the research, agriculture is an important source of income for the sampled households. In Uganda, 88% of the households have a strong intention to remain in agriculture. Even though households have various other sources of income, they still identify themselves strongly as farmers.

CGAP asked smallholders about the relative importance of various financial services – mobile money account, bank account (non-savings), savings account and credit – both generally to their household and to their agricultural activities. Results on credit and insurance were surprising: they were perceived as less important than the other financial services. In Uganda, only about half of respondents indicated that credit was ‘very important’ or ‘somewhat important’ to either their household or agricultural activities. The explanation could be that there were no providers of these financial products. In any case, the data emphasise that financial service providers should better understand their clients’ needs and consider that many people do not want a loan, and would instead prefer to use their savings to achieve the same goal.

In addition, CGAP’s data showed that young farmers represent a sizeable market in Uganda. In Uganda, this segment consists of around 8.2 million young farmers between 15-30 years old. Out of these youth, 4.8 million own a mobile phone and, of this group, 1.9 million also have a mobile money account. Using an estimate of the annual average savings of youth from the CGAP financial diaries with smallholder families, the potential annual savings that could be digitised from this subgroup of youth alone could reach USD 355 million. This provides a compelling market opportunity and financial service providers should be chasing this market.

CGAP’s data includes different variables that could be used to segment smallholder households. In a segmentation by agricultural livelihoods, the key variables are crop sales, amount of agricultural land and smallholder livelihood profile. Based on these variables, three distinct segments of meaningful size were identified: Smallscale households; Commercialising smallholder households and; Diversifying smallholder households. Each of these segments has distinct needs and preferences for financial inclusion. The prime target for financial service providers is the commercialising smallholder farmers.

Pride Microfinance is a leading MFI in Uganda that used data provided by CGAP to improve their product offer and serve smallholder farmers. By targeting smallholder farmers better, Pride’s aim was to reach scale (from 0.5 to 2 million clients by 2023), reduce costs, know their customers better, and improve their Credit Risk Management by going digital. Sylver KYENYUNE reflected on PRIDE`s data needs and used the insightful CGAP data to identify the following opportunities: 1) A new generation of small holder farmers as identified with very different needs and wants; 2) Farmers currently depend on limited financial products and services, plus; 3) Farmers are dependent on the existing agricultural infrastructure.

While Pride realised that farmers are very committed to agriculture, they also realised that 85% of smallholders do not have access to credit. The MFI had to find out what services they should provide to smallholder farmers and how to include young people.

Having discussed internally the CGAP survey data quite extensively, they developed one new product, a group agricultural loan which is digitally powered with the MFI going to the customer, and a credit assessment tool, an alternative credit score (due for pilot in 2019). With regard to the group agricultural loan, the data showed them that despite the time-consuming meetings for such products, 47% of their clients preferred the physical contact compared to simple data entry into the phone. The alternative credit score is being developed in cooperation with CGAP and Harvesting (a FinTech). The MFI also has a Memorandum Of Understanding with NUCAFE (Umbrella organisation for coffee farmers) and through this the pilot of the alternative credit score will initially focus on the coffee value chain for early learning with a view of scaling it for other value chains. Based on their financial data of the loan applicant, production data and environmental data (e.g. weather data and soil & water maps), the MFI was able to develop an alternative credit score. By implementing this assessment tool, Pride has achieved a repayment rate of 97%.

Besides the group agricultural loan, the MFI developed an alternative credit score in cooperation with NUCAFE. Based on an understanding of their incentives and a variety of data including financial data of the applicant, production data and environmental data (e.g. weather data and soil & water maps), the MFI was able to develop an alternative credit score. 

Jean-Marc DEBRICON opened with: “We chose to go to the moon not because it was easy, but because it was hard.” According to social lender Alterfin, this saying also applies to smallholder finance. From a cost-benefit point of view, providing financial services to smallholders is hard and as a result 75% of demand for smallholder financing remains unmet.

Alterfin and nine other social lenders are members of the Council on Smallholder Agricultural Finance (CSAF). CSAF members provide loans to the missing middle (USD 50,000 to 2 million loan size) which is not addressed by commercial banks or microfinance institutions. CSAF commissioned an evaluation of 4,000 loans that were disbursed by CSAF members over a six-year period.

The study described the risk-return profile of the disbursed loans. The most profitable loans for the CSAF members were those extended to: 1) Repeat clients; 2) In strong economies such as most South American countries; and 3) Loans financing actors in tight value chains. These loans showed the highest return and as a consequence, members had a preference for these types of loans. Risks for investors proved to be much higher when the investee is a new borrower from Sub-Saharan Africa and operating in a loose value chain. 

Alterfin addresses the above risks and high cost structure of certain loans by blending agriculture partly with microfinance. In such a diversified portfolio the microfinance operations cross subsidise investments in agriculture. Alterfin also uses guarantees for lending to more risky partners. These are partial guarantees to set the right expectations and secure commitment.

DISCUSSION

At the end of the different presentations and after a short discussion among panellists, a member from the audience wanted to know what objectives CSAF members have if profits are not attractive, as presented by Debricon. Siedek and Debricon explained that the strategy to provide finance to the missing middle is clearly not based on maximising profits only. Social lenders have a mission to achieve social and sometimes also an environmental impact. They should also have a long-term view and realise that new borrowers may not be very profitable, but may become more profitable with new follow-up loans. In response to a question from the audience on the role of equity to increase lending, Debricon provided more insights into the interest of their clients in equity financing. When borrowers develop a long-term relationship with their investor, they may also become more interested in equity financing. Usually, they are less prepared to open up to an investor when they do not yet have a strong relationship.

Siedek started a final discussion to find out how investors can contribute to social and environmental standards. A representative of Enclude in the audience recommended that investors can work together with smallholders on socially and environmentally sustainable value chains. Smallholders can have good ideas on how to comply with stringent requirements. A representative of an MFI in the audience explained that they already included several environmental aspects in their credit score: efficiency, soil management, contaminant reduction
and climate action.

To conclude, the discussion also covered the topic of smallholder segmentations. Picking up the results of the CGAP research it becomes evident that not all smallholders are the same. There are some who are subsistence farmers mainly producing for themselves, others might produce part of their harvest to sell locally, and only a few are commercial smallholders. It would be only these commercial smallholders who should be considered ideal clients to financial institutions. Therefore, financial institutions and investors firstly need to find out the type of smallholder or cooperative they have in front of them.

1 http://www.cgap.org/blog/series/diaries-tool-understanding-smallholder-families

2 Tight markets are formalised markets like cocoa and coffee with standards and other strong regulating institutions whereas loose markets are the opposite.