From CGAP's smallholder financial diaries to unlocking growth in financial solutions

Published on

May 2, 2016

CGAP's recent study, Smallholder Diaries, offers valuable insights into smallholder financing needs and supports the broader case for customer centricity to unlock growth in financial solutions. 

Every smallholder family has a unique story to share, and understanding these stories is part of unlocking growth in the era of farmer finance.  Our recent report Inflection Point (with ISF) drew on raw data and stories captured in CGAP’s February 2016 study, Smallholder Diaries, in validating assumptions and shedding light on the nature of smallholder needs.  The CGAP study is important in that it both illustrates the need for understanding customers better in developing financial solutions and demonstrates a customer-centric research methodology.

Over a period of year, CGAP researchers visited 270 smallholder households in three countries every two weeks to track where they earn their income, how they spend this income, and their agricultural activities.  Although the study by no means represents the lives of every smallholder farmer, it provides an instructive and nuanced look at smallholder finance through the lens of the daily lives of customers.  Sampled farmers in northern Mozambique are generally net consumers of agriculture, while the farmers studied in western Tanzania operate commercially in loose value chains, and those in Punjab, Pakistan sell into tight value chains.


Key findings from the smallholder diaries

Although smallholders are a very diverse group, CGAP’s findings highlight a few things in common:

  • Smallholders earn the majority of their cash income from a variety of sources besides agricultural production.  These sources may range from entrepreneurial activities (e.g. owning and managing a moto taxi) to part time or full employment by third parties (which may include casual farm labor) and comprise 60-90% of household net cash income, depending on the country. 
  • However, focusing on cash income can underestimate the importance of agriculture to smallholder households.  When household consumption is included, roughly half of income in all three countries was from agricultural production.
  • Smallholders have financial needs that go beyond agriculture. Families need to pay for school fees, cover emergency-related expenses and finance life events such as weddings and funerals.
  • Smallholders have few financial tools available to cope with and mitigate the factors that make agricultural income erratic and volatile, such as seasonality and exposure to weather shocks and commodity prices.  Three quarters of the households surveyed in Tanzania were unable to respond to weather shocks destroying their crops.
  • Despite a wide range in financial instruments used, use of digital finance or other formal tools remains limited across all three samples.  Farmers rely heavily on current income and short term savings to cover their agricultural and non-agricultural expenses, but very poor farmers have trouble accumulating savings and borrowing options are typically informal. 

The study concludes that digital financial solutions should be further expanded in light of the gaps left by traditional services and that “relevant financial tools must address the unique challenges and needs of each of these general profiles of smallholder households.” 

Understanding farmer needs to unlock smallholder finance growth

Our study, Inflection Point, estimates that formal financial institutions and value chain actors meet less than a sixth of smallholder agricultural and non-agricultural financial needs.
Even when accounting for informal and community based financial institutions such as ROSCAs and SACCOs almost three quarters of these needs remain unmet.  

Several persistent barriers have constrained growth in smallholder finance, including challenges developing profitable business models, and a mismatch between farmer needs and products available that manifests as lack of demand. Both of these challenges necessitate a deeper understanding of customer needs, preferences, and behaviors. CGAP’s Smallholder Diaries has deepened the industry’s understanding. Now, individual finance service providers must go deeper in their own markets, using customer surveys, human centered design, and feedback mechanisms to develop and refine solutions for smallholders. 

Smart design can make a product more accessible and attractive, for example, matching grace periods with income cycles or providing alternative payment options.  Opportunity Uganda  customized school fee loans for farmer families to match repayments with seasonal income cycles. The Rural Resilience Initiative insurance pilot in Ethiopia worked with smallholders to understand their cash constraints and used smart design techniques to develop a two payment option insurance product: paying with labor or cash. This made insurance accessible to the poorest farmers who were able and willing to work for coverage.

Customer-centric approaches can also unlock profitability.  A nuanced understanding of the nature and sources of risk smallholders face can improve provider ability to segment risk within target customer segments.  For example, customer research by Grameen Foundation and Musoni Kenya to understand fluctuations in income and expenses led to design of a staggered loan disbursement product, helping farmer to manage their money while reducing the risk of default.  (And, of course, increased uptake and usage of attractive products improves profitability through higher volumes of revenue.)

Studies like Smallholder Diaries and related efforts are “putting smallholder farmers in the driver’s seat.” The sector must collaborate in helping more financial service providers maximize the value of these efforts by incorporating customer-focused data and approaches into their operations.


Read, visualize, and analyze the Smallholder Diaries here.


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