Growth Pathway 5: Finance Directly to Farmer
The value chains of some local staples are unorganized, with dispersed producers and few points of aggregation. Reaching smallholders in these value chains is the last mile of addressing smallholder finance demand. The most promising solution is a variation on microfinance models for agriculture markets, perhaps through mobile banking.
This growth pathway is also expensive on a per farmer basis, because non-aggregated farmers tend to be isolated and dispersed across rural areas. In rural settings, the R&D costs of developing distribution models are high, as are the costs of marketing and operating. However, this growth pathway has the potential to minimize risk through diversification across a wide client base. Microfinance institutions could play a key role in addressing this demand.
There are different actors that are involved in each of the five pathways. The primary financier for the first two pathways are social lenders, while the primary financier in the third growth pathway is commercial lenders, in the fourth is donors and impact investors, and in the fifth is microfinance institutions. Needless to say, several of these financiers can be involved in the other pathways as well. There is ample room for all types of financial lenders to enter different parts of the rural finance market.
The above finance models must be combined with existing finance mechanisms, many of which also serve the “subsistence sector” and this is why they must also be considered. These models are the following:
- • Family and friends network “informal” finance
- • Interlinked credit (e.g. credit with labor or with land sharecropping), practiced between a larger intermediary (normally landowner or trader) and a farmer
- • Microfinance through group lending
- • Input supplier finance (interlinked trade and short-term credit)
- • Trader finance (interlinked trade and short-term credit)
- • Cooperative finance
- • Government finance via monopolistic purchasing and input supply parastatals
Clearly there is partial overlap between these and the earlier pathway models, but all are needed if the huge unmet needs for rural finance are to be met.