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Food & microfinance: Helping farmers reap rewards………Sarah Murray
In a new strategy to reduce reliance on food aid in the fight against hunger, the US Agency for International Development (USAid) plans to make investments to develop agriculture.
Smallholders using microloans will play a role in this. However, many microfinance and development experts argue that credit is not the only thing these farmers need.
Certainly, microfinance underpins rural economies. “Microfinance is the lubricating system for smallholder farmers,” says John Magnay, the agricultural adviser for Opportunity International, one of the world’s largest and longest established microfinance institutions.
“Unless they can get access to inputs and finance the production and marketing cycle, they will not be able to produce at optimum levels,” he adds.
Banks and microfinance institutions are not the only organisations that support smallholders in their efforts to become more productive. Through contract farming arrangements, suppliers have the potential to extend credit to the smallholders in their supply chains.
“Large suppliers or food processors can clearly link to small farmers and provide them with access to inputs through loans, as a way to get the quality and standards of produce they need,” says Maximo Torero, director of the markets, trade, and institutions division at the Washington-based International Food Policy Research Institute.
However, Mr Torero says that greater innovations in contract design are needed to discourage farmers from breaking the contract.
The “group lending” microfinance model pioneered by Grameen Bank in Bangladesh – where if one individual fails to repay, the others in the group are held responsible – could be one way forward.
“Instead of lending to one small farmer, [the company] can lend to a rural producer association for which all members are responsible,” he says. “An- other way is for the large supplier or food processor to give a warranty to financial institutions so they take higher risks in giving loans to smallholders.”
Mary Ellen Iskenderian, chief executive of Women’s World Banking and a member of the judging panel for this year’s FT Sustainable Banking Awards, sees a far greater role for smallholders in the global agricultural supply chain.
“One important reason that potential hasn’t been filled is that the majority of smallholder farmers in the developing world are women,” she says.
For women, difficulties in securing property title and land rights are often the biggest obstacle to getting funding and being able to pay for the agricultural inputs they need.
So Women’s World Banking encourages the microfinance institutions that are its clients to use things such as household cash flow as the basis for making loans.
Mr Torero also believes lenders need to simplify their processes, with simple credit scoring systems and risk databases to reduce the costs of applying for a loan. “There is a clear need for financial institutions to simplify their credit scoring mechanisms and to adapt their lending plans to what smallholders need,” he says.
Meanwhile, many microfinance institutions and non-governmental organisations are starting to package loans with other financial products, such as insurance and savings schemes, as well as education and training programmes.
In Kenya, for example, the One Acre Fund – shortlisted for the Achievement in Basic Needs Financing award – describes its services to poor farmers as a “market bundle”.
The bundle brings together farmers to make it easier to gain access to agricultural markets and then provides them with training and supplies of environmentally sustainable fertilisers. It acts as a bulk-selling agent for the farmers and also offers them crop insurance.
Meanwhile, in Malawi, Opportunity International combines microloans with savings accounts and weather insurance products. It also has a programme called the Total Farm Plan, which finances the crops produced for household food, releasing land for cash crops.
“We’re also encouraging farmers to plant trees,” says Mr Magnay. “So, in seven or eight years, they will have household fuel wood and timber to sell.”
Risk management, through micro-insurance, is also being seen as an increasingly important element of what is needed by poor farmers. Like any agricultural business, smallholders face risks such as catastrophic loss from extreme weather, as well as damage to expensive farm equipment.
The challenge for banks or microfinance institutions is that, when it comes to the poorest farmers, administering weather-related insurance for crops and livestock is expensive when the premiums are so low and the cost of assessing the value of individual losses and incidences of fraud is so high.
Yet the poorest farmers are also those in greatest need of risk management tools. “There is a correlation between risk-aversion and poverty,” says Jim Roth, a partner at LeapFrog Investments, a social investment fund focusing on businesses that provide micro-insurance. “The poorer you are, the more risk-averse you’ll be, because the consequence of getting it wrong could be the starvation of you and your family.”
One solution is to bundle crop and other agricultural insurance with other microfinance products, something being offered through Global Index Insurance Facility (GIIF) by the International Finance Corporation and the International Bank for Reconstruction and Development.
Mr Torero says: “Linking financial services to access to weather insurance could help, as this will reduce farmers’ risks and at the same time reduce the probability of defaulting on a loan.”
Another innovative way of offering low-cost agricultural insurance – also being used by the GIIF – is through index-based products. Insurers pay out – not on the basis of actual loss – but on when rainfall rises above or falls below a certain level.
In the case of livestock, the payments would be triggered when the average weather-related loss of livestock in a region rises above a certain percentage of the overall herd.
“There are a lot of experiments going on in index-based insurance,” says Mr Roth. “It has a huge amount of scope because it can hugely reduce the cost of managing it, compared with crop and animal insurance.”
Some initiatives are addressing climate change. MicroEnsure, the insurance agency of Opportunity International and one of the shortlisted organisations for the Banking at the Base of the Pyramid award, is working with the United Nations through the Munich Climate Insurance Initiative to create a $5bn climate change insurance plan.
This will cover people in developing countries who are facing increased incidences of climate-related flooding, drought and other extreme weather events.
These experiments in micro-insurance for smallholders come at a critical time, as the risks that farmers face are likely to rise sharply with the effects of climate change.
Meanwhile, because many poor countries – particularly in Africa – are still net importers of food, the need to expand domestic food production and facilitate global food trade is growing.
Ensuring food security means helping farmers in developing countries not only to feed themselves and their communities, but to contribute to the international supply chain.
Ms Iskenderian argues that, equipped with the right financial and other tools, smallholders can indeed contribute more.
Where women farmers do finally get ownership of the land, increases in productivity can exceed 25 per cent, she says. “So it’s a question of unleashing the potential that’s manifestly there.”
Sarah Murray is an FT contributor and author of “Moveable Feasts: From Ancient Rome to the 21st Century, the Incredible Journeys of the Food We Eat.”
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