Innovative Models to Finance Small-Scale Agriculture

Smallholder production, which generally occurs on plots of less than two hectares, is often characterized by low yields, low quality, poor linkages, and little access to finance. A recent Dalberg report called “Catalyzing Smallholder Agricultural Finance”, suggests that with increased financing, farmers all over the world can improve their yields and products and in some cases double their income. As per the report, the world’s 450 million smallholder farmers represent a large – and largely unmet – opportunity for agricultural financing. The report identifies five primary growth pathways for deploying investment to address smallholder finance demand. Strengthening these farms can also be beneficial for the environment, as smallholders represent stewards of natural resources that are in need of sustainable management to prevent deforestation and the degradation of ecosystems.

According to the report, investments should be deployed through the following five primary growth pathways:

_First, existing models of short-term trade finance for producer groups can be replicated and scaled, while encouraging commercial banks to follow.

_Second, new products can be innovated, such as providing long-term financing to cooperatives, addressing working capital needs, and developing on-lending schemes to finance group members.

_Third, financing schemes can be deployed through multinational buyers who have tightly integrated out-grower schemes (i.e., strong contractual relationships) with smallholder farmers. These first three growth pathways will only address 10 percent of the world’s smallholder farmers who are aggregated into producer organizations. To get to the remaining 90 percent and truly unlock smallholder potential, investors can take path four or five.

_A fourth pathway suggests a way to reach the remainder of farmers by providing finance through alternate points of aggregation in the value chain (such as warehouses or input suppliers).

_Finally, for farmers that are in very loose and dispersed value chains, direct to farmer financing models can be piloted, such as agriculture microfinance.

Smallholder farmers need financial assistance in order to realize their potential and meet the growing demand for food. The social lender model suggested in the report, can prove to be successful in meeting smallholder financing needs, improving production, building local markets, and encouraging sustainable management of natural resources.

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