Q&A: Bridging the Financial Services Gap for Rural and Agricultural Customers

Rural finance is on the agenda during European Microfinance Week

Far from the bustling financial centers of the city, people in rural areas have long been underserved by traditional financial institutions. While this is a problem for all rural residents, the lack of access to financial services is particularly difficult for farmers since it bars them from growing their agricultural businesses. We talked to Jonathan Agwe of the International Fund for Agricultural Development (IFAD) to get his opinions on the challenges that rural clients face in accessing financial services, as well as the solutions to help reach them.

Mr. Agwe will be part of a panel discussing rural youth and agriculture during European Microfinance Week. From November 29 through December 1, professionals from dozens of countries will converge in Luxembourg to discuss the most recent innovations, trends, and opportunities in the inclusive finance sector. If you’re interested in attending, you can find more information here.

Q: What role do financial services play for farmers?

A: Although the question is short, it is also very challenging — challenging because farmers need financial services for both farm and non-farm use. If the question were specifically about agricultural finance, then the here answer would be more direct. Let’s answer the more generic financial services for farmers:

On the one hand, one needs to take a holistic look at the demand side by conducting a thorough demand analysis on the financial needs of the farmers (tripling up as economic investors, social entrepreneurs, and consumers) and then categorize such needs into:

• consumption needs
• investment needs
• needs for inputs, including for technical services and hired labour
• needs for running capital, as well as for other transaction costs
• needs for assorted payments sent and/or received.

On the other hand, one needs to look at the supply side by unbundling financial services into:

• financial products (loans, grants, savings/remittances)
• non-financial products (financial literacy, capacity development/business development services, technology-enhanced delivery systems/digital financial services/assorted payment systems)

The next thing to do is to match the financial demands of the farmers with supply of tailored/appropriate/adapted financial services. Sometimes, tailoring or adaptation of existing traditional financial services to meet the needs of smallholder farmers is the real hurdle. So, the role financial services on the supply side play for farmers is to respond to the specific financial needs of the farmers.

Q: Where have you seen a gap in reaching rural populations?

A: Let me be more specific by narrowing the gap you are referring to, to ‘financial services gap’. With this refocusing then, one sees a gap in almost all of the supply-side traditional financial services listed above reaching rural populations. Such gaps exist due to several factors, some of which include but not limited to:

1. lack of the analyses listed above, thereby resulting in mismatches between the demand from rural populations and the supply of non-pro farmer/non-tailored/inappropriate financial tools and services);
2. not meeting the demand due to unaffordable pricing of financial services — unaffordable pricing caused partially by high transaction costs to reach breakeven catchment volumes of rural populations, as these populations:

• are so hard to reach because of bad or non-exiting infrastructure networks (access roads, telecommunication, electricity),
• are so geographically dispersed, and/or
• are so heterogeneous with diverse and non-standardized demand and risk profiles.

Q: To feed a growing population worldwide, we need farmers. But not enough young people are becoming farmers. How do we encourage young people to pursue careers in farming?

A: Feeding a growing population is important and we need farmers and more young people (for that matter) to get engaged, so that they would stay longer in the farming business. Currently, in the world with alternative opportunities in the urban and semi urban conglomerates that trigger and/or encourage rural youth outmigration, farming is the income-generating activity (IGA) of last resort for their livelihood enhancement. Farming is comparatively less rewarding economically; it is not so esthetical; and it is arduous and labor-intensive. To make young people take up farming as a career, it is necessary to remove all the challenges and barriers inherent in farming; transforming farming from a mainstay/livelihood activity into a profitable business. Sustainable profitability (void of subsidies, if possible) is the main incentive young people would be looking for in a career in farming.

Q: In a changing climate, how can we make sure agriculture remains a sustainable career and that smallholder farms have the tools they need to be resilient?

A: For us (I am not sure who in particular) to make sure smallholder agriculture remains a sustainable career, is really a far-fetched and unrealistic objective because talking sustainability means talking full cost recovery pricing for smallholder products. But we know smallholders are generally price takers as they hardly ever get involved in the price setting for their own products. So, for smallholder agriculture to be sustainable, they must fetch and receive and be paid full-cost recovery prices. For smallholders to have the tools needed to be resilient to climate change, they will need to get trained and certified in environmentally-friendly GAPs (good agricultural practices), which hopefully will reduce their production and production-associated risks. On the marketing side, such certified smallholders can get organized into groups to deliver their aggregated products under contractual arrangements to niche market opportunities offered by certification schemes, where they can negotiate reasonable full cost recovery prices to raise their returns — the ultimate incentive for smallholder farmers to stay and practice climate change resilience. But what would be the economies of scale of such niche market opportunities?

Q: What types of products (individual lending, input loans, etc.) have you seen making the most impact for smallholder farmers?

A: It is extremely difficult to answer this question with any reasonable degree of confidence because prioritizing financial demand needs vary for the heterogeneous community labelled smallholder farmers. However, what appears to have the most impact for smallholders across the board is business development services (BDSs). When smallholders have acquired skills that help them identify profitable business propositions, they usually generate business plans therefrom which would then naturally link them to all sorts of financing; potential financial service providers (if they are convinced), would consider the viable business propositions to be able to pay back any loan taken for that particular smallholder farm business. In some cases, especially in contract farming arrangements, verifiable viable smallholder business propositions have convinced lenders to wave collateral requirements. So, development of viable smallholder business plans makes the most impact on smallholder farmers.

Q: What do you see as the most promising innovations for reaching rural populations with financial services?

A: The most promising innovations would include but not limited to:

1. business development services, which of course is an innovation that does not sound like a financial service but is unavoidable for the success of financial services for rural populations;
2. digital financial services;
3. contract farming, especially contract farming with certification for environmental-friendliness for climate change resilience.