Financing smallholder farmers: Growth potential

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©Guiziou Franck/HEMIS.FR

Joacquim is a subsistence farmer from Etatara in Mozambique. At 46 years old, he is his family’s sole breadwinner, responsible for supporting his wife and three orphaned grandchildren. He lives in a traditional house, which he is unable to use as collateral, and grows maize, sorghum, cassava and beans. They consume a lot of the produce themselves, and what is not consumed is sold. Joacquim earns US$300-500 per month depending on the season and his produce.

In the attempt to understand the real livelihoods of lower-income individuals and households in markets such as Mozambique, the lack of data and field-based insights are challenging. UNCDF’s project focusing on financial services, Making Access Possible (MAP), for instance, seeks to place demand-side analysis at the centre of the research process to focus the minds of multiple stakeholders on the end consumer. Better provision of appropriate financial services is an ancillary tool to wider development goals of enabling more sustainable livelihoods for low-income populations.

Millions of smallholder farmers like Joacquim live in or close to poverty and rely on agriculture for their livelihoods. Agriculture is fundamental to poverty reduction, driving economic transformation and ensuring that growth includes the poor. Pathways out of poverty–whether through farming, employment, non-farm processing and trade, or migration–are all heavily reliant on agriculture. Moreover, improving agricultural productivity–while conserving and enhancing natural resources–is an essential requirement for farmers to increase global food supplies on a sustainable basis and enhance their livelihoods. Over the longer term, increasing agricultural productivity plays an even greater role in economic development by enabling economic transformation through a new green revolution.

For agriculture to work better and improve livelihoods, financial services need to work better in helping the poor to diversify their activity and become more resilient to periodic shocks and prevent them from falling into poverty traps. The rural economy requires a wide range of financial services and products, which no single type of financial institution is capable of efficiently providing. Microfinance, for example, can help to meet the short-term needs of farmers and other low-income residents and help to finance microbusinesses, though it is not as suitable for larger businesses to raise productivity.

As the OECD’s Multi-dimensional Review of Myanmar shows, the rural sector is the most underserved by the formal financial system, receiving only about 2.5% of total loans, even though it accounts for 30% of GDP and two-thirds of employment. Some groups, such as landless farmers, are effectively cut off from financial services.

The current financial system is unlikely to be able to support the broader development of the rural economy in Myanmar.

Apart from the basic loan products, other financial products and services have been quite limited. For instance, remittance services are particularly important to Myanmar’s rural sector, given that an estimated 2-5 million of its citizens are working in other (mainly ASEAN) countries and annually send a substantial amount of funds back to their families.

Finance is also needed for the agricultural investment that is a major catalyst for job creation, higher incomes and increased productivity across the economy as a whole. Financing agriculture and rural development more broadly, however, is complex. All of the challenges that hinder financial outreach in regular markets are larger in a rural context. Rural populations are poor, sparsely distributed, poorly literate and mostly engaged in informal activities. Agricultural activity–mostly smallholder farming–has low returns and high risks. For suppliers of financial services, the cost of operating in rural areas is often extremely high, which, when combined with the low and risky returns available, leads to a large undersupply of financial services.

If financial services are to work better for rural and agricultural populations, they need to be based on an understanding of the needs of the users, which can be very different to those of urban populations. But financial service providers, governments and donors do not have a good understanding of the financial behaviour, usage and needs of rural populations, and this restricts the effectiveness of rural outreach.

On the supply side, an increasing number of traditional and non-traditional financial service providers are innovating in the agricultural space, driven by a combination of declining profitability in more advanced markets and the huge potential offered by the unbanked millions in rural areas. Innovation is taking place in delivery models led by technology and building alliances between those who have assets and those who have low-cost outreach; in risk management enabled by big data and leveraging existing relationships within the value chain (buyers and sellers, farmers’ associations, co-ops); and in products driven by a better understanding of what farmers need, while matching repayment schedules to agricultural cash flows.

Understanding how agriculture shapes the demand for financial services and how the rural context affects the costs, risks and returns of supplying financial services is central. A key component of the MAP diagnostic is to build a target market profile based on the main income-generating activities of consumers and their financial services access, usage and needs. The analysis is informed by the context of the country and ultimately seeks to meet the policy objectives of financial inclusion as a tool to improve welfare and poverty alleviation.


OECD (2015), OECD Multi-dimensional Review of Myanmar,

OECD (2013), OECD Multi-dimensional Review of Myanmar,

OECD et al, (2012) “Sustainable agricultural productivity growth and bridging the gap for small-family farms”, report to G20,

OECD work on financial education, fi n/financial-education/

Making Access Possible (MAP),

World Bank Financial Inclusion Data,

©OECD Observer Special offprint, July 2015

Economic data


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