Shine a light on the gaps (1)

Financial inclusion matters for Africa’s smallholder farmers

Agriculture forms the backbone of African economies, accounting for 32 percent of gross domestic product (GDP). A majority of the continent’s farmers earn their living on small plots of less than two hectares, which represent 80 percent of all farms across sub-Saharan Africa. But these smallholder farmers are largely excluded from financial services and are therefore constrained from improving their wellbeing and transforming their farms into economically viable businesses. Although smallholder farmers face a number of challenges to raising productivity, bridging the financial access gap must be a priority.

There is much literature on expanding financial inclusion among the world’s poor. The issue has been a development priority since Group of Twenty (G20) leaders launched the Financial Inclusion Action Plan in 2010. But Africa’s smallholder farmers have received little attention, and women farmers—who make up half of the continent’s agricultural labour force—have received even less.

Being excluded from financial services has negative consequences for smallholder farmers. Access to credit can help raise farm productivity by expanding access to inputs as well as better storage, marketing, and processing. Access to savings instruments at harvest enables families to put money aside and helps smooth consumption at other times of the year. Access to payment platforms can offer a secure and efficient way to make transactions. And access to insurance products can protect against illness and weather-related shocks. In the absence of these formal mechanisms, smallholder households often rely on informal instruments. Although they are accessible and flexible, informal financial services can also be inefficient and costly in the short term, and they do not always offer the services needed to help transform subsistence farming into a profitable business.

Understanding farmers’ needs, and the range of financial services they rely on to meet those needs, must be the first step. But translating this knowledge into tailored products will be even more critical. While evidence is still emerging, digital solutions are at the forefront of these efforts.

Smallholder farmers are excluded from financial services

Large gaps remain in meeting the financial needs of smallholder farmers across sub-Saharan Africa. The Global Financial Index, or Global Findex, underscores the extent of their exclusion from the formal financial sector. Across forty-two African countries in 2014, only 29 percent of adults in rural areas had a mobile money account or an account at a bank or microfinance institution (MFI), compared to 34 percent at the national level. Although access to bank accounts in rural areas remains low, this represents an increase from 24 percent in 2011. Poor households and women are even more excluded than the rural population generally. Poorer households are much less likely than richer households to have a formal account (25 percent compared to 41 percent), and there is also a significant gap between women and men (30 percent compared to 39 percent).

While more than half of all rural households saved and borrowed money over the past year, only a small percentage used the formal sector. Among those who reported saving, 13 percent saved at a bank or an MFI, and 25 percent saved with a community savings group. The majority saved money under the mattress or in tangible assets such as livestock. Rural households are also excluded from formal sources of credit; only 6 percent borrowed from a formal institution. Forty-two percent of those who reported borrowing turned to family and friends, and 5 percent borrowed from an informal lender, such as a trader or processor. Because they are borrowing informally, the interest rates are usually between two and ten times higher than commercial rates. Furthermore, only slightly over 6 percent of farmers reported purchasing crop or livestock insurance. Finally, a majority of farming households received payments from agricultural sales in cash; only 8 percent received payments via mobile phone, and 7 percent received money directly to a bank or MFI account.

Demand and supply barriers limit access to formal financial services

A number of demand- and supply-side constraints explain why smallholder farmers are excluded from formal financial services. On the demand side, smallholder households cannot always afford fees or minimum balance requirements to keep accounts active. In Uganda, for example, annual account maintenance fees are almost 25 percent of GDP per capita. Rural clients must travel long distances to reach bank branches; to do so, they have to pay for transportation and forego daily wages. In addition, farmers do not always have the formal documentation, such as identification cards and land titles, required to open an account. There is also evidence of a lack of trust in financial institutions and low financial knowledge among the poor. For smallholder farmers in particular, the repayment cycles for standard bank and MFI loans often do not align with seasonal cash flows. Finally, gender dynamics further constrain women’s access: Given multiple household responsibilities, women are often time constrained, which limits their ability to engage with formal financial services. Women also lack formal land titles, even more so than men.

On the supply side, smallholder households are expensive to serve because a majority live in rural areas. And because agriculture is highly susceptible to weather shocks, financial providers perceive farmers as too risky to lend to. In addition, formal financial institutions often lack information about the credit histories of poor rural farmers, as well as the knowledge and capacity to serve agricultural households. Lenders sometimes fail to see farmers as a substantial source of savings and have therefore not traditionally marketed specific products to them.

This essay is part of a special edition being published in partnership with Foreign Affairs, titled “African Farmers in the Digital Age.” This anthology explores the future of African food systems and the role that digital solutions can play in overcoming the isolation of smallholder farmers and speeding up rural development. Look for it at https://www.foreignaffairs.com/anthologies on February 15.

Ngozi Okonjo-Iweala & Janeen Madan