Many smallholder farmers in developing countries have limited access to financial services. This constrains their ability to make productivity-enhancing investments, to use new technology and services, and to reduce risks. Provision of financial services to agriculture, especially credit, is largely constrained by: the high transaction costs of serving clients located in remote, less densely populated areas with limited infrastructure; covariant risks in agriculture (including weather, price, pests, and diseases); smallholders’ lack of collateral (such as land and other fixed assets); and inadequate information on smallholders’ credit history. Given these constraints, many financial institutions are hardly present in remote agricultural areas and provide limited types of products, often requiring collateral.
As part of its strategy to improve smallholders’ productivity, access to markets, and resilience to risk, the Agriculture Global Practice of the World Bank, with financial support from the Bill and Melinda Gates Foundation, established the Agriculture Finance Support Facility (AgriFin). AgriFin aims to provide technical assistance and knowledge support primarily to financial institutions to help them develop their business models for financing smallholder farmers. The Facility established a Technical Assistance program and a Knowledge and Networks (K&N) initiative. The Technical Assistance program provided capacitybuilding grants to 10 financial institutions in Africa and Asia to invest in product development, risk management systems, lending procedures, delivery channels, and staff training. The result was a dramatic expansion of agriculture sector lending by those enterprises. The K&N initiative facilitated sharing of knowledge and learning among agriculture finance practitioners through peer-to-peer events, development of tools, and operation of an online knowledge platform. This initiative demonstrated conclusively that sharing best practices has the potential to generate a substantial expansion in agriculture lending globally.
Overall, AgriFin has shown that capacity building and sharing best practice knowledge and information can unlock significant new financing to smallholders and enterprises operating in the agriculture sector. AgriFin’s dual-track approach is a cost-effective way to catalyze new lending globally that draws on financial institutions’ eagerness to tap new markets and exchange information as they learn what works and what does not. Development agencies, donors, and others hoping to encourage financial institutions to lend to developing countries’ agriculture sectors—and unlock the vast potential of smallholder farmers the world over—will also hopefully benefit from the lessons learned. At the most concise level, AgriFin’s experience has shown that increased lending to agriculture can be achieved by bridging the knowledge gap that often hinders banks from embracing a market segment often viewed as too risky or fragmented to be profitable.
The synergy between the two parts of AgriFin’s program is critical. AgriFin’s K&N program initially drew heavily on the large volume of technical material yielded by the technical assistance projects with AgriFin’s 10 partner banks and financial institutions. As a result, other banks worldwide were able to access operations guides and manuals, credit policies and processes, and product designs that had been trialed and proven in other markets. The sharing of these data encouraged other financial institutions to share their own technical materials with the wider network, further increasing the value of the network and driving new users to the network. This peer-to-peer exchange of technical, practical information is all the more crucial given the scarcity of well-qualified, affordable technical consultants who might have been able to undertake projects with financial institutions looking to expand their rural financing activities.
PURPOSE & ORGANIZATION OF REPORT
The purpose of this report is to share these lessons in the hope of guiding future initiatives and programs aimed at expanding the provision of agriculture finance services in developing countries. The target audience includes development organizations with programs involved in similar agriculture finance technical assistance and knowledge management initiatives aimed at improving financial institutions’ capacity in agriculture lending. The report is organized into two main chapters: the first deals with lessons learned from the design and implementation of AgriFin’s Technical Assistance program, while the second covers the lessons emerging from the design and implementation of the program.