October 28, 2011 3:05 pm

Lack of finance limits smallholders’ productivity and income growth

Access to finance remains a major challenge for smallholder farmers in most developing countries. The problem often is seen in terms of limited access to production credit to buy and use farm inputs as well as pay for non-family farm labour and other farm maintenance costs. Because smallholder farmers cannot afford yield-enhancing inputs, farm productivity often remains low on smallholder farms despite available technology for achieving higher yields. However, smallholder farmers also face major difficulty in accessing post-harvest credit, leading to severe household liquidity constraints which often compel them to sell the bulk of their produce at harvest when prices are extremely low. Financial constraints also prevent them to condition produce to meet quality requirements in premium markets. This way they miss out on opportunities for higher household income. Furthermore, smallholders have limited access to formal savings facilities because there are few financial institutions that provide such services in rural communities. Consequently, smallholders tend to hold their wealth in non-liquid assets (e.g. livestock and household goods), risking loss through theft, fire or other perils. Insurance and price hedging instruments are almost non-existent because markets for these are missing or severely under-developed.

This brief ESFIM Financial Innovations Policy Brief – final reviews some of the advances being made in developing countries to address financing constraints in the rural/agricultural sector by identifying financial models that improve access to financial services to smallholders. It focuses particularly on sustainable models that are embedded in enduring transaction-based relations in agricultural value chains