New Approaches to Smallholder Lending
This is the second post in the Cooperative Development Learning Series, highlighting learning from USAID’s Cooperative Development Program (CDP). Here WOCCU discusses what they’ve learned in agricultural lending in Guatemala, Mexico, and Kenya. See the previous post here.
Flora Mukiri, a smallholder farmer from rural Kenya, walks through rows and rows of green sorghum almost ready for harvest. Her name is appropriate, as she really does seem to be happy and at home among these plants. Not so long ago, Flora was only growing corn, frustrated by how long it takes to mature and how susceptible it is to pests. She still grows some corn, but it’s her sorghum that’s really thriving thanks to the advice and loan provided to her by her local credit union. “All group members in my farmer’s group have asked to be included in the next season after seeing my crop flourishing,” she says, beaming.
Jeremiah Baariu, who belongs to the same farmer’s association as Flora, has also started growing sorghum and sees his prospects growing: sorghum “is the best crop for this region and in the next season, we are going to double the acreage with the help of a [credit union] loan,” he says. These farmers had to buy water from distant boreholes and, with their profits, they bought every member a tank to harvest rain water.
Almost 75% of crop and livestock production in Kenya comes from smallholder farmers — extremely significant in a country where agriculture is the source of income for more than four-fifths of the population.  Yet, small farmers have limited access to credit and exist largely outside of the formal financial sector. It’s important to bring people like Flora and Jeremiah into formal banking, where they can grow their livelihoods, savings, and futures.
Under USAID’s CDP project, my team at WOCCU and I developed an agricultural lending approach and toolkit which we piloted in Guatemala, Mexico, and Kenya. The loans made under this new model were tailor-made for rural farmers and built for their unique support and timeline needs. This approach also streamlines the due diligence process and provides a simple score that loan officers can use to determine the riskiness of the loan and appropriate loan amount.
Key Features of this New Approach:
- Matching the loan to farmers schedule/adjusting repayment to crop cycle
- Specialized disbursement in form of inputs
- Crop insurance
- Bringing loan officers and agronomists to the field
- Partnering with more experienced farmers
- Coordinating with local credit union associations
Overall, we base the performance of the toolkit on the response of the farmers. Participating farmers have repaid their loans despite some struggles with their crops due to drought and flooding, and most of those who have had the option to apply for additional loans for later crop seasons have done so. This commitment to remain in good financial standing in order to have continued access shows that farmers are receptive to and enthusiastic about the opportunities provided by formal banking.
Smallholder rural farmers are exactly that — small and rural, without quick and easy access to physical financial institutions and little familiarity or trust in their services. We need to bring the institutions to them in the form of loan officers and agronomists who explain terms, start the application process, and collect key information on-site.
Partnering with farmers who already harvested the crop they received the loan for results in higher yields of improved quality which can be sold at better market prices. Since many farmers can still benefit from improved techniques and inputs, the lending institution provides them with continued training and site visits by agronomists.
Smallholder farmers are already economic engines in many countries, but they have the potential to be much more productive and economically powerful than they already are. They have shown that they will take advantage of the opportunities that they have access to. We need to increase that access by bringing formal banking to them and offering financial products that meet their needs.