Following this report, the Initiative for Smallholder Finance collected data from the Council on Smallholder Agricultural Finance (CSAF) members to provide an updated market size and to identify trends in the sector.
In 2013, the seven founding members of the Council disbursed $362M to agricultural businesses in the missing middle. By comparison, the addressable market is estimated at $22 billion. Microfinance banks, commercial banks, and state and agricultural development banks lent an estimated $9.3 billion to smallholders and to agricultural business that aggregate smallholders in 2013, with the majority of that coming from state and agricultural development banks. Lending from microfinance banks and from state and agricultural development banks is concentrated in areas where social lenders are least active, however. 84% of lending from microfinance banks and 65% percent of lending from state and agricultural development banks is focused in South and Southeast Asia. This leaves an addressable market gap for social lenders of over $12 billion.
Note: China excluded in lending from commercial banks, microfinance banks and state and agricultural development banks.
1. “Microfinance banks” refers to microfinance banks that are licensed to mobilize deposits. It does not include NGOs or non-banking financial institutions.
Source: Dalberg smallholder financing bank database.
Approximately 70% of disbursements by social lenders in 2013 were trade credit loans, with the cash typically being used by the borrower business to purchase the harvest from smallholder suppliers. Another 23% was general working capital, with longer-term loans for capital expenditure representing only 6% of disbursements. Indeed, longer-term loans represent a significant opportunity for growth in disbursements and in impact. Agricultural businesses often find long-term debt even more difficult to obtain than short-term debt, resulting in underinvestment in capital equipment (e.g., processing facilities that improve product quality and capture more of the value of the end-product). Meeting more of these long-term capital needs is essential to growing prosperous agricultural businesses and building sustainable livelihoods for smallholders.
Disbursements by CSAF members were concentrated in Latin America, with 40% going to businesses in South America and 30% to businesses in Central America. The remaining 30% of lending went to Sub-Saharan Africa (19%), South and East Asia (3%) and other regions including the Middle East, North Africa, Eastern Europe and Central Asia (8%). Capital controls and government regulation of, or participation in, the agriculture sector discourages or prohibits social lenders from supporting clients in certain countries. Nevertheless, ample opportunities remain to serve additional unmet needs of agricultural businesses in the countries where social lenders are already active, as well as in countries where social lenders are not.
Lending was also heavily concentrated in coffee, totaling 54% of global disbursements. Across all regions, disbursements to the coffee industry exceeded disbursements to any other single industry, and in South America and Central America they exceeded disbursements to all other industries combined (56% and 81% of total regional disbursements, respectively). The remaining loans were spread across a wide variety of agricultural products including cocoa—which was the next-largest industry at 8% of global disbursements—cashews, sesame and cotton.
The coffee industry has made as much, if not more, progress toward socially responsible and environmentally sustainable production as any other agricultural sector. In many geographies, a robust ecosystem of technical-assistance providers, certifiers (such as Rainforest Alliance, organic and Fair Trade) and buyers upstream in the value chain (i.e., importers, roasters and retailers) offer many forms of support to agricultural businesses and smallholder farmers; theses are complementary to financing and necessary for financing to have a positive social and environmental impact. This enabling environment is emerging in other commodities, such as cocoa and to some extent cashews in West Africa, and is critical to the growth of social lending for smallholder agriculture.
Note: This chart does not take into account USD 22.7M in social lending disbursements in 2013 for which geography was not specified; “Other regions” includes Middle East and North Africa (dominated by grapes, olive oil, dates), Eastern Europe and Central Asia (dominated by grains), and for disbursements for which geography was not specified; “Other” includes disbursements for which crop was not specified; Food crops include rice, root crops (cassava, potatoes), millet, maize, grains, food products, and cassava.
Sources: Data submitted by CSAF members; Dalberg analysis
Total disbursements by CSAF members are expected to grow to $500 million by 2016. In addition to increased activity in the geographies and sectors that council members serve today, this growth will come from movement into new geographies, sectors and financial products, as well as expansion of CSAF membership. Council members commit not only to growing the agricultural financial market, but to ensuring that that growth reaches populations and businesses that are currently unserved or underserved.