Of fintech and farmers: USAID, EIU research how to boost smallholders’ access to finance
Bangkok, February 24, 2021 – Financial technology, or fintech, reduces the risk and cost of lending to smallholder farmers and can incentivize them to adopt sustainable agriculture, according to new research commissioned by the United States Agency for International Development (USAID) Green Invest Asia from the Economist Intelligence Unit (EIU), which was presented in a roundtable today attended by fintech representatives covering Southeast Asia.
Southeast Asia – where less than 30 percent of adults have access to formal banking services, one-third of the work force is agricultural, and one-third of small and medium enterprises lack access to business financing – is one of the fastest growing markets worldwide for fintech. Also known as alternative lending, fintech uses technology – from mobile payments to machine learning – to automate the delivery and use of financial services.
Smallholder farmers cultivating less than two hectares of land each produce at least one-third of the world’s food, with some estimates going as high as 80 percent. Researchers have shown how smaller farms account for greater crop diversity – which is better for the ecosystem – than large commercial farms, and could be encouraged to “intercrop” with additional capital and market guarantees. But lack of finance has been a barrier, according to an earlier USAID-EIU roundtable on sustainable agriculture in Asia; financial institutions cite too-high risks and costs lending to unbanked farmers.
One emerging solution is digital lending platforms that extend credit to unbanked populations in Asia, with some focused on farmer financing like the Philippine agrifinance company Agronomika; peer-to-peer lending platform CROWDE and crowdlending platform TaniFund, both in Indonesia, and IDH FarmFit Fund.
But providers like these cover only a small fraction of farmers’ finance needs; in 2018, DBS Bank estimated a $170 billion investment opportunity in sustainable agriculture and food production in Southeast Asia through the year 2030.
EIU examined which financial business models hold the most promise to facilitate investments in sustainable agriculture at scale among smallholders. (Research summary here.) It concluded that fintech can scale direct loans to smallholders and in ways that fits farmers’ needs unmet by conventional loans, which often have long approval times and lending cycles that don’t match growing seasons.
Going beyond finance
Based on research that included dozens of interviews with fintech providers, banks, impact investors and non-profit organizations representing smallholder concerns, EIU found how farmers’ low digital literacy, lack of smartphones, insufficient collateral and credit history, as well as their preference to work in cash have limited their uptake of fintech, thus far. To appeal to smallholders, fintech would need to provide more non-financial services, such as access to agriculture inputs and markets. Credit scoring would need to look past credit history – which many smallholders lack – and gather data about agriculture performance.
Technology like satellite data has helped improve field/area validation, farm monitoring and judging crop suitability said Jonna Bickel, General Manager for Agronomika Finance Corporation. But farmers’ lack of access to smart phones and mobile networks remains a challenge for the Philippine company.
“Most of our farmers have been un-banked before and this is the first time they access any kind of formal financial service so their trust in digital services is limited for now,” said Bickel. “The use of technology to reach out to these farmers needs to implemented step-by-step and needs to be accompanied by a ‘human touch’ model.”
Cash may help producers’ income, but not lessen their crops’ environmental footprint without proper loan extension services and oversight, said Brad Arsenault, Senior Environment Officer for USAID in Asia. “Fintech is a promising option, and requires that lenders be committed to high environmental, social and governance principles. ”