Agricultural finance for smallholder farmers
Rethinking Traditional Microfinance Risk and Cost Management Approaches
Traditional microfinance has made strides in providing financial services to low-income populations without requiring conventional collateral. However, many microfinance institutions (MFIs) remain hesitant to venture into rural areas and agricultural finance due to perceived high risks and costs. Daniela Röttger's research illustrates how MFIs can effectively mitigate these risks and costs when lending to smallholder farmers by integrating established microfinance mechanisms with tailored loan features specific to smallholder agriculture. She conducts a systematic comparison of traditional microfinance risk management strategies with those used in agricultural microfinance, identifying successful approaches. The study involves interviews with eight MFIs offering agricultural finance to smallholder farmers across four East and West African countries: Uganda, Kenya, Benin, and Cameroon. Findings indicate that MFIs can successfully serve smallholder farmers in rural areas, but the necessary adaptations warrant careful consideration before pursuing such initiatives. A strong commitment, in-depth knowledge of agricultural value chains, and the ability to adjust loan terms and lending procedures to the unique aspects of agriculture are crucial for the successful development and sustainability of agricultural microfinance.
