“This demands action!”

That’s what we thought as we finished writing a report called “Catalyzing Smallholder Agricultural Finance,” authored in 2012 by Dalberg Global Development Advisors with support from the Citi and Skoll Foundations. Before the report, global development players of all stripes recognized smallholder farmers’ critical role in meeting the global demand for food and serving as stewards of vulnerable natural resources. Most also knew that the 450 million smallholders are a core component in pulling developing countries out of poverty, with large numbers of the world’s poorest people living in households dependent on agriculture for their livelihood.

Yet, despite recognizing smallholders’ importance, many did not fully comprehend the significant unmet demand for smallholder access to finance.  Nor did they fully understand what efforts were underway, and more importantly, what more could be done with focused resources. The report paired its most startling finding – that only 2 percent of the estimated $450 billion global demand for smallholder financing is met by formal institutions – with guidelines for five strategic pathways that can most rapidly meet this demand.

Our interviews with players already involved in the sector, including banks, investors, donors, NGOs, and companies made us realize that, while there are many excellent efforts underway, making a serious dent in the financing gap would require a more structured approach. The report generated substantial interest. Sources such as AgriFin and NextBillion reported on the new findings, and groups from multinational corporations to regional banks expressed a desire to dig deeper into our research.

In response to this call for a research and development platform, the Initiative for Smallholder Finance was created to demonstrate the ways in which particular products and services can be structured to provide smallholder farmers with greater access to capital.

The Initiative team conducts research, facilitates communications among market participants in different parts of the agricultural finance supply chain, and brokers investment opportunities between market participants. Our approach aligns with the five strategic growth pathways outlined in “Catalyzing Smallholder Agricultural Finance” for spurring a financial market to serve the unmet needs of the world’s 450 million smallholder farmers.

To do this, the Initiative will investigate and, in some cases, pilot or pursue a variety of finance solutions aimed at smallholder farmers—from using technology to transfer capital directly to farmers, to developing long-term debt financing options. We will monitor and evaluate the effectiveness of pilots and partnerships and develop policy recommendations to improve smallholders’ access to finance accordingly. By pursuing this combination of activities, the Initiative will build a foundation of research and development for the industry and pave the way for groups including multinational buyers, commercial lenders, social lenders, donors, impact investors and technical assistance providers to serve the smallholder market.

The Initiative is guided by a steering and advisory committee whose organizations have already made significant strides towards improving the livelihoods of smallholder farmers. Our steering committee includes the Skoll Foundation, the Citi Foundation, the Ford Foundation, KfW Development Bank, MasterCard Foundation, and USAID. We benefit from the advisory guidance of the Aspen Network of Development Entrepreneurs, Business Action for Africa, Business Fights Poverty, CGAP, Root Capital, and Technoserve.  We anticipate this list will expand as our research and development efforts evolve.

The Initiative’s first research effort culminated in a briefing document by Dalberg, “Local Bank Financing for Smallholder Farmers: A $9 Billion Drop in the Ocean,” which explored the importance of local banks increasing their capacity to serve smallholder farmers. The report found that lending from these local banks—which should be a main avenue for smallholders to gain financial access—totals $9 billion and meets only 3% of overall demand. Further analysis suggested that donors can incentivize lending to smallholders by increasing investment capital and supply side technical assistance for banks rather than focusing on guarantees, which have not been sufficient to stimulate lending.

Subsequent briefings will break down the local lending market and explore the technical assistance landscape for smallholder farmers. Over the next year, the Initiative for Smallholder Finance will periodically release additional research and share investment opportunities for the smallholder finance industry.

Our team is eager to engage with the many enterprises – both new and existing – who seek to serve smallholders, as well as with other market participants along the agricultural value chain.

Ultimately, the Initiative for Smallholder Finance will define success by making marked progress towards closing the gap between the $450 billion in smallholder agricultural financing need and the current $10-$15 billion supply. We’re excited to work with those organizations that recognize the value of investing in this market to capture the benefits closing that gap will yield.

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