Unlocking capital for smallholder farmers through blended finance

The Initiative for Smallholder Finance (ISF) explains its approach to helping small-scale farmers access the finance they need.

Over the last decade, the agricultural finance community has realised that addressing the market and financing needs of smallholder farmers and their families requires collaboration across multiple types of organisations, from buyers to financiers to non-governmental organisations (NGOs) and community-based organisations. Moreover, the diversity and intensity of risks involved in small-scale farming means that growth and productivity can only be achieved through effective risk-sharing and risk-mitigation strategies. Putting all of this together requires complex partnership structures and blended forms of financing.

Through our research into different aspects of farmer financing, including our recent report titled Inflection Point, our team at the Initiative for Smallholder Finance (ISF) has grown to understand the critical need for an intermediary role between capital providers and organisations working with smallholders, and we have transformed our own organisation to support that role.

Our specific interests are at the level of philanthropic and capital providers, which can include industry players such as development finance institutions, governments, foundations, private investors and impact investors. Our team at the ISF is helping to structure partnerships and blended-finance facilities to increase the flow of both investment and grant funding to financial service providers (FSPs) such as local banks, microfinance institutions, social lenders and certain NGOs, which in turn serve smallholder farmers (see chart below).

Based on research and analysis, including interviews with nearly 80 different organisations, our Inflection Point report calls for a substantive shift in the level of coordination in the farmer-finance industry and challenges stakeholders to rally around the goal of doubling annual growth  of farmer-finance from roughly 7% to 14% to meet more than half of smallholder’s need for financing by 2025. The research particularly highlighted the need for this intermediary role, which enables FSPs and other organisations to access the capital they need to increase lending to smallholders.

Building on these findings, we have shifted our approach at the ISF to prioritise filling gaps where we are best positioned to do so:

  1. Intermediating at the level of philanthropic and capital markets. We are helping to create partnerships and financial structures that allow money to flow more easily from philanthropic and capital markets to FSPs, so they can ultimately better serve smallholders. In frontier markets, actors frequently lack the capacity, dedicated resources or relative incentive to focus on the development of new financial structures until there is a refined business concept, an engaged set of investors and local partners interested in moving forward. The ISF helps shape these early-stage opportunities, bringing them to the point at which the principals involved, and the supporting cast frequently engaged, have the incentive to execute the investment.
  2. Continuing to support the evolution of a global conversation around smallholder finance. The ISF provides a structured forum for the donor and investor communities to share programmatic activities, interests and intent while respecting the varied mandates of the individual organisations involved. Beyond the funder community, we facilitate market actors working in related markets on a pre-competitive basis in order to improve transparency and establish standards. For example, the ISF has been a partner for several years with the Council on Smallholder Agricultural Finance, a pre-competitive alliance of social lenders.
  3. Selectively using research to support partnerships and financial structures. We continue to publish industry research, with a focus on documenting specific past transactions or forward-looking opportunities. For example, we recently released research on the application of big data in smallholder finance and how to unlock local currency lending through foreign exchange risk management.

We are not the only ones who have recognised the importance of an intermediation role to unlock blended financing for farmers. The development community has widely acknowledged that structuring blended finance requires a patient and flexible approach, given the associated complexity and risk. A few comparable and complementary examples include:

  • Convergence is a blended-finance platform to connect private, public and philanthropic investors; it also offers grant funding to design blended instruments or products
  • NatureVest, sponsored by JP Morgan Chase, uses a similar approach and team structure to the ISF, but focuses primarily on conservation
  • IDB InfraFund supports the identification and design of bankable infrastructure projects that involve blended sources of finance.

What’s working so far? Lessons for others aiming to play this role

In our transition to an intermediation role, we have found a few key components to be critical, and hope these lessons will inform others trying to play a similar role in the agricultural sector:

  1. Connect with all the major players. We have a diverse steering and advisory committee consisting of influential funders and practitioners in the space, from donors such as the United States Agency for International Development (USAID), the Small Foundation and the Bill and Melinda Gates Foundation to FSPs and practitioners like Root Capital, One Acre Fund and the Sustainable Trade Initiative (IDH). We maintain active communication with over 100 collaborators, and we share our industry learnings with a contact list of over 1,000 practitioners. To make meaningful impact, we have found it critical to retain a large, active network that can provide input on our efforts and benefit from our support around building partnerships and financial structures.
  2. Develop deep sector knowledge and define specific needs. We spent three years building a strong evidence base for the sector, and we continue to regularly publish executive briefings about critical issues the industry is facing. We use this research to not only inform our own endeavours, but also to help guide practitioners and funders in their strategies. As we transitioned from a research-focused role to an intermediation role, we built a partnership with the Rural and Agricultural Finance Learning Lab, where we publish our research and share our data.
  3. Build commitment. Our steering committee recognises the importance of our intermediation role to push the market forward, and they work flexibly with us, allowing us to collaboratively determine the most effective agenda and align resources accordingly. This flexibility frees us to play the intermediary role based on where we see market gaps and opportunities, thus avoiding the typical barriers of more structured project-based grants.
  4. Staff the right team. We have crafted a team consisting of a mix of well-connected and knowledgeable sector experts with strong strategy and facilitation skills, alongside experienced finance professionals who know how to design and structure complex blended-finance facilities. The combination of these two skillsets on our team has been essential to our success in flexibly responding to complex intermediation needs.

Looking ahead

Moving forward, we are committed to helping the industry accelerate from a 7% growth rate to 14% in order to close the financing gap, in partnership with others. We need the concerted efforts of financial service providers and other actors to engage closely with customers to design and offer appropriate, desirable products through integrated partnerships, supported by more and smarter subsidy. The ISF looks forward to playing our role in closing the gap in smallholder finance and we hope that you will join us.