Inclusive Finance:

Challenges and Opportunities

The Rome-based agencies perspective

Enabling poor rural people

to overcome poverty
Introduction
Most rural households and enterprises need access to financial services in order to grow and
generate income. This is especially the case for the people who work the worlds estimated
500 million small farms, and the many agribusinesses that buy from and sell to them.
However, access to finance in the developing world is unevenly distributed. Promoting
inclusive finance means intensifying the depth of outreach and providing services to
marginalized groups, especially women, reaching beyond conventional microcredit to the
people at the bottom of the economic pyramid.
Smallholder farmers need ongoing access to financial services specific to their agricultural
activities and to reach markets. But small producers are often perceived as too risky by
commercial financial institutions and can fall into the category of the missing middle, as they
are served neither by microfinance institutions nor by commercial banks. And in many places,
formal financial services are not aligned with the business and investment purposes of small
producers, as well as being simply too far away or too expensive.
Women farmers and entrepreneurs tend to face disproportionately greater obstacles in accessing
financial services, training, networks and information, in addition to barriers in the legal and
policy framework. The burden of unpaid work also hampers rural womens ability to take
advantage of on- and off-farm employment and market opportunities in the agricultural sector.
Rural small and medium-sized enterprises (SMEs), on which farmers rely for inputs and sales,
also need diverse financial services. SMEs are often caught in the gap between consumer
products provided by microfinance institutions and commercial services from banks. As a
result, they cannot get the financial services and loans they need to grow and thrive.
Smallholder households have a range of financial needs:
savings to manage irregular cash flow, respond to external shocks and make investments
working capital to finance their engagement in agriculture and marketing
investment capital and access to leasing and insurance services
money transfers to send and receive payments from family at reasonable cost, and to sell
and buy goods
liquidity for their normal and extraordinary household expenditures
insurance to help manage the impact of risks and unexpected events.
Expanding access downwards, however, must be about more than just smaller loans the
extreme poor frequently cannot access a market or invest capital in a way that allows for the
repayment of a loan. And while they often benefit from social safety net programmes which
typically include cash/voucher transfers, food assistance, or public works employment, such
programmes sometimes lack effective exit strategies.

Pro-poor financing modalities

The three Rome-based United Nations food agencies (FAO, IFAD and WFP) give particular
emphasis to the implementation of innovative financial instruments that are of particular
relevance to smallholder farmers:
Credit through private-sector agricultural businesses. Embedding finance in the
production chain along with other goods and services (e.g. seeds, inputs, weather
information, insurance) through agricultural production finance or value-chain
finance arrangements is most relevant to higher-value agricultural products sold through
structured, contractual relationships. Contract farming, in which credit is often in-kind
(in the form of inputs), as is the repayment (in the form of produce), makes feasible large
numbers of small-scale loan transactions to farmers. Contract farming can also provide
access to technical and marketing assistance. Marketing cooperatives acting as market
intermediaries can also play a role in providing short-term credit in effect, a form of
bridging finance to their members.
 Collateralization of physical assets. Besides loan guarantees, the instrument of greatest
relevance to smallholder farmers is the warehouse receipts system, in which a third-party
warehouse operator stores the produce delivered by farmers at agreed quality standards,
and issues them a receipt that they can then use as collateral to get a loan. This system
eases access to finance and also helps to reduce market transaction costs through the
independent enforcement of produce standards.
Collateralization of forward delivery contracts. Smallholder farmers can use forward
delivery contracts from reputable and well-established buyers as collateral for loans.
New information and communication technologies. Financial service providers are
encouraged to have management and information systems that can handle multiple,
customized credit, savings and payment products, including point-of-sale transactions and
direct transfers.
Savings and insurance. Different kinds of savings accounts and various insurance
products can be useful to assist smallholders as they transition from subsistence farming
into the market economy.

Looking beyond production

Agricultural value-chain finance does not replace conventional finance. Despite its many
benefits, value-chain finance cannot also provide the range of other financial services that serve
the more general needs of rural households, beyond agricultural activities. The biggest
challenge is for poorer farming households, which fall outside the scope of highly structured
arrangements. Their demand for financial services must be met holistically.
The development of well-functioning rural financial systems able to provide sustainable access
to demand-responsive financial services is critical for rural economic development. The
Rome-based agencies address persisting challenges at the country level with scalable solutions
and opportunities, together with other United Nations agencies and partners.
The Capacity Building in Rural Finance (CABFIN) Partnership is a knowledge networking and
development partnership of FAO, IFAD, World Bank, United Nations Capital Development
Fund and Deutsche Gesellschaft fr Zusammenarbeit (GIZ). It develops and supports the Rural
Finance and Investment Learning Centre (RFILC), a dynamic portal that offers rural finance
information and presents on-line training in English, French and Spanish.
FAO and IFAD work to support countries on Comprehensive Africa Agriculture Development
Programme (CAADP) country investment plans and the African Agribusiness and
Agro-industries Development Initiative and partnership with Making Finance Work For Africa.
FAO and IFAD also provide technical support to WFP on the Purchase for Progress (P4P)
Working Group on Access to Finance. P4P promotes local procurement of staple food with the
intention of achieving a higher developmental gain by buying in a smallholder-friendly way,
while building capacity at the country level in post-harvest handling or storage, access to
financial services and financial literacy.
The WFP/IFAD Weather Risk Management Facility is a joint initiative that supports the
development of innovative weather and climate risk management tools, such as weather index
insurance, that improve rural livelihoods and reduce hunger.
WFP promotes financially inclusive food assistance through safety nets and social protection
programmes, by providing vulnerable and poor populations with access to basic financial
services on a low-cost basis through a variety of means, including agent banking and mobile
money schemes.
Financial Graduation is a transformative approach that aims to prepare beneficiaries for
integration into markets so that their business activities (and the household benefits) last
beyond the usual initial period of intensive support. The programme uses a three-step targeting
approach to identify the poorest households. Consumption support is provided as cash or
food. The amount, frequency and duration vary across sites. Options for viable livelihoods are
discussed with participants to individually match the right asset to their interests and skills sets.
Results so far provide strong evidence that the graduation model can work, leading to increased
food security, increased and more diverse incomes, and increased assets.
Remittances also promote financial inclusion. In 2013, over US$450 billion will be sent by
migrants abroad back to developing countries 40 per cent of it to rural areas. Through the
Financing Facility for Remittances, IFAD, in partnership with the European Commission, the
Consultative Group to Assist the Poor, World Bank, United Nations Capital Development
Fund, and the governments of Luxembourg and Spain, has been addressing major
constraints in the remittances market. While remittances are mainly used for daily
subsistence needs, a small percentage of these flows is invested in agriculture, which
represents an amount equal to four times global official development assistance to this
sector. However, significant facilitation is still required in order to maximize diaspora
investment in agriculture. The Diaspora Investment in Agriculture initiative is addressing
how the global diaspora can be encouraged to invest in sustainable agricultural projects
with real potential for impacting the lives of poor rural people.

Questions for discussion

How can we provide smallholder farmers with tailor-made financial services and how can we
connect them to markets? What are the persisting gaps? What are scalable solutions?
Many banks do not recognize smallholder farmers as entrepreneurs. What are the best
practices for providing financial and business development services so as to help micro, small
and medium-sized enterprises grow and thrive?
Given the importance of agriculture to food security, nutrition and rural development,
including for post-2015 sustainable development goals, how can we catalyse universal
access to financial services? How can the RBAs, together with other United Nations
partners, jointly define a vision and path toward making universal access to financial
services a reality?
How can the Rome-based agencies further advance the above objectives, individually
and with other United Nations partners and actors such as mobile phone operators,
private companies, financial service institutions and agribusinesses? Are there particular
country-level opportunities?
How can cash transfer programmes and other payments supported by the RBAs be used to
develop more inclusive financial systems, and to help households and businesses transition
to formal accounts and other financial services?
How should we best measure progress toward financial inclusion and ending hunger,
alleviating poverty and achieving food security? At the global level? At the country level?

IFAD/GMB Akash

Calvin Miller Michael Hamp Brian Bogart

Senior Officer and Leader
Agribusiness and Finance Group
Food and Agriculture Organization
of the United Nations
Viale delle Terme di Caracalla,
00159 Rome, Italy
Tel. (39)-06-570-54469
calvin.miller@fao.org
Senior Rural Finance Advisor
Policy and Technical
Advisory Division
International Fund for Agricultural
Development
Via Paolo di Dono 44
00142 Rome, Italy
Tel. (39)-06-54592807
m.hamp@ifad.org
Policy and Programme Advisor
Policy, Programme and
Innovation Division
World Food Programme
Via C.G.Viola 68
Parco dei Medici
00148 Rome, Italy
Tel. (39)-06-65132690
brian.bogart@wfp.org