By Jamie Anderson, Financial Sector Specialist, CGAP

How are smallholder families managing their money? What challenges do they face? And what financial solutions can help?

Answers to these questions are emerging after a year of data collection and thousands of conversations with farming families in three distinct areas. Researchers with CGAP’s Financial Diaries with Smallholder Households (“Smallholder Diaries”) project visited 270 farming families in Mozambique, Tanzania, and Pakistan every two weeks from June 2014 to July 2015 to track how they were earning money, how they were spending it, and their agricultural activities. They also recorded all the ups and downs these families faced, from births and deaths to droughts and floods, offering a unique window into their financial and agricultural lives.


 
So what did we learn? First and foremost, distinct markets need tailored solutions. Smallholder farmers often have a few things in common—volatile incomes, high expenses, and wide-ranging risks, but there is tremendous diversity in what they grow, the techniques and technology they use, and where they sell their crops and livestock, if they sell anything at all. There are as many distinct solutions as there were major profiles of families in the Smallholder Diaries.

Solutions for noncommercial smallholder households in Rapale, northern Mozambique: Improving crop storage and other means of saving

Smallholders in the project’s Mozambique sample stored their harvests in burlap sacks or simple bamboo cisterns that pests could easily penetrate. Many families relied on these stored crops for their own food and did not sell anything over the entire year of data collection, and post-harvest loss was a major issue: close to two-thirds of the sample (61 percent) had lost crops in storage due to contamination from pests.

This points to a clear opportunity. Securing agricultural output in a more resilient form of storage (e.g., reinforced plastic bags, small metal grain silos) could improve the agricultural and financial lives of noncommercial smallholders. A range of financial tools and service providers could support the uptake of improved storage methods, including commitment savings plans and tailored credit products from financial service providers (FSPs) and targeted layaway products from retailers.
 
Solutions for commercial smallholder households in loose value chains in western Tanzania: Moving savings from in-kind or under the mattress into a financial tool

Smallholder Diaries families in Tanzania used their stored crops as a kind of “term deposit,” waiting for their harvest to gain “interest” with price increases over time; 21 percent considered crop storage their most important form of savings. In many cases, families delayed the sale of rice and maize until funds were needed, and the cash from selling the crops was then stored at home.

This presents a case for Financial Service Providers (FSPs) to offer more avenues to store money, and demonstrates the role that warehouse receipts can play. Tailored savings instruments could be designed around seasonal patterns as well as the agricultural and household needs of smallholder families. FSPs will need to recognize that these financial savings tools would be competing with crops in storage as their own tangible form of savings. Positioned as compatible, smallholder households may have an interest in using them both.

Solutions for commercial smallholder households in tight value chains in Punjab, Pakistan: Expanding options and engaging middlemen

Among the sample in Pakistan, smallholder families were operating in a relatively tight value chain, relying on one middleman to finance all their inputs and buy all their outputs. There are good and bad points about such dependence on one middleman. Families disliked that they were compelled to repay the middleman immediately after harvest, when prices were at their lowest, but they also knew that if their crops failed, they could arrange with the middleman to repay the following year. Families had worked with these middlemen for years, at least in absence of a compelling alternative.


 
There is clearly room for more options on the supply side, but to compete, other service providers would need to match the flexibility and proximity of the middlemen, or offer better terms and service. The middlemen themselves may benefit from a wider range of financial tools to cope with cash constraints, transaction costs, and risk. Addressing their pain points may allow greater flexibility on the products and terms that they offer the smallholder households with whom they work.
 
Not every farming family is the same. The needs and struggles of each profile of smallholder households should be thoroughly understood and any approach tailored accordingly, whether it’s government policies, or agricultural extension, or financial products.
 
For more information on the Smallholder Diaries, download the report or explore the interactive data visualization.