By Matt Shakhovskoy, Executive Director, Initiative for Smallholder Finance

“Finding common ground” to address some of the most complex development, resilience, and climate challenges affecting the rural poor is not something that partners typically just stumble upon. Rather it’s something that is intentionally designed and discovered, often over years. As an intermediary player in the agricultural and rural sector, the Initiative for Smallholder Finance (ISF) has become very familiar with the “facilitator” and “partnering” role. For example, we played an integral role in organizing the Council on Smallholder Agricultural Finance (CSAF) which is a pre-competitive alliance of social lenders in the smallholder sector, and we are currently working with Opportunity International to strengthen partnerships for the delivery of value chain financing in East Africa.

Anyone who has been at the center of the design and management of one of these partnerships will know that aligning incentives across commercial and social impact, geographic, sectoral, and risk dimensions is a complex and sometimes impossible task. And yet with the imperative to bring 450 million smallholder farmers into more formal and structured markets, we are seeing more and more complex examples of these partnerships emerging, like the Farm to Market Alliance (formerly the Patient Procurement Platform) and the Tropical Landscapes Financing Facility.  At ISF, we have learned some key lessons about how to facilitate these partnerships and design common ground.

Understanding fundamentals: The why and what of progressive partnerships
 

Our recent state of the sector report, Inflection Point, documents the need for “progressive partnerships” to strengthen business models and increase reach. Such partnerships provide the structure for provision of capital and overcome the challenge of low business model profitability for Financial Service Providers (FSPs) attempting to serve smallholder farmers.  In our experience these partnerships exist at two different levels:

First, at a pre-competitive level, partnerships emerge between actors who share common interests despite competing with one another in the market. This may take the form of an industry body such as the World Cocoa Foundation (WCF) or the Council on Smallholder Agricultural Finance (CSAF), both of which help their members to share experiences and establish common best practices. It’s also common among funders who have shared objectives in underlying investments and want to structure a fund that addresses different risk-return profiles. For example, Arise is a recent partnership between FMO, Norfund, and Rabobank to further invest in African banks that serve rural clients and businesses. Given the tension between collaborative and competitive dynamics, this kind of progressive partnership can be a complex undertaking to structure and manage. 

Second, at the level of the financial service provider, value-chain partnerships between financial institutions and other actors within commodity markets build off the respective capabilities of each actor to better serve farmers.  Financial institutions wanting to serve smallholder farmers face steep costs in product design and distribution, as well as high risk of non-performing loans. Progressive partnerships mitigate this problem by spreading the risk across multiple stakeholders—including agribusinesses, financial service providers, NGOs, etc.— ultimately increasing business returns on high-risk investments. In recent times these value chain partnerships have expanded to include technology vendors, such as Arifu or Esoko, that are increasingly well positioned to enable greater reach and scope in providing services to smallholder farmers. Identifying clear roles and responsibilities, negotiating level of contribution for each actor, and ensuring accountability for results makes these partnerships complex to design and manage.

A rising trend: Partnerships across sectoral divides
 

As climate adaptation for the rural poor becomes a more significant issue, we are beginning to see the emergence of new forms of partnership. Our 2016 briefing note, The Climate Conundrum describes a growing overlap between the agricultural finance and climate finance sectors, as their activities converge in spheres like preserving forested land and farm resilience. Investors are using innovative finance to combine multiple revenue streams and invest in climate smart agricultural practices for smallholder farmers:

• Convergence is an organization that connects private, public, and philanthropic investors to create the next generation of blended financing deals. They provided Rainforest Alliance a grant to design a financing facility to increase lending to smallholder farmers in the Ghanaian cocoa sector. The grant will help Rainforest Alliance explore an investment and risk sharing facility for local financial institutions in Ghana to lend to smallholder cocoa farmers and their organizations for climate smart agriculture (CSA) investments.
• The Action Plan for the Prevention and Control of Deforestation in the Legal Amazon is a partnership between government and banking to support Brazil’s Forest Code. Upon improved farmer compliance with the code, slowing deforestation has reaped economic benefits: for example McDonald’s recently resumed purchasing beef from Brazil after a 30 year no-buy policy.
• Several impact funds and social enterprises like the Livelihoods Fund for Family Farming and Althelia are developing models that use multiple sources of revenue in order to deliver returns that can attract investors. In addition to using a portion of the revenue from sales of the underlying commodity, these enterprises use mechanisms such as carbon credits that monetize environmental benefits.

Sharing our lessons learned: patience, commitment, and skilled facilitation
 

Complex, multisectoral partnerships are becoming more common and more sophisticated in response to converging global challenges. And the more complex they are, the more challenging.   As we have worked as a neutral broker across the world with organizations designing their own common ground with others, we have learned a number of things:  

• First, courtship takes time. Many of these partnerships take a long time to incubate and even longer to achieve meaningful scale. Having the right short, medium, and long term expectations about how these partnerships emerge and how much they can achieve is critical.   
• Second, the bigger the prize the greater the complexity. Unfortunately, more often than not, there is a mismatch between ambitious goals and on-the-ground realities. Risk, innovation and scale all increase complexity in partnerships. For partnerships with big innovation agendas, looking to mobilize large amounts of money or clients, the associated complexity and “hurdle rate” to get something going is almost always higher.  
• Third, having a neutral space and translation service is often critical. Because there are so many different players with very different motivations, partnerships often require an intermediary and neutral player in the early stages to help facilitate, design, and manage them.
   

Despite their complexity, progressive partnerships are key to increasing impact, mitigating risk, and improving business model sustainability in the smallholder finance sector. With patience, commitment, and skilled facilitation we can find common ground and foster lasting partnerships to better serve the world’s smallholder farmers.