After years of neglect, a new generation of lenders is making microfinance work for Africa’s small farmers.
Traditional microfinance has never been particularly well suited to agriculture. With variable incomes that typically rise after harvests and taper off during the off-season, farmers are unable to keep up with the inflexible payment schedules that come with most microloans. Additionally, external factors such as weather, disease or price volatility can severely constrain farmers' incomes and ability to repay loans.
So, you're a poor farmer and want a flexible loan that fits your income? Too bad, most [microfinance institutions] MFIs say, try opening a kiosk.
The result has been an uneven expansion of financial services to "microentrepreneurs," even as access to credit has dried up for Africa’s small farmers. But the focus on providing credit to microenterprises is helping to fuel an unsustainable explosion of "traders and hawkers" in urban areas. With farming becoming less attractive, the migration of rural Africans to cities and towns in search of new opportunities is leading to overcrowding, unemployment, and conflict.
In response, the One Acre Fund is proposing a new type of microfinance designed specifically for Africa’s small farmers. Named this winter in The Global Journal's list of the Top 100 Best NGOs in the World, OAF works with farmers across Kenya, Rwanda, and Burundi to provide a package of agricultural goods and services that includes training, credit, access to inputs, and insurance.
"This is a comprehensive package that generates more income for the very poor," explained OAF employee Margaret Vernon. "With this spending power, farmers can choose for themselves how to improve their lives."
It works. The average OAF farm triples its harvest and doubles its profit after joining the program.
Far from being a handout, farmers that work with OAF must pay for its services. The organization provides flexible loans to farmers and supplies inputs to local markets, allowing farmers to purchase their own seeds and fertilizers. After providing training in cropping techniques and input utilization, OAF expects farmers to repay their loans at harvest time.
"Because we’re charging them for the good or service it means we can [ensure financial] sustainability as an organization," says Stephanie Hanson, director of policy and research at OAF.
The loan terms are what make the One Acre model work for farmers. Rather than forcing farmers to make regular payments, OAF allows farmers to repay loans at their own convenience. The only stipulation is that farmers must finish repaying their loans at harvest time. In the case of a major crop failure caused by drought, disease, or a natural disaster, OAF offers farmers the opportunity to purchase insurance. In extreme cases, the organization will even forgive the loan in order to allow farmers to feed their families.
Investments in African agriculture have the potential to spur rural development, but a lack of access to credit, inputs, training, and markets means small farmers continue to live in poverty. By designing its services specifically for smallholder agriculture in Africa, OAF hopes to change that.
"You can get a Coca-Cola, often cold, in nearly any rural village in Kenya," offers OAF founder Andrew Youn. "We want to make basic agriculture technologies, finance, and training every bit as ubiquitous."
Microfinance – when targeted to smallholder agriculture – can improve the lives of rural Africans, stem the tide of urbanization, and increase food security across the continent. OAF currently serves 75,000 farm families, and plans to expand to over 200,000 families in the next three years. With a 98 percent repayment rate on its loans in fall 2011 that rivals even the highest-performing MFIs, OAF is proving that microloans for agriculture are possible.
The question now is whether the One Acre Fund will inspire other MFIs to follow suit.
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