More than 60 percent of Africa’s population is comprised of smallholder farmers, according to McKinsey, who need over $33 billion in financing, yet only 20 percent of this demand is currently being met. Some organizations and companies have risen to meet this challenge, but they still face difficulties doing this profitably and at scale due to larger systemic challenges. However, data that provides community-level insights on seasonal variations, agricultural practices, asset ownership, and ability to pay can usher in a new era for smallholder financing.

There are proven tools and approaches that can extend financing and productivity enhancements to smallholder farmers, but they haven’t yet scaled and reached their transformative potential. Productive use solar equipment (e.g., water pumps, cold storage, among other products), mobile money platforms, pay-as-you-go (PAYG) financing structures, and the proliferation of “big data” have all been positive developments that could substantially improve smallholder farmer productivity, livelihoods, and resilience to climate change. These innovative solutions have been introduced to the market and have started to gain traction, but they are still not at that point where they can be rapidly scaled to hundreds of millions of smallholder farmers in Africa. Moreover, organizations that provide loans or product financing to smallholder farmers in Africa are still struggling to find profitable, scalable business models.

Systemic Challenges Constraining the Sector

At Nithio, we believe that there are three sets of significant systemic challenges that confront agriculture financiers and product financing companies:

First, there is a limited amount of quality data at the farm-level that can inform risk assessments and help companies properly segment and target smallholder farmers. Collecting accurate, relevant data on African smallholder farmers is an enormous challenge, but gradual progress is being made. Forward-leaning organizations have started to collect and use farmer-level data in multiple geographies, but there is still a lack of centralization and comparability across datasets. Remote sensing and the internet-of-things approach to monitoring soil quality, water usage, or weather conditions offer another rich source of information, but it can be difficult to manage and meaningfully process this constantly-streaming and abstract data. Thus, many companies are still trying to figure out how to fully harness the potential of data. Machine learning, artificial intelligence (AI), and other advanced analytics approaches have the potential to unlock data’s business potential, but investing the significant resources necessary to build an internal AI team is a steep trade-off stacked against the needs for day-to-day operations. The ecosystem needs more specialized analytics service providers that can support and channel data’s potential for smallholder farmer financing.

Second, there are high transaction costs for engaging with a geographically dispersed market with limited absorptive capacity. Getting the unit economics right for engaging with or selling to smallholder farmers is inherently difficult. Factors such as geographic concentration, ability to absorb sufficiently large loan sizes, and many others pose significant challenges to agriculture financiers and product financing companies. Innovations in mobile technology, such as money transfers, digital wallets, and PAYG financing structures, have started to take root and help improve unit economics, but significant risks and untapped potential still remain. In this regard as well, the larger ecosystem needs to catch-up to mitigate the drivers of risk and bring expert, specialized knowledge in unlocking the potential of these innovations.

Finally, donors, impact investors, and agriculture financiers need a common infrastructure that can allow them to unlock and combine their respective funding streams. The proliferation and success of blended finance approaches points to the catalytic potential concessional funding sources can have on commercial actors. However, one key gap is harnessing data in a way that allows for precision financing and grant support at the farmer-level at scale. This level of granularity can help maximize the potential return on impact for donors, while at the same time de-risking financing (or serving) smallholder-farmers. This type of common infrastructure is also glaringly absent from the ecosystem.

Hyper-localized Data

Nithio is building a data-driven platform that can transform the way agriculture financiers, product financing companies, donors, and impact investors engage with smallholder farmers. 

Nithio builds on billions of data points that can be used to provide insights on smallholder farmer needs and risks. Our sister company, Fraym, has compiled a robust dataset that provides insights down to a 1 x 1 kilometer level on such questions as the following:

• What types of crops does this locality grow?
• What types of irrigation systems are in place?
• What types of assets do individuals in this area own?

In turn, Nithio uses this data to help provide deeper insights on creditworthiness, such as: 

• What is the risk of extending credit to a given customer?
• What future cash flows (both in quantity and in timing) can you expect from a given customer?
• How does seasonality (and other environmental factors) affect a customer’s creditworthiness and future cash flows?

By answering these questions, agriculture financiers and product financing companies can obtain more accurate risk assessments. They can also more effectively segment smallholder farmer customers in a way that enhances the impact and efficacy of financial products. Using this data analysis, it might even be possible to design customizable loan products that are tailored to the needs of individual smallholder farmers. 

Unlocking the Full Potential of Recent Innovations

Nithio’s ability to provide hyper-localized market intelligence improves the efficiency of further market expansion and helps mitigate credit risks related to serving new customers. By providing detailed 1 x 1 kilometer profiles of smallholder farmers, agriculture financiers and product financing companies are able to gain significant insight into potential markets. These profiles go beyond just size of population and assess other critical questions like ability to pay and creditworthiness. In a large market where there are significant costs to expansion, this kind of analysis can help companies scale and reduce their portfolio risks.

Nithio used its advanced analytics to map out repayment performance of One Acre Fund’s Nigeria farmers and the characteristics associated with these farmers. Nithio identified that education, income sources, and livestock ownership are the most important characteristics that determine what repayment path a farmer will follow. Using this, Nithio identified the ideal repayment behavior and how One Acre Fund should screen and offer farmers these ideal repayment paths depending on their available resources and income streams. Based on these indicative features, Nithio created a Likelihood of Ability to Pay Credit Index, a criterion defined by Nithio to determine farmers' ability to repay based on agricultural wealth indicators and household wealth indicators.

Integrating Concessional and Commercial Capital

Nithio’s ability to assess smallholder farmer creditworthiness at a granular level allows us to enable the smart flow of capital and strategic blending of concessional and commercial sources of funding. Agriculture financiers and product financing companies have the potential to serve a large part of the smallholder farmer market. However, there is an even larger portion of the smallholder farmer market that has limited ability to pay and needs de-risking in order for these kinds of companies to serve. This is where grant or deeply concessional funding can especially be catalytic, and Nithio provides the granularity of data and infrastructure through which this funding can be channeled. 

Bottom line: To have a transformative impact on smallholder farmers, agriculture financiers, product companies, donors, and others need a new ecosystem. The promise of recent innovations can be unlocked and scaled to meet the needs of smallholder farmers, but this requires a new ecosystem rooted in hyper-localized data and advanced analytics that can change the way stakeholders work together. For more information, please drop us a line at [email protected].