This post is written by Thai Thi Minh, senior researcher, Upscaling Innovations at the International Water Management Institute (IWMI).

Farmer-led irrigation (FLI) can substantially increase the reliability, quality and yields of agricultural produce, which leads to an increase in incomes and a reduction in poverty. This benefit could be widespread if FLI reaches its expansion potential. However, a lack of affordable credit prevents many smallholders from adopting irrigation technologies such as pumps, pipes and sprinkler systems.

Lenders are often hesitant to offer financial products to rural smallholders, preferring to focus on clients who are perceived to be lower risk and less costly to reach.

To find solutions to this issue, stakeholders from the irrigation sector in Ghana and Ethiopia met virtually to discuss options for improving the availability and effectiveness of financing solutions for farmers, who are increasingly driving investments in irrigation.

The meetings are part of an ongoing series of multi-stakeholder dialogues. Initiated in 2019 by the IWMI under the USAID-funded Feed the Future Innovation Lab for Small-Scale Irrigation (ILSSI), the dialogues bring together relevant actors to innovate and facilitate FLI development at both national and global scales.

Tailoring solutions

Several key insights emerged from the meetings. First, financing solutions for smallholder irrigation are largely still missing or need to be better tailored to the local context.

In a number of countries, irrigation equipment suppliers have stepped in to fill the gap. PEG Africa, for instance, has pioneered a pay-as-you-go financing model in West Africa that enables customers to pay for and eventually fully own solar home systems through regular installments. These installments can be sculpted. This means farmers pay lower amounts in lean seasons and higher amounts in harvest seasons, helping to reduce the payment default risk.

Over the next three years, PEG Africa will collaborate with ILSSI to customize its model for solar-powered irrigation to reach more women and resource-poor farmers.

Creating a financing ecosystem

A second insight from the meetings was that financing alone is not enough to enable investment in irrigation. Successful irrigation scaling has to be embedded in a wider financing ecosystem that bundles credit with inputs and services, market information and access, and technology such as digital payment.

In Ethiopia, the fragmented and complex market structure makes it hard for a financing ecosystem to take root. It also limits companies’ ability to target investments in irrigation, despite the immense business opportunity.

This was noted by Hack Stiernblad, director of business development at SunCulture, a solar-powered irrigation company. Ethiopia is one of the biggest potential solar water pump markets in Africa, he said, referencing data published by IWMI that maps the area that could be suitable for these pumps.

He added that policy reforms would open up possibilities for realizing some of this potential. Reforms to consider include increasing access to foreign currency to enable distributors to buy irrigation technology from abroad. In addition, streamlining import and duty exemptions, which are often complicated and inconsistent, would reduce the costs of getting the technology into the country. These savings could then be passed on to farmers.

The Ethiopian government recognizes the need for these reforms and is taking steps to implement them, said Zeleke Belay Admasu from the Ethiopian Ministry of Agriculture during the meeting. He acknowledged that IWMI, as a member of the Agricultural Water Management Task Force advising the government, is actively engaged in this process.

Another positive sign of change is the emergence of platforms like M-BIRR, Ethiopia’s first mobile payment service. It is accessible to users even in remote areas and does not require internet or a smartphone to send and receive money.

Building resilience, reducing risks

Another insight was the role of irrigation in building smallholders’ resilience. In a study conducted in May 2020, IWMI researchers found that agricultural households in Ethiopia with shallow wells had greater food and nutrition security. Moreover, these households noticed an increase in their neighbors’ demand for water for sanitation and hygiene purposes. These findings underscore how removing barriers to irrigation can mitigate the impacts of health and economic shocks.

The 2030 Water Resources Group, which is hosted by the World Bank, is using these findings to inform its investments in financing models that target FLI in several African countries. One model being trialed in Kenya is a first-loss guarantee, whereby a third party compensates the lender if the borrower defaults. As the third party pays for the losses, the risks for lenders are reduced. The model also incorporates weather and insurance products for high-value crops.

IWMI will continue to organize multi-stakeholder dialogues in the coming months, as experiences in Africa suggest that facilitating intersectoral linkages, and having critical conversations between diverse actors, helps to move solutions into action. Based on participants’ input, the next event will focus on value chain and market system approaches to scaling farmer-led irrigation.