> Posted by Mary Hansen, Organizational Development and Training Associate, Accion

842 million people struggle through the hunger games yearly. The games begin as food and money run low sometime before harvest and last until the first ripe crops. This is better known as los meses flacos, the thin months, in Latin America. Or as I knew it in East Africa, wanjala in Swahili and nyengo yonjala in Chichewa (the hunger season). These recurring hunger games are not state sponsored and the participants do not fight each other to the death, but they do fight individuals, families, or communities to survive. Every day, 25,000 people around the world die from hunger-related causes, including 16,000 children. That’s one child every five seconds.

The regions deeply affected by hunger depend heavily on smallholder farming. Around 75 percent of the world’s poor are smallholder farmers. Half of the world’s undernourished people, including three-quarters of Africa’s malnourished children and the majority of those living in absolute poverty live on small farms.

Many of these farmers face the struggle of the hungry season. To understand their situation, consider how you would budget if you were only paid a few times a year.

Personally, I struggle with budgeting when paid twice a month. When I was in the Peace Corps in Malawi and was paid monthly, I struggled even more. Yet, smallholder farmers often receive payment only during harvest, or twice a year. I still do not fully understand how families survive with this income structure, even though I lived in a rural town in Malawi for two years. Yet, this is the reality for many of the 2.5 billion people that depend on smallholder agriculture for their livelihoods.

I have never felt as helpless as I did during the hunger seasons I experienced in Malawi. While Peace Corps Volunteers were training people on bed nets and safe sex, some people in our communities used mosquito nets to fish and others thought about the monetary value of sex. The priorities targeted by outside development experts sometimes felt nonessential when basic needs like access to food weren’t met. After Malawi, I came back to the United States cynical about international development and its ability to have a real impact. But soon after my return I learned about financial inclusion and its potential to help solve the budgeting crises of smallholder farmers and contribute to financial stability.

The benefits of financial services for smallholder farmers can be enormous. Without savings accounts, farmers have to transport physical cash long distances and store it unsecurely at home. Savings accounts allow funds to accumulate without the increased threat of theft, weather damage, or other shocks. Money in the bank can allow farmers to make purchases like new agricultural inputs. Lines of credit allow farmers to invest in larger agricultural inputs, like new machinery or animals. Credit can also be instrumental for weathering the hunger season, providing funds between harvests, especially right before a new season when one wants to buy new seeds, fertilizer, and other inputs. Insurance helps protect farmers against crop loss, and reduces the risk of borrowing, which in turn opens the ability to plan farther into the future.

Sadly formal financial services reach few smallholder farmers. According to the Global Findex, in Sub-Saharan Africa 12 percent of adults living in rural areas saved at a financial institution in the past year, compared to 23 percent of adults living in urban areas. Estimates for 2011 indicate that smallholder farmers took out roughly $9.4 billion in loans, while the demand for financing could have been as large as $450 billion, according to Dalberg Research.

Physically reaching the unbanked is one of the core challenges of financial inclusion – a barrier that’s heightened in extending services to rural areas. To put it simply, it’s costly for providers to extend branches to rural areas. Another challenge is designing financial services that fit the needs of both the financial institutions and the farmers.

Advancements in technology and product design are now starting to create rapid growth in rural financial services. Mobile money services like AgriLife in Uganda allow subscribers to receive payments from buyers or farmers cooperatives directly through their phone. Other advancements in portability include Opportunity International’s portable banks-on-wheels, Entrepreneurial Finance Lab’s smartphone/ tablet-based credit application for agent banking, and M-KOPA’s mobile phone-based asset financing tool.

When it comes to credit, smallholder farmers’ financial footing leads to difficulty with most lenders’ collateral requirements, rigid payment schedules, and short loan durations. Of the $9.4 billion in loans disbursed to smallholder farmers in 2011, 90 percent was for short-term financing. However, new products better suited to farmers needs are generating promising results. Lenders know  that monthly repayment is more efficient than weekly repayment, if it can be done without sacrificing repayment rates. Member banks of the China Association of Microfinance have successfully incorporated flexible repayment methods in their loan products to farmers, as well as larger loan amounts and alternative collateral. Non-traditional insurance products are also gaining traction, like a microinsurance product in Ghana that uses airtime and offers loyalty benefits.

Yet, budgeting for the hungry season is hardly the only challenge smallholder farmers face. In my opinion, the bigger issue is the price that small farmers can receive for their crops on the world market.

I worked with small cotton growers for a year in Malawi. Months of work led to an average production of 700kg of cotton per hectare. Most small farmers in Malawi had half a hectare and in 2012 the average price for cotton was 40 cents per kg. This meant that the average cotton farmer was paid $140 for a year’s work. The input cost was about $20 a year, leaving a net of $120. That’s not much to live on.

Thanks to producer groups, there is progress in fair pricing for smallholder farmers’ products. The Fair Trade network now includes more than 1.2 million farmers and merchants, harnessing their collective bargaining power for fair prices and increased market access. In addition to fairtrade networks, Fairtrade International, Grameen Foundation, Incofin IM, and Incofin cvso launched the Fairtrade Access Fund last year. The impact investing fund increases farmers’ market access and facilitates their adoption of financial products and technical assistance. Small scale producer groups are gaining traction elsewhere in the industry, too. A set of case studies on such groups can be found in the CARE-produced Integrating Very Poor Producers Into Value Chains Field Guide. Along with improved commercial relationships with buyers, suppliers, and financial services providers, producer groups often lead to increased market information dissemination.

On the other side of this equation, consumers can improve pricing for smallholder farmers by exercising their individual purchasing power. We rely on and want the products that small farmers provide, but often do not demand that they receive a fair price or have safe working conditions. It is time that all of us consumers recognize our effect on global markets and the lives of billions of people. Learn where the products you buy are from, follow the value chain, and demand that buyers provide a living wage to their farmers.

Image credit: Travis Lupick

Have you read?

Sowing Sustainable Finance: Making Rural Inclusion a Priority

Silos No More: Financial Inclusion for the Whole Value Chain

The Secret (Financial) Lives of Rural Residents – What Every Market Researcher Needs to Know