What is the financial gap that Traive aims to fill? What is the importance of agricultural finance in general, and financing small & medium farmers (SMFs) specifically?
Globally, total commercial credit to agriculture is lower than the contribution of agriculture to GDP. According to FAO, in 2018, “the agriculture sector in nearly half of the countries received less than 3.5 % of total credit.”
Besides the unmet credit capacity of the agricultural sector in general, the existing credit is not dispersed among farmers evenly. There are millions of small & medium farmers (SMFs) whose financial needs are too big to rely only on microfinance, & too small for traditional lenders (the so-called Missing Middle Farmers)
No, there is no universal one-size-fits-all answer. The right definition is always dependant on the specific purpose that it addresses, and it always comes with a tradeoff between completeness and feasibility. Nonetheless, usually one or a combination of these factors are taken into account: 1) access to factors of production 2) the type of management 3) market orientation 4) the economic size of the holding
The definitions may also take a quantitative, qualitative or hybrid approach. Traive uses a hybrid approach and takes into account a combination of factors. Reaching a definition that is as accurate and feasible as possible is a challenging, but imperative milestone. While we are committed to achieve this goal, our North Star in this journey is the fact that neither microfinance nor traditional finance meets the needs of our targeted segment fully. We refer to them as the Missing Middle and SMFs interchangeably.
Financial exclusion of the SMFs is a complex issue that is both the reason for, and the result of many socio-economic problems. However, the inability of lenders to risk assess farmers properly and cost-efficiently is one of the main reasons lenders either do not enter this market, or if they do, provide loans with very high interest rates.
This is why Traive harnesses the power of high-tech, data-science and our novel algorithm to generate a live risk assessment for each farmer, at considerably lower costs and with higher accuracy for lenders. Providing both lenders & farmers with reliable and timely warning alerts, accompanied by embedded intelligent insurance, further enable them to mitigate their risks. These are key to opening the market to more lenders, and they are all at the heart of Traive’s solutions
Financial exclusion of the SMFs is a complex issue that is both the reason for, and the result of many socio-economic problems. In the next question (More Information About SMFs) you may read briefly about some of these issues. It is important to note that while such problems cannot be explained or solved solely by financial issues, finance plays a critical role in all of them.
This is why financial inclusion “is positioned prominently as an enabler of other developmental goals in the 2030 Sustainable Development Goals, where it is featured as a target in eight of the seventeen goals”. Here are a few more resources if you are interested to read more about this topic: Achieving the Sustainable Development Goals: The Role of Financial Inclusion
Poverty and Economic Growth
Smallholders make up a significant portion of the world’s poor. This is why according to World Bank, “Growth in the agriculture sector is two to four times more effective in raising incomes among the poorest compared to other sectors,” and according to FAO, “Investment in agriculture is more effective in reducing poverty, particularly amongst the poorest people, than investment in non-agricultural sectors.”
Affecting Climate Change
Agriculture, forestry and land use change are responsible for 25% of greenhouse gas emissions. At the same time, according to FAO, while “Agriculture emits around one quarter of greenhouse gases, it [also] holds almost half of the solutions to global climate goals.” SMFs, as the largest group of farmers in the world, can play a critical role in increasing or decreasing the effects of climate change. While under the pressure of poverty, they often resort to short-termism, which leads to massive deforestation, desertification, and degradation of land
Affected by Climate Change
“Agriculture is hit hard, taking about a quarter of all damage and losses caused by natural hazards and disasters in developing countries.” And given that SMFs rely heavily on weather conditions, they are the most affected by climate change.
Needless to say, such climatic risks decrease both farmer’s financial resilience and lenders appetite to enter the market.
Vital to Our Food Security
Projected world population in 2050 is 9 billion, and agricultural production must increase
50-70% by then “sustainably”. The vast majority of the world’s farms are very small in size, and although a majority of the global production comes from the very small percentage of large farms, smallholders produce about 80% of the food supply in many countries, especially in Asia and Sub-saharan Africa. Also, some studies estimate that “smallholders globally produce 28–31% of total crop production and 30–34% of food supply on 24% of gross agricultural area.”
Financial distress is one of the main reasons behind outmigration of SMFs. By 2050, we are expecting a massive urban sprawl with another two and half billion people living in the cities across the world. According to FAO “Urbanization is foreseen to continue at an accelerating pace with urban areas to account for 70 percent of world population in 2050 (up from 49 percent at present ).” (UN projection in 2014 was 66%, up from 54% at the time, and then 68% in 2018 up from 55% at the time).
What are Sustainable Development Goals(SDG)
- Traive offers financial inclusion and data analytics solutions that aim to decrease the gap in the financial sector for the small and medium farmers. While financial inclusion is not a direct goal among the 17 Sustainable Development Goals (SDGs), it is an important enabler for all of them, specifically for 8 SDGs that we explain below.
- The SDGs were set in 2015 by the United Nations General Assembly, to be achieved by the year 2030. They include 17 goals in order to achieve a “better and more sustainable future for all.” They are interdependent, and progress or failure in anyone, affects the others.
- To learn more, please click on each SDG in which you are interested. For more resources on this topic, see UN Sustainable Development Goals
- Smallholders make up a significant portion of the world’s poor. This is why According to the FAO “Evidence shows that investment in agriculture is more effective in reducing poverty, particularly amongst the poorest people, than investment in non-agricultural sectors.” Therefore, “…Investment in agriculture and rural areas will need to increase substantially to achieve the Sustainable Development Goals (SDGs) of eradicating poverty and hunger by 2030 and to feed an additional two billion people by 2050.”
- Specifically, according to World Bank “an increase in overall GDP coming from agricultural labor productivity is on average 2.9 times more effective in raising the incomes of the poorest quintile in developing countries and 2.5 times more effective for countries in Latin America than an equivalent increase in GDP coming from nonagricultural labor productivity.”
- According to IFC (International Finance Corporation), “By 2050, there will be two billion more people in the world; a 70 percent increase in global food production will be needed to feed them. Most of the additional investment must come from the private sector. Sustainability, pressure on natural resources, climate change, and access to affordable food all present challenges, but also opportunities.”
- The vast majority of the world’s farms are small or very small, and although majority of the global production comes from the very small percentage of large farms, smallholders produce about 80% of the food supply in many countries, especially in Asia and Sub-saharan Africa. Also, some studies estimate that “smallholders globally produce 28–31% of total crop production and 30–34% of food supply on 24% of gross agricultural area.” Therefore, they will play a critical role in this growing need for food.
- According to UNSGA “Farmers who have access to financial services often produce more bountiful harvests, leading to progress on the second SDG: reducing hunger and promoting food security.”
- Agriculture represents the most important sector for women’s employment in the world, specifically in low-income and lower-middle-income countries (most of them unpaid or underpaid). Several reasons, including massive out-migration among small-medium farmers due to poverty has led to the feminization of agriculture in many areas across the world (although not in the same amount every where), because while men leave the farm to find a job in the cities, women usually stay on the land and struggle to continue the farm business, because they have far less access to capital. Consequently, this puts more financial pressure on them to retain the farm, and it further exacerbates the inequality and poverty.
- International Labor Organization (ILO) Women at Work, Trends 2016
- FAO- The Role of Women in Agriculture
- BACKGROUND PAPER FOR THE WORLD DEVELOPMENT REPORT 2008 – Feminization of Agriculture: Trends and Driving Forces; Susana Lastarria-Cornhiel
- Feminization of Agriculture in the Context of Rural Transformation. What is the Evidence?
- “Until 2000, agriculture was the mainstay of employment around the world. Since then, the services sector has assumed this mantle and the gap between the two has widened.” Since then, employment growth in agriculture has slowed down especially in the developed countries. Nonetheless, it is still the largest sector of employment in sub-Saharan Africa, East and South Asia, and a major employer in Latin America (Although “Much labour in agriculture is informal, characterized by high levels of pluri-activity and seasonality. It can be self employed or unpaid, and/or supplied by family members.”)
- The bitter truth is that “many people are employed out of necessity than by choice”, due to the poverty and harsh working circumstances. This is also one of the main reasons behind the massive out-migrations and urban sprawl, which will only continue to increase during the next decades. According to FAO “Urbanization is foreseen to continue at an accelerating pace with urban areas to account for 70 percent of world population in 2050 (up from 49 percent at present ).” (UN projection in 2014 was 66%, up from 54% at the time, and 68% in 2018, up from 55% then)
- Poverty, and consequently lack of a decent and safe working place, leads to many health issues. This has also led to a very high percentage of child labor in this sector. According to International Labor Organization (ILO), “Worldwide 60 percent of all child laborers in the age group 5-17 years work in agriculture.” And, according to FAO “The agriculture sector also has the highest incidences of both unpaid child labour and early entry into the workforce, which often occurs between the ages of five and seven years. Around 60 percent of all child labourers – about 129 million girls and boys – work in agriculture. According to ILO, more than half of these children engage in hazardous work.” and “Poverty is the principal driver of the high rate of child labour in agriculture.”
- Another consequence is that the younger generation is increasingly less interested in working on the farm, putting the fate of agriculture in more danger.
- Studies show that providing farmers with even short-term credit can improve their productivity because they can simply eat better, hire labor, and make more investments on their land. All this together, contributes to a better working environment for the farmers.
- WORLD FOOD AND AGRICULTURE 2017 STATISTICAL POCKETBOOK 2018
- FAO_Global Agriculture Towards 2050
- ILO _Child Labor in Agriculture
- Statistical Yearbook of the Food and Agricultural Organization for the United Nations 2013
- Statistical Yearbook of the Food and Agricultural Organization for the United Nations 2012
- World Development Report 2019 – The Changing Nature of Work
- Reducing inequality (SDG 10), both at national level and countries level, is tightly related to SDG 1 (No poverty) and SDG 2 (No hunger). According to FAO, “absolute levels of hunger and poverty are the most dramatic issues when it comes to addressing inequality.” At the national level, farmers are usually among the poorest and belong to financially excluded segments. Also, at the country level, the majority of the small & medium farmers live in developing or least developed countries.
- SDG 10 is also closely related to SDG 13 (Climate change) and SDG 15 (Life on land) because they are all tightly linked to environmental sustainability and agriculture. Farmers, as well as the countries that rely heavily on their natural resources and agricultural sector are the most vulnerable to the effects of climate change. “It is in these countries where there is also less capacity to prevent and cope with impacts.”
- SDG 13 (Climate change), SDG 15 (Life on land) and SDG 10 (Reduced Inequality) are closely related to each other, because they are all tightly linked to environmental sustainability and agriculture. Farmers, and consequently the countries that rely heavily on their natural resources and agricultural sector are the most vulnerable to the effects of climate change, and “It is in these countries where there is also less capacity to prevent and cope with impacts.”
- According to FAO: “Climate change could cut crop yields, especially in the world’s most food-insecure regions.” And many studies predict that even at an increase of 1 ° C in the temperature of the planet, there will be considerable amount of decrease in yield.
- At the same time, agriculture, forestry and land use change are responsible for 25% of greenhouse gas emissions. And simultaneously, according to FAO, while “Agriculture emits around one quarter of greenhouse gases, it [also] holds almost half of the solutions to global climate goals.” SMFs, as the largest group of farmers in the world, can play a critical role in increasing or decreasing the effects of climate change.
- Providing farmers with timely and affordable financial resources, especially Green Finances, combined with data analytics tools that predict the climate-related risks, and empower farmers to adapt to the new conditions, is the key to prevent or to alleviate the drastic effects of climate change on them.
- “…Biodiversity is integral to ecosystem health, essential to the sustainable increase of food production and necessary to build resilient livelihoods. However, the alarming pace of biodiversity loss today threatens devastating consequences for humankind if it goes unchecked. While changes to the climate may be reversible in time, there is no going back once species become extinct.” Loss of biodiversity means flora and fauna will be more vulnerable to pests and diseases. Our food security and nutrition, and the future of millions of people whose livelihood depends on agriculture will be at risk.
- Unsustainable agricultural practices accompanied by climate change effects are a major cause of loss of biodiversity. The way we have used the nature during the last decades has put considerable pressure on the earth. According to WWF, “we are currently using 25% more natural resources than the planet can sustain.” This is while World Bank estimates that feeding the growing population requires at least 50 percent increase in agricultural production and a 15 percent increase in water withdrawals by 2050. According to FAO “Ninety percent of the growth in crop production globally (80 percent in developing countries) is expected to come from higher yields and increased cropping intensity, with the remainder coming from land expansion.” Both scenarios, if not done in a sustainable manner, will have dramatic and irreversible consequences such as severe shortage of freshwater in near future.
- Adopting sustainable soil and land management can play a critical role in stopping or at least slowing down the rate at which we are losing such vital resource. However, for small and medium farmers who are not equipped with the knowledge and financial resources, transition to sustainable practices can be a too-long-and-costly practice, which puts their livelihoods at risk in the short run. Besides access to educational programs, they need financial support to make the necessary changes and to be able bear some losses before they can start to gain the benefits of becoming sustainable.
- Besides creating financial solutions for small and medium farmers in general, Traive is in the process of developing solutions specifically for Green Finance providers as well as sustainable farmers.
- The State of the World’s Biodiversity for Food and Agriculture )FAO COMMISSION ON GENETIC RESOURCES FOR FOOD AND AGRICULTURE ASSESSMENTS • 2019)
- FAO- Introducing Climate-Smart Agriculture
- Biodiversity for Sustainable Agriculture – FAO’s work o biodiversity for food and agriculture
- WWF: How does Biodiversity loss affect me and everyone else?
If everyone is moving forward together, then success takes care of itself. -Henry Ford
- The ambitious goal of financial inclusion of the small & medium farmers, especially the Missing Middle Farmers, calls for many stakeholders to come together and to share their strengths and wisdom together. We bring our high-tech solutions and creative tools to the table to empower farmers and lenders. We look forward to collaborating with you if you share the same passion and mission.