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“It is absolutely possible to develop a sustainable lending model for rural clients in agriculture. And at the risk of putting ourselves out of business, we hope to help more microfinance institutions jump into the sector,” explained Andrew Youn, co-founder and executive director of One Acre Fund. In an interview tied to the second annual MasterCard Foundation Symposium on Financial Inclusion, we discussed the concept of farm microfinance, putting clients at the center, how to develop the agricultural finance sector more broadly, and Youn’s key takeaways from the event.
Andrew Youn started One Acre Fund in 2006. Andrew graduated from Yale magna cum laude, is a former management consultant, and received his MBA from Kellogg School of Management. Andrew co-founded the program in Kenya with John Gachunga, and now lives in Rwanda.
Tell me a little bit about 'farm microfinance' and how One Acre Fund is helping to pioneer this concept.
I want to tell you one amazing fact: seventy percent of the world’s poor share a single profession: farming. They face a remarkably similar situation. They tend about one acre of land, with little more than a hand hoe and some saved seed from the previous year. Although their primary profession is to grow food, they routinely go hungry because they simply cannot produce enough.
This is an incredible opportunity that we are not sufficiently grasping as a human society – most of the world’s poor people face fundamentally the same situation: how to eke a better life out of one acre of land.
One Acre Fund seizes this opportunity by specializing only in serving farmers, and by providing a generalized set of services that enables any smallholder farmer to succeed. We distribute quality seeds and fertilizer to the remote areas where farmers live, we provide on average $80 of financing, we train farmers in agriculture techniques, and we educate them on how to properly store harvests and maximize market prices.
Farmers live in remote areas and need more support – a cash loan alone will not magically solve all of their problems. We believe farm microfinance should be bundled together with value-added services training and input delivery.
When we talk about putting clients at the center of financial inclusion, what does that mean to you in practice?
One Acre Fund puts farmers first in everything we do. We listen to farmers every day, and run trials together to learn from them. Our leaders (myself included) live in rural places near the farmers we serve so we can better understand their perspective. We measure success in our ability to make farmers more prosperous and when we develop our products and services, we test them in the field with farmers to see what they think.
For any given product or service, we carefully study the financial and social gain for clients, test products in the field together with thousands of trial farmers, hear their feedback, and co-create a solution that works.
For example, we heard from farmers that they don’t want to sell their crops right at harvest time when prices are often 40% lower than they are later in the year when demand is higher. But farmers typically have to pay school fees so they end up selling their harvest immediately to cover those costs. So, working together with the farmers, we created a financial product that gives them a small loan at harvest time, enabling them to store more crops they can then sell later in the year. This harvest time loan is currently in trial with 1,000 farmers.
What are some of the key challenges to developing the sector of rural, agricultural finance?
Agricultural microfinance is very unique: every customer is engaged in exactly same profession: farming.
This unlocks a huge opportunity. Instead of just making cash loans that could be used for any purchase, we can ensure that funds are used for income-generating purposes like the purchase of farm inputs. At One Acre Fund for example, we only loan seed and fertilizer to farmers, not cash. Other organizations require farmers to convert their cash loan into productive assets like seed and fertilizer. This is a challenge, because the microfinance industry is not traditionally strong at providing agricultural input services. But it can learn, or work with local agro-dealers to provide this service.
Another enormous opportunity is the chance to provide training together with loans. Actually in most African countries, seed and fertilizer usage lead to zero net profit improvement because they are used incorrectly. One Acre Fund therefore bundles agriculture-specific training together with our loans of seeds and fertilizer. Again, the microfinance industry is not particularly strong in this area. But again, it can either learn, or contract those services out to others.
But let’s talk about the elephant in the room. Many microfinance institutions are now expected to achieve 100% operational self-sustainability. That means they are going to focus on attracting clients near urban areas where the client density is high and where operating costs will be low. Clients in urban areas are also more likely to demand larger loan sizes, which increases the lender’s income from interest. Farmers in rural areas need smaller loans and are harder to reach. That will remain a major barrier for a while, but we hope to show that it is possible to break-even, or even profit, in this area.
How do we overcome some of those challenges?
First, we need to facilitate learning among practitioners. We need to create open relationships, regularly share knowledge, and make it easier for those interested in entering the sector to do so.
Second, we need to build a strong, collective voice among practitioners. In essence, we need to create a farm finance industry association and develop standards that will help improve the quality and impact of available services. We would like to see those standards and common practices driven by practitioners in the space.
Third, MFIs need to develop more nuanced lending products, including asset-based loans. Our loan works because it’s in the form of farming inputs (seeds and fertilizer) and onsite services (training and education). This ensures that our investment funnels directly into the most productive economic activity they have: farming.
Last, we need to create operational partnerships that increase and improve delivery of farm finance services to MFI partners. If we can help one another with product and client service development and facilitate relationships with third parties, we will be able to reach more clients in need of our services.
What were some of the big takeaways for you from the Symposium?
I was pleased to see the level of interest and engagement among MFIs in client-centered design. We’ve been worried that it would just be a trendy topic that fizzles out, but it looks like it is gaining traction from a significant portion of the microfinance sector.
I also noticed that the perception of risk in lending to farmers is very high. While there are significant risks, our experience has shown us that the risks are more manageable than people often think they are. It is absolutely possible to develop a sustainable lending model for rural clients in agriculture. And at the risk of putting ourselves out of business, we hope to help more microfinance institutions jump into the sector.