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9 Sep 2021

Unlocking Farmers Access to Finance

Malawi’s economy is driven predominantly by the agriculture sector. The potential for growth in the sector is high, with one big hurdle in the way – access to finance.  More than 2 million smallholder farming families contribute to the economy of Malawi, but they struggle to sustain, grow and diversify their farming business. Beyond a general lack of access to finance, financial institutions also often doubt the ability for smallholders to repay loans due to the volatility of the agricultural sector. 

Traditional financial institutions require specific, strict conditions to be met before lending – conditions that farmers are often unable to meet such as multi-year credit history illustrating repayment, cash contributions of up to 40% of the total financing requirement, assets in lieu of cash that could be used as collateral, as well as high interest rates on top of the loans. The main reasons why farmers often struggle to meet these conditions, and subsequently repay their loans include: erratic weather, lack of insurance, low and unstable market prices and financial illiteracy.

To support farming communities and empower them to access finance, the Clinton Development Initiative (CDI) provides input loans to farmer cooperatives that help build credit history, as well as financial literacy training to farmers, and brokering of relationships between banks and farming groups Working in partnership, CDI and Standard Bank are creating agricultural loans based on farmers’ abilities and capacities, decreasing the default rate and creating good credit history for the farmers, eventually enabling millions of farmers to access loans, increasing their productivity, growing their farm businesses and improving their livelihoods.

Earlier this year, CDI began to directly link farmers to financial institutions like Standard Bank Malawi. Standard Bank  committed to provide loans to farmers working with CDI, and for many years has shown a willingness to create favorable lending environment for the agrarian sector. This means securing interest rates favorable for farmers and creating a repayment schedules that corresponds to farmers’ cash flows.  In the month of June, Standard Bank disbursed 15 Million Kwacha (USD18,868) to 4 farmer cooperatives.  This loan is payable in three months at an interest rate of 17.5% - this is compared to the 22% average interest rates other banks are offering, on top of agreement fees of an additional 3%.  Farming cooperative management teams are now buying and selling groundnuts and maize from their members and other farmers  in their localities at more favorable than traditional vendors and traders.  We hope that if farmer cooperatives continue to provide the market to their fellow farmers, it will help prevent manipulation of prices by vendors.

CDI finance director, Kettie Munthali, explains the importance of linking these various partners to support farmers.

“Financial services for smallholder farmers collectively are critical to achieve financial goals such as  early grain cash loans. These enable farmers to buy commodities from fellow farmers on time, and at competitive prices, hence maximizing productivity for better markets. This eventually leads to improved profitability for domestic usage and also access to quality farm inputs at reasonable prices.”

Speaking on the benefits of the partnership between Standard Bank and CDI, Graham Chipande, Head, Relationship Banking at Standard Bank said the loans will facilitate growth in  many key areas for farmers.

“This will enable farmers to timely procure commodities from their fellow farmers during harvest hence improving farmgate prices for small holders who can be prone to predatory pricing and marketing tactics by middlemen. The access to finance also gives farmers an opportunity to deal with a commercial bank which helps them to grow their entrepreneurship mind hence sustainability of the business.”

Chipande further touted strategic partnerships between stakeholders as the best way to empower local smallholder farmers.

“Our purpose statement at Standard Bank PLC’s says “Malawi is our home we drive her growth”, meaning we will not achieve this alone but through building strategic partnerships with various organizations. We believe CDI’s initiative to empower farming communities with market opportunities will not only support livelihood of small-scale farmers but also contribute to the economy of Malawi at large.”

Most recently, farming cooperatives have faced a new challenge with the outbreak of the COVID-19 pandemic.  To help provide continuity to the partnership, Standard Bank is employing “digital solutions” which will enable farmers to access its services using their mobile phones.

This private-public-producer partnership rests on low default rates, which encourages lending institutions such as Standard Bank to maintain confidence in the Initiative and farming communities.

“For several years of CDI working with farmers repayment rates have been over 80% and the past season achieved a 100% recovery rate,” says Chrispine Kamanga, loan portfolio advisor at CDI.

Such a satisfactory situation means more opportunities for farmers. For instance, some farmer cooperatives have harbored plans to build warehouses or purchase land to increase their production, but they were limited due to lack of finances. Accessing financing therefore makes their vision come true under the current initiative.

CDI also works hand in hand with Ministry of Trade to provide training to farmer cooperatives and link them to formal finance institutions with the aim of enabling farmers to secure financing for both farm inputs and commodity aggregation.

Today, many farmers have saved enough to not need a loan for the upcoming season, one of the best indicators of the success of the partnership between CDI, Standard Bank, the Ministry of Trade, and so many others working to create an enabling environment for farming businesses to thrive.