Rural farmers’ access to loans is generally very poor in Nigeria, with only about 3% of farmers granted credit from financial institutions. This means that over 80% of Nigeria’s farming population who live on less than $2 a day are financially excluded. Although, financial institutions have many financial products targeted at rural farmers and small businesses, unfortunately, these products are not necessarily tailored to the recipients’ circumstance or need. In addition to this, the requirement of high equity contribution by banks and limited capacity to understand the loan application and repayment processes contribute to the financial exclusion of farmers and small business owners. Consequently, the cycle of poverty will continue if these and other barriers to financial inclusion are not addressed.
In the past, numerous development projects have focused on educating small businesses to adopt improved practices and expand their operations, but adoption requires capital which most do not have. Understanding these issues, Propcom Mai-karfi partnered with Standard Microfinance Bank (SMFB) in Adamawa State, North East Nigeria, to develop and pilot tailored loan products that align with the agricultural production and business cycles of target beneficiaries. The aim was to prove that reducing the equity requirement for rural farmers and small businesses, bundled with farmer education and financial literacy, would lead to improved repayment rates. The reduced equity contribution to access loans can help more farmers get loans and improve the Bank’s customer base.
The pilot, therefore, involved supporting SMFB to test the impact of the reduced equity model on loan access with 5000 farmers and small businesses in hard-to-reach communities in Adamawa State. Furthermore, the financial products developed for the pilot were bundled with Digital Agricultural Extension Service (DAES) to close the existing extension information service gap; ensuring farmers received relevant and important agriculture information, such as good agricultural practices, market linkage information, weather forecasts, and financial literacy tips, among others.
By the end of the pilot, 5,793 farmers and small businesses had accessed loan from SMFB at reduced equity. Preliminary survey results revealed that SMFB’s customer base increased by 62% from about 3000 customers; half (31%) of the new clients were women. Convinced, the Bank changed its loan access policy by reducing equity requirement for loans for farmers and small businesses to 25% from 35%. This is significant step in the right direction and will improve rural farmers’ and small businesses’ access to credit. Thus, improving their productivity and income.
Although it’s still early days, there are clear indications that incorporating DAES to the financial products enhances farmers’ capacity to utilise their loans effectively, with reported improved yield. More farmers can access the capital they need when the equity requirements for accessing loans are within their reach. The pilot has shown that microfinance institutions (MFIs) can increase their customer base through reduced equity. However, more learning is required to determine the key components of the Bank’s risks and how to better manage it while promoting financial inclusion.
For more information on our Access to Finance work, please contact us via email, email@example.com, or mobile, +234(0)805 479 6992.