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2. Inputs and credit

Possible policy indicator questions: inputs and credit (general)

  • Is the state taking appropriate action to ensure sustainable provision of inputs to smallholder farmers? (this could include, but should not be limited to, smart subsidies)
  • Are effective parastatal marketing board services or other relevant institutions providing access to input markets?
  • Are any measures in place specifically to facilitate women farmers’ access to inputs?
  • Are the voices of smallholder farmers, especially marginalised women farmers, heard and acted upon in decision making on access to inputs and credit?
  • Are competition laws in place to prevent the creation of monopolies in input markets?

58. To scale up their participation in markets smallholder farmers need to produce more of the right kinds of products to allow them to take advantage of market opportunities throughout the year.  Diversifying their output will also help increase resilience against price and weather shocks and help improve food security.  For crop producers, increased output starts with higher yields, underpinned by high quality seeds and improved soil fertility. 
59. In the past many African farmers obtained (usually subsidised) inputs and credit from state-owned commodity marketing boards, but these have fallen out of favour due to mounting evidence of inefficiency, mismanagement and, in some cases, corruption. State-run marketing boards were largely disbanded or commercialised during the wave of liberalisation that swept through much of Africa during the 1980s and 1990s. However, Ghana’s reformed cocoa industry association COCOBOD demonstrates how, given the right design and governance, such a body can hugely improve farmers’ productivity, market access and incomes. Research from the IDS concludes that achieving these benefits does not necessarily require a radical transformation – suggesting that similar success could be within reach of other marketing boards with potentially only subtle reforms (Williams 2009). Given efficient management, improved governance and greater accountability, and a clear understanding of the challenges facing smaller producers in particular, parastatal marketing organisations can still play a valuable role in supporting smallholder farmers’ market access.
60. Agricultural inputs and services are today typically provided by the private sector but these markets are characterised by many market failures, including high transaction cost of obtaining inputs, asymmetric information on prices and monopoly of power by some intermediaries.  State action is needed to remedy these failures or replace the market where it does not function at all.  The challenge is to design these interventions in a way that effectively delivers improved access to inputs and credit markets for smallholder farmers, including women farmers in particular.

61. Agro-dealer networks are often established to improve accessibility to quality inputs, but in a weak policy environment these networks can become a vehicle for patronage within government and lead to the creation of local elites and multinationals could come to dominate the domestic seeds or fertiliser sector.  Regulation is needed to prevent input suppliers from forming monopolies or from having undue influence with government.

Box 3 Input subsidies in a changed environment

Having been prevalent in Africa during the 19060s and 1970s, input subsidies subsequently largely fell out of favour as they were seen to be ineffective and inefficient. The many problems with subsidies included high costs which were difficult to control; strong political pressure to expand them but weak pressure for their control, making exits very difficult; the difficulty of accurate targeting due to problems of diversion and leakage; their tendency to lead to over-use of inputs or of input-intensive rather than labour-intensive production methods; the danger of crowding out private sector investment; and the fact that they were often regressive, benefiting larger farmers who could afford subsidised inputs (Dorward et al 2009).

Nevertheless there has been resurgence in interest in agricultural input subsidies in Africa. In addition to the conventional arguments for subsidies – to promote the adoption of new technologies through allowing farmers access to purchased fertilised and improved seeds at lower costs – subsidies are now also seen as a potential way to help replenish soil fertility, provide social protection for poor recipients and help improve food security at the national and household level (Dorward et al 2009).

Based on analysis of successful green revolution packages where input subsidies, of fertiliser in particular, played a major role, Dorward et al argue that their major pro-poor growth outcomes were a thickening of markets, as they helped kick-start the staple-food supply chain and subsequently the wider rural economy.  On the other hand, critics of the “green revolution for Africa” approach point to the negative consequences of the huge increase in fertiliser use during Asia’s green revolution and beyond, including soil and water acidification, contamination of surface and groundwater resources, and increased emissions of potent greenhouse gases (FAO 2011b), and claim that subsidies could contribute to those negative impacts being observed in Africa as well.

Malawi’s recent input subsidy programme saw production increase from around 1t/ha in 2005 to just under 3t/ha in 2009/2010, enough for Malawi to export surplus maize to neighbouring countries. Food security increased, as did rural wages (Dorward and Chirwa 2011). But the high cost of Malawi’s programme raises questions about its sustainability. Dorward and Chirwa (2011) argue that when the indirect benefits of the subsidy scheme are taken into account, the economic returns to the programme have been “satisfactory”. The authors caution that “(a)ny application of Malawi’s subsidy experience to other countries needs to take account of special characteristics of the Malawian maize economy and of measures needed to raise such programmes’ effectiveness and efficiency and ensure their best fit with and contribution to sustainable development policies”.

The negative effects of an under-resourced and poorly executed subsidy programme is captured in a case study from ASFG member Practical Action in the Guruve district of Zimbabwe. The state marketing board initiated an input subsidy voucher which interfered with the development of efficient local input supply chains. Local agro-dealers, finding that they could not compete with subsidised seeds and lacking access to credit, withdrew from the local market.  This led to serious disruptions to supply when funding for the subsidy programme dried up and farmers were forced to acquire inputs from distant markets at even higher cost than usual.

62. Input subsidies can help to overcome the issue of cost. Wiggins (2011) recommends that governments should “embrace the use of smart subsidies in certain circumstances”. But subsidy programmes are plagued by a variety of problems (see Box 3), and some question whether conventional input subsidies are the best way for African governments to support smallholder farmers. Christian Aid’s Healthy Harvests report (2011) argues that funding allocated to subsidies should be re-orientated towards sustainable, resource-enhancing and affordable farming approaches that work well for smallholder farmers with limited assets and incomes.  This could include the promotion of indigenous and local crop varieties that do not require agro-chemicals; participatory seed breeding; organic methods of soil fertilisation; polycultures; mixed livestock-arable-aquaculture systems; soil/water conservation measures; cheap, labour-saving tools; and natural pest-control techniques.  Fertiliser subsidies can be useful as a temporary measure if they are accompanied by an exit strategy tied to a rolling-out of such sustainable intensification methods. 

2a. Seeds

Possible policy indicator questions: seeds

  • Do national seed laws recognise and protect farmers’ rights and access to seeds of their own choosing, including both modern and local varieties?
  • Are the rights of farmers to freely breed, conserve and exchange traditional seed varieties enshrined in law?
  • Are affordable seeds of good quality, adapted to the changing climate, available for purchase?
  • Does government support the design of seed programmes and policies that promote and/or strengthen entrepreneurship in both formal and informal seed systems, including through support for seed banks?

63. African farm yields are among the lowest in the world, and one of the reasons for this is the fact that African farmers make much less use of improved seed varieties (Livingston et al 2011).  Following the demise or commercialisation of most state-run marketing boards referred to above, high quality seeds are often not readily available and are expensive, placing them out of reach of many smaller producers.

64. Efforts to support smallholder farmers in improving their output is currently heavily skewed towards promoting the increased use of biotechnology, including genetically modified (GM) seeds. The urgent need to increase global food production to meet food security demands and to adapt to a changing climate leads many to argue that these challenges will not be adequately addressed without making use of the full range of available technologies, including GM seeds (Conway 2012).  However, to date only one country in sub-Saharan Africa – South Africa – is growing GM crops on a commercial basis, although others like Kenya and Uganda have GM products in the pipeline (for pest and disease resistant seeds), and regional organisations like COMESA are busy formulating GM frameworks to facilitate entry and regulation of GM.

65. Whilst GM seeds are not yet widely used in Africa, there is much debate about whether the GM route is appropriate for African farmers (see, for example, Practical Action 2008, Christian Aid 2011).  Supporters of more organic approaches point out that local seeds systems are socially, financially and environmentally more sustainable than international seed systems and that it would be more cost-effective and feasible to focus on strengthening these. Farmers rely overwhelmingly on farmer-saved or informally-sourced seeds, with only 5-10% of all seeds acquired in the formal market (both public and private) (Minot et al 2007, cited in Van Mele et al 2011). Local seeds can be bred and adapted, are pest and disease resistant, are familiar to farmers, are easy to store and are amenable to traditional methods of processing. Farmers would benefit from investment in training and extension to re-build skills around seed breeding and adaptation, particularly adapting seeds to allow for the effects of climate change, such as focused breeding for greater drought-resistance (the case study in Box 4 deals with the question of seed breeding skills), and in seed system infrastructure such as seed banks. Local community seed banks can improve access and facilitate seed sharing and exchange, as well as indigenous knowledge sharing by local smallholder farmers.

66. Moreover, GM seeds are associated with a number of serious challenges for African smallholders. Soils in many parts of Africa are too fragile or degraded to allow these seeds to perform as intended (Sanchez 2002).  Bio-safety and contamination are key issues– especially if farmers are trying to grow for organic markets, or rely on saved and exchanged seed. The seeds themselves are expensive and may only be available from a limited number of licenced dealers, which creates significant access issues especially for remote farmers. There are also global concerns around human health and environmental impacts of GM food crops (Conway 2012). Some countries have laws prohibiting GM imports altogether, meaning farmers hoping to export to those countries could be disadvantaged.

67. Problems are not confined to GM seeds only.  The introduction of modern seed varieties that are cultivated as monocultures has led to a loss in agricultural biodiversity. In some countries, new seed laws are being introduced which enforce compulsory registration of seeds, thus making it impossible for small farmers to grow their own diversity or local markets, and forcing them into dependency on giant seed corporations.  Lack of investment in national breeding systems, skills or knowledge threatens to exacerbate this dependency.

68. There are also issues around intellectual rights to ‘new improved’ seeds.  Most multinational seed breeders want governments to adopt laws similar to the 1991 Act of the International Convention for the Protection of New Varieties of Plants (‘UPOVS 1991’), which would grant them breeder rights meaning that farmers depending on the informal seed market can no longer save, purchase and multiply seed that they originally bought from these companies.  To address this problem national seed laws should give maximum scope to farmers to save, re-use, exchange and sell locally seeds of their choosing – including both local varieties and modern varieties developed by seed companies (Christian Aid 2011).

69. The UN’s 2004 International Treaty in Plant Genetic Resources for Food and Agriculture (ITPGR) explicitly protects farmers’ indigenous knowledge, demands rewards for their contribution to maintaining crop diversity, ensures their participation in decision-making about genetic resources, and guarantees their rights to save, use, exchange and sell traditional seeds.  These principles are also captured in the IAASTD report, the FAO Guidelines and the EU’s food security policy framework. Governments should enshrine these rights in national legislation.

Box 4 Supporting community-based seed enterprises in Zambia

The Zambian seed sector is characterised by intense promotion of hybrid maize seed that is distributed at subsidised rates to small-scale farmers within the Fertilizer Input Support Programme (FISP) of the Ministry of Agriculture and Livestock. Maize cultivation is further promoted by the Food Reserve Agency (FRA), which buys maize at a guaranteed price set by the government.  The FISP and FRA are designed to address food security concerns; together they account for almost half of the government’s agricultural budget.

The focus on maize reduces farmers’ interest in cultivating other crops and local varieties. This crop replacement results in dependency on one crop, reduces biodiversity and creates vulnerability in times of drought. There is therefore a great need for promoting diversification through greater availability of quality seeds for other food crops.

Both national and multinational seed companies are active in the hybrid maize seed sector, but for all other important food crops, informal seed systems, comprising both farm-saved and community-based seed systems, are dominant. These crops tend to have less commercial value and therefore attract less interest from national and multinational seed companies.

Zambian law provides a regulatory framework for the set-up and registration of seed businesses through the Plant Variety and Seeds Act, but inadequate investment in the public institutions responsible for research and development of non-commercial crops has resulted in a shortage of seeds for such businesses to multiply and sell. The Zambia Agricultural Research Institute (ZARI) is still biased towards conducting improvement activities for commercial value crops, such as hybrid maize, wheat and soya bean, which has restricted investment in other food crops.

Evidence gathered by ASFG member Self Help Africa through its Seed Entrepreneurship for Economic Development and Food Security (SEEDFS) programme shows that it is possible for local seed businesses to produce certified seed themselves to relieve current bottlenecks. With the right support, local businesses with low overheads can produce a diverse range of good quality seed at affordable prices to resource-poor farmers in remote areas with limited purchasing power.

In Zambia’s Northern Province, Self Help Africa initiated a training programme involving specialist breeders from the local ZARI research station which trained both male and female farmers as community-based seed entrepreneurs. Over the course of two growing seasons, common bean (Phaseolus vulgaris) farmers produced and marketed their own certified 1st generation Class 1 seed, contributing to a 60% increase in the availability of improved certified beans to smallholders in the province.  Findings from three growing seasons 2009-2012 indicate that farmers using improved legume seed generally doubled their yields, leading to raised incomes and improved household food security.

Government can help ease bottlenecks in seed production at public institution level and encourage the creation of more community-based seed businesses through supporting farmer training in basic breeding techniques, and improving the transfer of research to local level. Facilitating greater availability of improved varieties of seed provides an effective way of helping farmers realise increased yields, higher incomes and greater food security.

2b. Fertiliser

Possible policy indicator questions: Fertiliser

  • Are incentives available to encourage wider distribution of affordable fertilisers and quality advisory services on their application?
  • Does the government allocate sufficient funding for research and extension services specifically aimed at supporting integrated soil fertility management?
  • Are smart subsidies or other incentives available to support farmers during the adoption of agro-ecological techniques to enhance soil nutrition (including, where appropriate, adoption of agro-forestry practices)?
  • Are incentives available to private enterprises and other entities providing integrated soil management services to smallholder farmers?

70. Low soil fertility is another underlying cause for the low yields recorded by smallholders in much of sub-Saharan Africa. While low soil fertility is the result of many factors, one of the major contributors is the failure to adequately replenish soil nutrients, through manure or fertiliser, during decades of intensive farming (World Bank 2007).  The result has been very high depletion rates: research quoted by Sanchez (2002) indicates that farmers across 37 countries in sub-Saharan Africa lost an average 22 kg of nitrogen, 2.5 kg of phosphorus and 15 kg of potassium per hectare (ha) annually from their soils over a period of 30 years.  This reflects “ a breakdown in traditional practices and the low priority given by governments to the rural sector over this time” (Sanchez 2002).   Depleted soils have contributed to average yields of grain crops in sub-Saharan Africa stagnating at around 1 t/ha since the 1960s, compared to 2.5 t/ha in South Asia and 4.5 t/ha in East Asia (Gilbert 2012).
71. There is little question about the urgent need for many African smallholder farmers to replenish their soils in order to increase their productivity, but there are widely divergent views on the best way to address this challenge (for a concise discussion of main points of the debate along with key sources, see Scoones 2008).  On one hand there is a strong push from African governments as well as the donor community - supported by powerful agri-business interests - dramatically to increase the use of inorganic fertiliser, which is seen as the quickest and most practical way to boost productivity (see, for example, World Bank 2007; increasing the availability and use of chemical fertilisers is a key objective of initiatives such as AGRA, the New Alliance and CAADP). Inorganic fertiliser is one of a handful of agricultural technologies that have huge potential for raising the productivity and incomes of poor smallholders. Over the past 40 years, mineral fertilisers accounted for an estimated 40% of the increase in global food production (FAO 2011b).
72. But chemical fertiliser use in Africa is very low: on average, sub-Saharan African farmers used only about 8 kg of fertiliser per hectare of arable land in 2002 compared with 78 kg/ha in Latin America and 101 kg/ha in South Asia (World Bank 2007). Fertiliser use by most African smallholder farmers has been severely limited by lack of access to savings or credit for purchasing the input. Global fertiliser supplies are tight and individual African countries are very small players in global fertiliser markets where suppliers prefer to sell large bulk orders, putting pressure on prices. In addition, because of transport expenses, farmers in inland Africa pay more than twice as much for fertiliser as farmers in Europe; and supply is often unreliable because of poor distribution systems (Gilbert 2012).

73. On the other hand, many argue that massively scaling up chemical fertiliser use is not the best solution for African smallholders and believe that the answer lies in more organic, environmentally sustainable and affordable approaches (see, for example, OHCHR 2010, Christian Aid 2011).  There are serious concerns about the environmental impacts of long-term chemical fertiliser use.  It has a highly disruptive effect on natural ecosystems; along with pesticides, fertiliser use poses a major threat to biodiversity (Conway 2012). Fertilisers are a significant contributor to climate change due to emissions associated with its highly fossil fuel-dependent production as well as its application, made worse by incorrect dosing and large-scale wastage. As pointed out above, fertiliser prices are high and volatile due to tight supplies. Moreover, the fragile and damaged soils typical of much of Africa’s rainfed lands cannot sustain high levels of fertiliser use (Sanchez 2002).  Relying only on chemical fertiliser to boost crop yields in Africa therefore appears unlikely to deliver the desired outcome and could have many other negative consequences.

74. The FAO and others are actively promoting various organic methods of soil fertilisation and repair, including conservation farming with cover crops and low or zero tilling, agroforestry, nitrogen-fixing legumes, composting and crop rotation (FAO 2011b). Evidence is growing that these agroecological techniques can successfully improve soil fertility and raise yields in a range of circumstances while at the same time protecting the soil, water, and climate. Systems like sustainable root intensification (SRI), which carefully regulate the amount of water that crops need and the age at which seedlings are planted out, have shown that organic crop yields can be doubled with no synthetic chemicals.  The widest study ever conducted on agroecological approaches covered 286 projects in 57 developing countries, representing a total surface of 37 million hectares, and found an average crop yield gain of 79% (Pretty 2006).

75. Based on research into organic approaches to boosting soil fertility conducted over 10 years by the International Center for Research in Agroforestry, Sanchez (2002) states that ‘tens of thousands of farm families in Kenya, Uganda, Tanzania, Malawi, Zambia, Zimbabwe and Mozambique use various combinations of fallows, phosphorous, and biomass transfers with good and consistent results. The challenge is to accelerate the adoption rate… to tens of millions of farm families.’  Governments should redirect some of the funding currently earmarked for promoting or subsidising smallholder access to chemical fertiliser to more research and training on these agroecological methods. Sustainable approaches should form a central part of national agricultural strategies. Support to farmers to help them make transition to sustainable agriculture would be especially useful in early years when yields sometimes dip as new approaches are being adopted and in cases where transition costs make it difficult for farmers to move quickly from chemical-dependent to sustainable approaches (Christian Aid 2011).

76. In its 2011 Save and Grow report the FAO argues for “sustainable intensification of smallholder crop production”, and identifies soil health as one of the critical components of this approach.  However, it does not suggest that farmers should rely on organic farming methods exclusively: “(t)he best yields are achieved when nutrients come from a mix of mineral fertilisers and natural sources, such as manure and nitrogen-fixing crops and trees. Judicious use of mineral fertilisers saves money and ensures that nutrients reach the plant and do not pollute air, soil and waterways. Policies to promote soil health should encourage conservation agriculture and mixed crop-livestock and agroforestry systems that enhance soil fertility. They should remove incentives that encourage mechanical tillage and the wasteful use of fertilizers, and transfer to farmers precision approaches such as urea deep placement and site-specific nutrient management”(FAO 2011b).  And Conway (2012) argues for both organic and biotech solutions, in order to support what he terms the “doubly green revolution”: one that repeats the success of the first, in many diverse localities, yet is sustainable, equitable and environmentally friendly.

77. An integrated soil fertility management (ISFM) approach recognises the need for both organic and chemical inputs to improve soil health, and acknowledges that no one size will fit all: the optimal combination of inputs will depend of a range of local factors.  Government should support farmers’ choice on which inputs or combination of inputs to use, including through implementing policies to improve the availability, quality and affordability of chemical fertilisers and proving training into their correct use and dosage.

2c.  Credit

Possible policy indicator questions: access to credit

  • Does the state provide or support institutions which provide affordable and flexible financial products that are well-suited to the needs of smallholder farmers, such as agricultural development banks?
  • Are incentives in place to encourage innovation from the private sector in meeting the credit and other financial needs of smallholder farmers? (for example to promote buyer contracts as secure collateral to access credit/insurance)
  • Does the state provide or promote financial literacy training among smallholders, and capacity building/skills development in the financial sector to facilitate better service provision to smallholder farmers?
  • Does the government support or participate in any loan guarantee funds that target smallholder farmers?

78. The majority of African smallholder farmers have few assets, which makes it hard for them to access credit as they have nothing to offer up as collateral; when they do own an asset it is often disproportionately valuable compared to the amount they need to borrow, for example to purchase new season seeds. Financial institutions are reluctant to lend to the agricultural sector because of the real and perceived high risk and high transaction costs associated with a hugely dispersed client base with few assets and great exposure to unpredictable weather. Weak land rights exacerbate the problem. Women farmers are particularly disadvantaged by their lack of provable/recognised and secure rights.  Other financial services such as insurance or savings tools also tend not to be available to poor farmers who typically do not own bank accounts or the means to acquire one, and who may lack financial literacy.  This reduces farmers’ capacity to invest in productivity- enhancing assets and increases their exposure to the vagaries of the spot market and the weather, so contributing to greater vulnerability.

79. Where credit is available, it is often unaffordable due to very high interest rates, and repayment terms can be incompatible with farmers’ needs – many farm investments (such as planting nitrogen-fixing trees) take several years to start producing a return, but few loan products would allow repayment over such an extended period. Farmers are therefore forced to rely on small savings, where they exist, or informal sources of credit with the associated risk of exploitation; the only other option is to operate on a cash-only basis which drastically reduces their entrepreneurial capacity.

80. Agriculture receives only a small share of total credit - in Africa, only about 10% of the total portfolio of commercial banks goes to agriculture, including agro-industries (World Bank 2009 in GIZ et al 2012). A recent report by Dalberg estimated the global demand for smallholder finance at US$450 billion, most of which is currently still unmet (Dalberg 2012). Loans are rarely extended to smallholders, and especially to women farmers: the share of female smallholders who can access credit is 5 – 10 percentage points lower than for men (World Bank 2007 in GIZ et al 2012). In addition, financial infrastructure serving the agricultural market segment is generally weak (this includes credit bureaus, payment 
systems and collateral registries).  Agriculture finance is often overregulated and inflexible because legal and regulatory frameworks do not take adequate consideration of the specificity of the sector (GIZ et al 2012). 

81. Governments can begin to address this problem by simplifying regulation dealing with finance provision for smallholder farmers, whose needs should be identified through consultation that specifically includes women farmers. The state can also create or support institutions which provide affordable and flexible financial products that are well-suited to the needs of smallholder farmers. Many state-owned agricultural development banks were loss-making with poor records on loan repayment and reaching their target clients; they were also subject to political manipulation and poor governance.  As a result, many were closed, particularly in Africa.  However, research by GTZ (now GIZ) suggests that, given the right reforms, agricultural development banks can play a valuable role in promoting access to finance for smallholder farmers.  The authors cite the example of Uganda’s (now fully commercial) Centenary Rural Development Bank as “an African flagship of reform” that combines sustainability with outreach to the rural poor and demonstrates the feasibility of agricultural lending (GTZ 2005).

82. One area that has witnessed a lot of innovation in recent years is private sector-driven agricultural value chain finance.  Whilst not a new phenomenon in itself, the range of value chain finance models is rapidly expanding (for an overview and examples of success stories, see Miller and Jones 2010; Vermeulen and Cotula 2010). Examples include various forms of contract farming (discussed in more detail in the next section) and outgrower schemes where the agro-producer serves as the front for financial institutions that provide smallholders with loans. Miller and Jones (2010) point out that finance is only one of a range of services that are required if the goal is the integration of smallholder farmers. Other elements of the value chain ‘ecosystem’ include: business and technical training, access to inputs, group organising, building negotiation skills, dispute resolution and collective bargaining skills, market information and access, and infrastructure support from warehouses to transportation and communication.

83. Governments should offer incentives to encourage the development of more inclusive agricultural value chains that specifically include smallholders and facilitate their access to finance; donors can support this process including through offering co-investments or risk-sharing. Governments and donor agencies do not need to be fully versed in all value chain finance instruments, but it is important for them to understand the benefits and risks of instruments on the various participants within the value chain, and to ensure that there is adequate regulation in place to permit and govern their application (Rural Finance 2011). There is also a need to protect the interests of smallholders in value chain contract negotiations, in recognition of their weak bargaining position.  One way of doing this would be to support the creation of representative and properly-governed farmer groups who can negotiate contract terms on their behalf, and to facilitate capacity-building in such organisations. (Cooperatives and farmer groups are dealt with in Pillar 5).

84. Many of these value chains are highly commercialised, and the scope for participation by smaller producers tends to be limited unless they are already organised into efficient groups. The Dalberg report suggests that agricultural value chains are unlikely to reach more than 10% of the smallholder population; for the remainder of farmers, financing will have to be provided through alternate points of aggregation in the value chain (such as warehouses or input suppliers). For farmers that are in very loose and dispersed value chains, the report suggests a need for piloting direct to farmer financing models, such as agriculture microfinance (Dalberg 2012).  Governments can put in place incentives to encourage private sector providers of financial services to develop products that are well suited to the needs of this group.

85. Governments could also cooperate with donors and other funders in the creation of loan guarantee funds that target smallholders specifically. In one such example, the Alliance for a Green Revolution in Africa’s (AGRA) Innovative Financing Initiative has unlocked US$160 million in affordable financing for smallholder-based agriculture since 2009. AGRA works with national partners to establish loan guarantee funds with funding from banks. With a ‘smart subsidies’ approach, guarantees that are put up by AGRA and their partners can leverage up to ten times their amount in low-interest loans. Smallholders benefit from lower interest rates for loans backed by these guarantee funds.  In Kenya, AGRA recently announced the scaling-up of an initiative where an original risk-sharing facility of US$5 million, provided to Equity Bank in partnership with IFAD and the Government of Kenya, helped leverage a total of US$50 million of financing which has already benefitted over 49,000 smallholder farmers in the form of direct lending for farm inputs (AGRA 2012).

86. Another effective way to channel credit to smallholder farmers is the warehouse receipt system, which allows the use of stocks as collateral for credit. Warehouse Receipt System laws in countries like Uganda and Tanzania allow the private sector to own and manage warehouses under a legal framework. The arrangement solves the problems of the lack of local and district storage facilities whilst addressing the difficulty of obtaining credit. There is wide agreement on the advantages of the warehouse receipt system and it is often recommended to policymakers (for example, the World Bank’s proposes including this in their proposed Doing Business in Agriculture indicators); but special measures are needed if smaller producers are to benefit from these systems.  Acting alone, most small producers would not be in a position to meet the minimum volume requirements typical of most warehouse receipt systems (e.g. 10 tonnes of grain); but cooperatives or other farmer groupings can be well-placed to take advantage of such schemes. Hence support for farmers groups would be a necessary component of policies to promote the use of warehouse receipts by smallholder farmers.

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