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💸 When you think of the term “financial services” what’s the first thing that comes to mind? It’s probably the image of a stereotypical banker on wall street in a dark-colored suit.

📈 While it’s easy to abstract away the underlying assets that capital markets are providing funding for, we must not forget that the numbers on trading charts & spreadsheets are mostly ultimately going towards things in the real economy, including agriculture!

🌾 In this issue, we’ll be wrapping up our food & agriculture series while transitioning over to our next series: climate finance 💸.

🤔 What’s the deal with agriculture finance?

💡 Let’s first start by defining what exactly the broad term “climate finance” is referring to…

💰 In Asia’s emerging markets specifically, there is a climate finance need of over USD1T annually but such countries are only receiving around USD300B annually at the moment, representing a gap of about USD800B (IMF, 2024).

🚨 Agricultural financing, particularly related to climate mitigation & adaptation, is a component of climate finance. Overall, the total climate finance for food systems as a whole is over 7x lower than is needed (CPI, 2023).🧑🏻‍🌾

🧑🏻‍🌾 Smallholder farmers—defined as farmers who operate on <5 hectares of land— are particularly impacted by these financing gaps given their low levels of income and high vulnerability to climate shocks. Smallholder farmers represent over 95% of the world’s farms and provide up to 80% of the food produced and 40% in developing countries (CPI & IFAD, 2020).

🌏 In Southeast Asia, the demand for smallholder finance in the broader region currently stands at USD 100 billion annually—however, less than one-third of this demand is currently being met (Climate Focus, 2021).

❓ But why is there a financing gap? There’s a number of root causes here:

1. Lack of aggregation / high fragmentation: most smallholder farmers have plots that are less than 2 hectares yet are able to remain productive relative to larger farms, particularly for crops such as rice due to subsidies as well as off-farm income (ACIAR, 2022). This stubbornly high degree of fragmentation makes it difficult for financial services providers to acquire smallholder farmer customers as well as ensure that projects are bankable.

2. Low productivity and returns: Smallholder farmers often lack access to quality inputs and technical knowledge, which limits their ability to optimize yields. Moreover, they tend to have higher exposure to the risks of climate change such as unpredictable weather patterns, droughts, pests, etc. This increases the risk of providing financial services to them as a result (ADB, 2022).

3. Lack of credit history: Across developing countries, only around 10% of rural adults had access to formal savings account (Mastercard Foundation, 2018). This is due to the fact that there tends to be a lower density of bank branches in rural parts; even with the availability of digital banking nowadays, rural populations also tend to have lower internet connectivity.

4. Lack of affordable & tailored financial offerings: when available to farmers, credit products tend to be expensive and have repayment schedules that are misaligned with the inconsistent cashflows of smallholder farmers (Business Times, 2019).

5. Informal land holdings: As we briefly mentioned on our land use issue, the rural parts of developing countries tend to have major problems with unclear land titling, particularly for indigenous communities. Such land title issues make financial services providers less likely to provide credit to farmers because of stringent underwriting processes.

🧐 So, which actors are providing financial services to smallholder farmers?

👇🏽 Well there’s actually quite a range of financial services providers delivering a variety of financial services products.

🏦 In Southeast Asia in particular, state banks tend to play a large role in promoting financial inclusion to smallholder farmers and other rural populations. In Indonesia, Bank Rakyat Indonesia (BRI) is a particularly notable case. Their first financial inclusion initiative was the 1970 creation of a nationwide network of village banking units for channeling funds for farmers to purchase a package of inputs comprising new rice seed, fertilizer, insecticides and cost of living allowance. Fast forward to today and the have 14.5 million borrowers with assets of USD113B (Harvard Kennedy School, 2022).

💰 However, savings gaps across rural Southeast Asian countries tends to vary quite a bit; In part due to the aforementioned BRI case, Indonesia has a relatively low rural savings gap while Cambodia has a gap of 85% and Philippines has a gap of 40%, with high rates of informal savings (ADB, 2022).

⚖️ Southeast Asian governments have prioritized regulations & policies to promote rural financial inclusion. For instance, in Indonesia—building upon the work of BRI—the financial services authority (OJK) launched Laku Pandai, a program that promotes branchless banking through low-cost basic accounts that resulted in $3B in deposits from 1.1 million new rural customers in less than a year (ADB, 2022). In the Philippines, the central bank launched a Rural Bank Strengthening Program in 2022 to bolster the already quite robust network of 472 rural and cooperative banks with a network of more than 3,600 branches spread around the country (WEF, 2023).

📲 FinTech and AgriTech startups also have a role to play. Across the region startups such as Ricult, Crowde, and PasarMikro are building the bridge between smallholder farmers and the future of agriculture finance through digitalizing various financial processes.

👏🏽 However, at the of the day, there needs to be someone to tie all these players into one team that aims for the same goal; which is to gather, enable, and expand initiatives aimed at fostering food systems that are more inclusive, resilient, and sustainable. We’ll learn more about that from our interview later with Grow Asia!

📚 Want to learn more about this topic?

1. “Unlocking Smallholder Finance for Sustainable Agriculture in Southeast Asia” by WWF

2. “Transforming agricultural finance in ASEAN” by CGIAR

3. “Sustainable Financing of Small-Scale Agriculture in South Asia and Southeast Asia” by ADB

4. “Examining the Climate Finance Gap for Small-Scale Agriculture” by Climate Policy Initiative

📢 Shout-out to PasarMIKRO

⛓️ PasarMIKRO is on a mission to connect smallholder producers through digital a platform. They believe it is time for these smallholder producers to be reachable and visible to the stakeholders. Starting with trade and supply chain, they are now collecting and tracking richer data from both our land and sea community.

🌴 They are exploring additional activities from a tree planting to the fish catch monitoring through the platform. PasarMIKRO are more than happy to be your tech partner for your impact program, build a solution together with their building block and create a better information for a better decision.

🗞️ Recent News

🎙️ Interview with Pranav of Grow Asia

💡 Why were you initially inspired to tackle sustainable agriculture?

📚 I studied Development Economics and took a particular interest in Environmental and Behavioral Economics. My Master’s thesis focused on the intersection of the two, and upon graduation, I secured an offer to work with the UK’s Department of Energy and Climate Change. Unfortunately, issues with work permits meant that I wasn’t able to take that opportunity up. 

🖇️ I have spent my career working in communications—first as part of a team that launched a university and then as the Managing Director of Redhill, one of the world’s fastest-growing PR agencies. I’ve had the chance to work with governments, financial institutions, startups, and large corporations; and in 2022 had the opportunity to work with the Singapore government on their inaugural pavilion at COP27. 

✳️ I joined Grow Asia a few months ago because it was the right opportunity at the right time for me. The transition to a sustainable, low-carbon economy in ASEAN requires fundamental shifts across sectors, and especially in farming practices. Agriculture accounts for 30% of the world’s greenhouse gas emissions. Food systems transformation in this region will not happen unless we support the 70 million + agri-SMEs who are at the forefront of this transition. 

⚔️ This is a challenge that receives scarce attention yet is paramount to address if countries across the world are determined to keep to their commitments made at global forums. For me, it provided the best intersection between my professional experience in communications with my personal interest in sustainability and climate.

🛠️ How exactly is Grow Asia solving it?

🚜 Smallholder farmers and micro-SMEs that produce the majority of ASEAN’s food currently lack affordable access to technology and finance. Studies have shown that 45% of financing needs are currently unmet due to barriers to access, eligibility, and market failure. 

🌽 At the same time, less than 9% of impact investing is allocated to food and agriculture. In fact, the amount of climate finance targeted as small agrifood businesses decreased by 44% last year. It currently represents less than one percent of total climate finance. 

📊 Financing models aimed at solving this challenge have been typically fragmented and narrow in scope. They have failed to deliver targeted technical assistance to de-risk businesses, and funders have lacked the convening power to bring investors to the table across multiple countries and value chains. The current system is not designed to put small ticket loans into the hands of small rural businesses that have no collateral, no liquidity, and no equity to offer.

💚 Grow Asia, along with our partners, have identified an opportunity to radically innovate blended finance models to address the risks for investors and close this gap. We have designed a new blended finance mechanism, GrowBeyond, to catalyze US$ 1 billion in climate financing and technical assistance by 2030.  

🍀 GrowBeyond will deliver a closed-loop finance model that brings the right blend of public-private stakeholders - governments, financial institutions, private investors, fintechs/agritechs, philanthropy, and Technical Assistance providers - to deliver financial and market services required by the millions of agri-SMEs to upgrade their businesses by adopting regenerative practices, resulting in an improvement in livelihoods and environmental outcomes. 

😲 What is a misconception or surprising fact about agriculture financing?

🤨 Only 0.3% of international climate finance reaches smallholder farmers, who produce 80% of our region’s food, and invest about 20-40% of their annual income to mitigate climate impacts. 

📱 It’s no surprise then that farmgate adoption of technology in Southeast Asia lags behind other regions. Recent estimates show that Asia requires about US$ 800 billion of additional agricultural investment to meet consumer demand in the next decade, while Southeast Asia alone has a US$205 billion untapped investment opportunity for the adoption of practices that lead to more sustainable food systems in this region.

🎬 What actions can readers take now to support Grow Asia?

☝ Grow Asia is a multi-stakeholder platform established by the World Economic Forum and ASEAN. We do this by brokering commercial and non-profit partnerships between the 690+ global and regional organizations that make up the Grow Asia Network, creating an ecosystem that unites actors from the public, private, civil society, and research communities to accelerate knowledge sharing, collaboration, innovation, and policy change. 

🤝 We welcome partners who want to collaborate to support food systems transformation in Southeast Asia. Please contact me directly or visit our LinkedIn or website to learn more about us. 

🦸🏻 What do you do when you’re not saving the world?

🤎 I love sports - whether football ⚽️ (Manchester United), American football 🏉, cricket 🏏, tennis 🎾, cycling 🚴🏼‍♂️, or F1 🏎️. I enjoy long-distance running 🏃🏾, and am currently training for a triathlon🏅. I have a mild obsession with coffee ☕️, and enjoy cooking 🍛(my specialty is my mom’s biryani) and baking 🧁. I hope to one day run my own cafe 🍽️.

⏭️ Next week, we’ll be discussing the role of venture capital in climate finance, stay tuned!

❓ Did you enjoy this week’s issue? If yes, please do forward to your friends who would enjoy the read as well. Also, feel free to let us know what you thought by giving us feedback at [email protected].

🌊 SEA you next week!

Karina & Massimiliano