SAFIRA focusses on agricultural value chain financing to expand smallholder farmers' access to finance. The goal of SAFIRA is to increase the income of poor smallholder farmer households in eastern Indonesia.
Why we work in this sector
Farmer incomes can be further increased if they have better access to improved assets, technology, inputs and services. These services include financial services. At the farm level, the investments needed are small (i.e. $200-1,000) but do require financing. For lower income farmers, this financing usually comes through the non-formal sector (loans from family and friends, advances from buyers or suppliers, savings and loan associations etc.). For many smallholder farmers, access to formal financial institutions can be difficult because of: (1) the requirement of financial institutions for collateral; (2) products not appropriate for small land plots; (3) requirements of legal land title; (4) little to no rural branches or access points; (5) lack of financial education provision; (6) the limited range of risk mitigation options available, such as insurance schemes; and (7) high transaction costs associated with traditional delivery of large quantities of small loans.
It is these factors that make small-scale farmers very unattractive clients for the formal financial sector. This limited market opportunity for formal financing is the focus of SAFIRA support.
SAFIRA aims to leverage the usually intangible assets that smallholders do have, namely their long-term relationships with their suppliers and buyers, to access small credit for investments. This would work something like this:
In Kupang District in NTT, SAFIRA helped to facilitate, at a strategic level, the extension of a loan amounting to $70,000 from a regional bank for a maize seed producer, who then repackaged this finance into 40 smaller, more appropriate, loans for his contract farmers, with whom he already had a relationship and an off-take agreement with. These smaller loans enabled the farmers to pay for the inputs to produce the seeds that the maize seed producer needed to expand his sales. This loan was repaid within six months and this seed producer has currently applied for a second loan to undertake the same arrangement for the following season.
This form of lending is frequently called ‘value chain financing’ (VCF). When properly constructed, this form of lending is profitable and beneficial for the providers of the financial services (e.g. banks), their customers (e.g. seed producers, processors, buyers), and the farmers. SAFIRA develops and formalise value chain financing with selected banks, other financial service providers and value chain actors (e.g. suppliers and buyers) in eastern Indonesia as one way to scale-up cost effective and sustainable lending to rural smallholder farmers.
SAFIRA seeks to introduce more rural banks and financial service providers to the agricultural sector and develop their products and services as well as their expertise to take advantage of the opportunities that the agricultural sector can provide to them. At the same time, SAFIRA assists value chain actors to:
1) help institutions understand and mitigate the real and perceived risks associated with traditional lending when applied to agriculture;
2) integrate credit into the value chain more efficiently and effectively; and
3) facilitate the growth of businesses through expanded outreach.
This is being done through capacity building and technical support of our partners and the larger VCF support community.
The SAFIRA program works in close collaboration with the other AIP-Rural programs to provide support in access to finance solutions for their interventions.
The target beneficiaries
SAFIRA aims to increase the incomes of 6,000 smallholder farmer households by increasing access to financial services, primarily credit, through internal and external value chain finance for 12,000 farmers and 250 SMEs.