Edward Ngololo, a tea grower in the Mulanje District of Malawi, farmed his one-acre plot for years, earning barely enough to provide for his wife, two children, and aging mother. With no resources for land improvements, yields were low, generating about $28 per month for six months of the year.
When the USAID Malawi Deepening the Microfinance Sector project started in 2004, this was a typical scenario among the nation’s tea growers. The project focused on developing financial services for smallholders like Edward who couldn’t access credit to fund productivity-boosting improvements.
Agriculture, especially for the smallholder farmer, has always been considered high risk, despite ongoing successful lending relationships between farmers and buyers and the potential for high incomes and increased employment. The USAID project helped farmers like Edward by working with banks and microfinance institutions to help them target new clients in underserved sectors, particularly farmers of plantation crops such as coffee, tea, and cotton.
At its inception, the project held value chain finance stakeholders workshops with commercial bankers, microfinance institutions, farmers, input suppliers, processors and other service and product providers to conduct a market analysis using a value chain approach. Participants developed value chain maps that identified actors and links, described the type of financing needed at each level, and proposed solutions to fill gaps.
The project followed the workshops with intensive value chain finance studies to assess the existing credit demand and supply. The findings for the tea sector were captured in a 2006 report that identified a significant unmet demand for fertilizer and infilling by the majority of smallholder tea growers. The need for infilling, or renovating aging fields by filling gaps with new tea plants, was reported to be up to 50 percent of total acreage.
To encourage local commercial banks to venture into agricultural lending, the project worked with USAID to design and implement a $13 million multi-lender Development Credit Authority loan portfolio guarantee. The Development Credit Authority is a tool USAID uses to stimulate lending through the use of guarantees that cover up to 50 percent of defaults on loans made by private financial institutions. 26 loans averaging $25,000 and worth a total of $1,440,950 have been issued by partner banks to small to medium agricultural enterprises.
One microfinance institutions that took advantage of project assistance and the loan guarantee was CUMO Microfinance Limited, which designed a special loan product in 2008 for smallholder tea growers affiliated with Eastern Produce Limited, a large tea broker. Under the arrangement, CUMO extended cash loans to smallholder tea growers. At harvest, Eastern Produce Limited purchased green leaf from the farmers and issued a credit through CUMO. The credit went toward the loan payment, and any remaining funds were deposited in the farmer’s personal savings account at Malawi Savings Bank. The Small Holder Tea Growers’ Association assisted to confirm farmer identification.
In the initial pilot program, 100 smallholder tea growers received loans ranging from $15 to $212 each, and the project achieved a 100 percent repayment rate. With their loans, the farmers financed clearing, infilling, and pruning of their fields, and purchased farm tools, chemicals, and fertilizers from suppliers they chose. Some diversified their income-generating activities to help them in the low tea harvest months of July to November. CUMO reached 1,922 of the more than 10,000 smallholder farmers in Mulanje and Thyolo districts.
Through the CUMO program, Edward obtained an $18 loan in 2008 to hire labor to clear his fields of weeds and prune his tea bushes before the rainy season began. The result was a strong start to the growing season, and Edward doubled his normal yield. He used the extra income to buy six goats and to expand the family’s sources of income by helping his wife start a doughnut business.
“The loan has given my family and me a lot of relief. I am now able to send my child to a paying school, and care for my family as well as my goats,” he reports. Edward plans to request a larger loan this year to help him fill the empty spaces on his plot with new tea seedlings.
As a result of project efforts, several local commercial banks are now aggressively pursuing loan clients from the agricultural sector. Pilot projects by banks and microfinance institutions to extend the reach of financial services into rural areas is occurring at an increasing pace.