Segmentation of Smallholder Households: Meeting the Range of Financial Needs in Agricultural Families

There are an estimated 500 million smallholder farmers in low- and middle-income countries. And, despite some improvement in their access to general financial services, relatively little progress has been made in financial services specific to their agricultural activities. This paper from CGAP examines the challenge of providing financial services that support the multiple goals of rural households, including those related to their more universal, general household needs and those linked to their agricultural activities. Following an overview of the policy and business case for attention to smallholders and their agricultural activities, this paper proposes a segmentation framework for the 500 million smallholders in low- and middle-income countries to more precisely characterize their demand for financial services related to agricultural activities. These three segments—(i) noncommercial smallholders, (ii) commercial smallholders in loose value chains, and (iii) commercial smallholders in tight value chains—are differentiated by what they grow, how they engage with markets as buyers and/or sellers, and how those markets are organized. These segments are not meant to be fixed, iron-clad divisions, but rather categories based on common traits that can begin to illuminate the financial
mechanisms that might best fit the given financial goals and cash flows.