NOTES
AgriculTurE & rurAl DEvElOpmENT
45568
Financial Services for Developing Small-Scale
irrigation in Sub-Saharan Africa iSSuE 41
SEpTEmBEr
By JOSEF grimm AND mArEN richTEr 2008
Food insecurity and income poverty are rampant in Sub- less than 10 percent of the population currently enjoys
Saharan Africa. Thirty-one percent of children under the access to financial services and few financial prod-
age of five are malnourished and some 72 percent of ucts are available to finance small-scale irrigation.
the population lives on less than US$2 day. Forty-one Broadening and deepening the variety of private sector
percent lives on less than US$1 day.1 The impoverished financial services available to finance small irrigation
and hungry are concentrated disproportionately in infrastructure carries great potential to capitalize on the
rural areas and rely mainly on the consumption and promise of the region's 700,000 uncultivated hectares.
sale of agricultural produce for their food and income.
Africa has experienced increasing dependency on food Interventions that employ financial services to support
imports that its countries cannot afford. the expansion of small-scale irrigation must:
� make financial institutions aware of the opportunities
Yet an estimated 700,000 hectares of arable land and market mechanisms that exist for serving small
in Africa remains uncultivated. It is land that could producers in their acquisition and use of small-scale
become productive through small-scale irrigation using irrigation;
basic technology to draw on small-water resources, � provide those institutions with information from base-
such as tube wells, and dambos. The technologies can line data and research, including market research;
be applied to cultivate smallholder plots of up to five � help them develop customer-friendly procedures and
hectares. Employing them would enable up to 4 million effective marketing;
low-income households to intensify agricultural produc- � make smallholder farmers aware of financial services
tion and increase productivity. and help them to overcome financial illiteracy and
mistrust of financial institutions;
Access to financial services can enable smallholders � advance policies that promote competition and the
to invest in irrigation technology. In Africa, however, financial viability of service provision;
� broaden the range of financial products available for
small-scale irrigation;
� deepen the outreach and coverage of financial insti-
tutions to farmers who irrigate or who want to;
� target grant funding to the extreme poor and explic-
itly separate it from lending.
Establishing enabling conditions in these areas should
yield a number of benefits. Raising incomes by intensify-
ing and diversifying farm production will enable farmers
to expand into the production of higher-value crops.
Enabling farmers to produce high-value crops with
diverse growing seasons will make cash flow between
seasons more even and reduce credit risks. Making
farming less vulnerable to drought will reduce agricul-
tural production risk, reduce nutritional vulnerability,
and increase nutrition and food security.
ThE WOrlD BANK
TArgET ArEAS AND into by individual farmers. Promising financial instru-
pOTENTiAl cliENT grOupS ments include medium-term loans, savings and current
Different financial services are appropriate in differ- accounts, and short-term loans to pay for repairs.
ent geographic situations and among different client
Output-based aid (OBA) is a model worth considering
groups. Distinguishing between high-, medium-, and
in some low-potential areas. At the outset, a com-
low-potential areas is essential.
munity contributes to an investment in infrastructure
Smallholder farming households and community irri- for small-scale irrigation, financing the remaining costs
gation schemes in higher potential rural areas are the through a loan. It also commits to certain outputs,
principal client groups with whom financial institutions such as increased coverage of lower income farmers in
may expand lending and related services. These areas remote areas of the community. When these outputs are
are where financial services are most likely to succeed achieved, the remaining one-half of the loan is paid off
in helping farmers to acquire small-scale irrigation through a grant. OBA is a promising approach which has
infrastructure. Farmers here typically produce cash seen success in a number of instances, yet it remains to
crops, hold title to their land, and have access to credit be tested in different contexts and the up-front capital
as members of marketing cooperatives. The areas are that must be mobilized may prove challenging for many
densely populated, with good transport and commu- local communities.
nications infrastructure, and typically situated within a
reasonable distance from a major consumer market. ADDrESSiNg cONSTrAiNTS
TO ESTABliSh ENABliNg
When these conditions are lacking in significant mea- cONDiTiONS
sure, financial service markets are constrained in serving
individuals and communities who might benefit from A variety of constraints limit the use of financial services
small-scale irrigation. Medium potential areas are often to support small-scale irrigation in Africa. Interventions
promising settings for the development of irrigation that effectively address these constraints must promote
infrastructure. However, for that promise to be fulfilled, the creation of enabling conditions in the finance, water,
a favorable market environment must come into being. and agriculture sectors. With these conditions in place,
rural financial institutions will find new incentives to
In low-potential areas financial services, markets, and develop financial instruments designed for small-scale
basic infrastructure are generally lacking and persistent irrigation by smallholders. Improved credit markets can
credit market failures coexist with extreme poverty. Water enable households and communities to bring small-scale
supply is insufficient and undependable. Subsistence irrigation to bear on their own poverty.
farmers living in these areas make up a large propor-
tion of the rural poor living on less than a dollar a day. The conditions that enable the provision of financial
Even here, however, there is simple, low-cost irrigation services for smaller-scale investments in irrigation are
equipment that could enable them to increase their own lacking throughout much of Africa. Transport and com-
food security and possibly move beyond subsistence munications infrastructure are absent or underdevel-
farming. These farmers will generally require grant fund- oped in many African countries. Macroeconomic policies
ing, at least until they can generate sufficient income to and legal frameworks, including courts, land and prop-
repay loans and "graduate" to more market-oriented erty registries, contract enforcement, and legal arrange-
financing. Transparent, carefully targeted and effectively ments to facilitate leasing, are often not in place. As a
guarded "ring-fenced" grant funding can be used to result, the incentives for financial institutions to support
reach those who lack both income and collateral. irrigation and for farmers to invest in it are lacking.
In low-potential areas where high installation costs make Most African countries have shallow financial systems
irrigation technologies for individual use unfeasible, cap- that provide limited access to services, especially for
ital intensive irrigation schemes may be the only viable the poor. Increasing the variety of financial products
alternative. Community irrigation schemes account for and services offered and extending their outreach to
most government-supported irrigation development in a wider array of rural clients are important priorities
Africa and are instrumental in channeling assistance in many of these countries. Improving the quality
to impoverished communities in lower potential areas. and client orientation of those services and efficiently
The water user associations that manage the schemes mobilizing deposits is also a priority in appealing to and
invest in relatively large infrastructure that is tapped stimulating demand among commercially active farmers,
2
entrepreneurs, and other rural clients--including those intermediaries while learning to manage the risks associ-
outside the traditional clientele of most rural financial ated with agricultural production.
institutions.
Despite the ongoing international debate about indi-
Commodity-based credit providers, such as exporters, vidual versus group lending methodologies, it is clear
input suppliers, and marketing cooperatives, are among that farmers engaged in small-scale irrigation need both.
the financial institutions suited to support small-scale For low-income farmers just starting with these irrigation
irrigation. However these credit providers offer a very systems, a group scheme is most often an appropriate
limited range of products, and financing through banks method because loan amounts are small and farmers may
and microfinance institutions is generally preferred. not have individual collateral. (Group lending also reduces
Savings and credit cooperatives may be well placed to the transaction costs of micro-lending and provides a
do so as well, although many lend almost exclusively guarantee mechanism.) Individual lending on the other
to clients with long savings histories, and loan terms hand is generally more appropriate than group lending
seldom exceed 12 months. Few commercial banks cur- for more farmers with more experience using small-
rently appear interested in engaging in the market for scale irrigation, and micro-entrepreneurs with growing
small-scale irrigation. businesses who are investing in individual medium-cost
irrigation systems.
The types of financial products that can be used in sup-
porting small-scale irrigation include short-term working
capital loans, short- and medium-term investment loans,
micro-leasing, and savings. Lenders who are investing in
small-scale irrigation may also be interested in insurance
services and financial services that combine lending with
insurance may reduce transaction costs as well. These
are fairly common products that are familiar to most
rural finance institutions, suggesting little need for any
extensive capacity building or skills development.
Financial institutions in Africa tend to have bad repu-
tations among low-income clients. Improving their
image will require greater transparency in how interest
rates and fees are determined and timely processing
of transactions and service requests. Easy-to-under-
stand customer-friendly procedures and a wider range
of different products with flexible repayment modes
and collateral requirements will enable rural financial
institutions to reach a broader clientele and to reassure Wholesale lending allows financial institutions to pro-
low-income customers. Opening local branches and vide indirect lending for small-scale irrigation through
extending local delivery mechanisms will make services community-based financial intermediaries, suppliers of
more readily accessible. inputs and equipment, processors, marketing coopera-
tives and others. Community-based financial intermedi-
lESSONS aries can use wholesale loans to on-lend to their clients.
Commercial operators can use it to invest in new activities
Irrigation should not be treated as an isolated technical in the value chain.
issue, but should be firmly anchored in water and agricul-
ture policy and in integrated rural development plans. The combination of financing and insurance can reduce
production risk. Well-designed insurance products can
For farmers who are just beginning to use small-scale irri- substitute for traditional collateral. Leasing is often a
gation and who have never before dealt with a financial good alternative to lending for rural finance institutions
institution, graduation is a useful way to build manage- and a good alternative to borrowing for farmers. For
ment capabilities. Graduation enables farmers to acquire farmers it is a way to gain access to equipment for small-
lower-cost irrigation systems and gradually introduce scale irrigation and having the equipment itself serve
larger units, establishing a track record with financial as collateral. For finance institutions micro-leasing may
3
create opportunities to link to equipment suppliers and sources that are required to support the development of
to buyers of agricultural produce. Equipment suppliers small-scale irrigation. Refinancing facilities that compensate
are interested in new marketing channels in which to for this mismatch and that buffer liquidity shortages will be
promote their merchandise. The buyers see investment in an important focus of financial assistance in the region.
productive capital like small-scale irrigation infrastructure
as a way to make their supply of produce more reliable. Financial assistance is also likely to involve providing prelim-
The savings in overhead costs achieved through these inary support to rural finance institutions that extend their
relationships may offset the high transaction costs of outreach to lower-potential areas. Both financial institu-
administering and monitoring large numbers of small tions and non-financial actors such as equipment suppliers
value contracts. Small-scale irrigation can also entail seri- will require support in providing end clients with term lend-
ous implications for the environment, and these must ing and leasing arrangements. Second-tier institutions that
always be prudently assessed. offer micro-level refinancing will sometimes need support.
Local equipment manufacturing facilities will often require
Coordinating assistanCe start-up financing. Large-scale irrigation infrastructure and
additional storage capacity will likely require loan financing
Technical and financial support by international develop-
in order to capitalize on local hydrology.
ment agencies needs to be carefully coordinated with
national plans and according to national priorities. The
support by different agencies and organizations itself ConClusion
needs to be coordinated and harmonized in the spirit of Small-scale irrigation can increase agricultural productivity
the Paris Declaration. and production, thus contributing to economic growth in
rural areas and increased well-being among small holder
Technical support is likely to involve policy advice, supervi-
farmers. Its potential to increase and stabilize food supply
sion to ensure financial soundness and security of savings,
and helping rural financial intermediaries expanding the is especially important in light of the ongoing food crisis,
variety of products available to support small-scale irriga- and especially in Africa. Expanding the use of small-scale
tion. Supporting research to develop these products will irrigation requires farmers to have access to financial
often be a prerequisite to expanding outreach of services. services. The many constraints and obstacles that rural
Because most of Africa's major river catchments extend financial institutions in Africa confront must be purpose-
over a number of countries, facilitating cooperation in fully navigated if financial services are to fulfill this role.
water resources management across borders is a priority Effectively tailoring financial services and products to sup-
for assistance in the region. port irrigation in different settings and among different
client groups will be essential to success. Carefully target-
There is a pronounced mismatch between the short-term ing grant funding to the very poorest subsistence farmers
nature of deposits and other funding sources available and clearly separating it from lending will be likewise be
to rural finance institutions in Africa and the longer term critical to the sustainability of these financial services.
1 2007: World Bank Group (calculated online at http://iresearch.worldbank.org/PovcalNet/jsp/index.jsp).
The Note was prepared by Gunnar Larson, Consultant with the Agriculture and Rural Development Department, based on a position paper
written by Alison Lobb and published by the Deutsche Gesellschaft f�r Technische Zusammenarbeit (GTZ). The position paper reports on
the results of a series of studies undertaken by Josef Grimm and Maren Richter, commissioned by GTZ on behalf of the World Bank.
tHe World BanK 1818 H Street. NW Washington, DC 20433 www.worldbank.org/rural