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

This paper examines the challenge of providing financial services that support the multiple goals of rural households, such as general household needs and those linked to agricultural activities. It proposes a segmentation framework for smallholders in low- and middle-income countries to more precisely characterize their demand for financial services related to agricultural activities. These three segments, noncommercial smallholders, commercial smallholders in loose value chains, and commercial smallholders in tight value chains, are differentiated by what they grow, how they engage with markets as buyers and sellers, and how those markets are organized.

The paper outlines the demand for and supply of financial services within each segment. It concludes with some initial ideas on opportunities to better meet farmers financial needs such as:

• Most farming families need a portfolio of general finance all the time, and specific agricultural finance only when they engage in higher-value crops;
• They need loans that are tailored to the agricultural cycle if they are growing staple crops for sale into loosely organized value chains;
• Their need for specialized financial tools increases as they start producing more higher-value crops for sale through tight value chains;
• Such financial tools are embedded in the value chain itself.