Bridging the smallholder finance gap: Collaborative research with WeGro in Bangladesh

Farmers in many low- and middle-income countries face a major financial gap, with available resources often insufficient to enable them to increase production—and putting many higher-value products with the greatest potential to increase incomes out of reach. Yet banks and other formal financial institutions shy away from lending to smallholder farmers.

There are several reasons for this predicament. Farms tend to be small, geographically scattered enterprises, implying the costs of doing business with them are higher than for urban businesses of similar size, and harder to monitor over time due to the spatial dispersion. In addition, due to their urban orientation, bank staff also tend to be less knowledgeable about both potential profits and risks from agricultural activities, while farmers lack access to collateral, making obtaining a loan even more challenging.

Governments and development agencies have tried to develop innovative solutions to this challenge. One approach involves engaging with private sector entities to design creative solutions to bridge the finance gap—finding ways to loan to farmers that lenders also find advantageous. To succeed, such solutions should benefit borrowers in the short or medium term, and should be profitable for the lender. If clear evidence shows both conditions are met, a good case can be made for scaling up such programs.

IFPRI and the CGIAR Research Initiative on Rethinking Food Markets are studying one such solution—partnering with WeGro, a social enterprise in Bangladesh, to conduct a rigorous evaluation of its livestock fattening financing scheme. The scheme’s goal is to help farmers overcome credit constraints in purchasing cattle and thus boost their incomes, while allowing WeGro to make enough money to continue to operate and expand the loan offerings to additional farmers.

Financing livestock fattening

Here’s how the livestock fattening scheme works: WeGro first screens farmers for eligibility (barn ownership, etc.) for a livestock loan. A WeGro staff member then accompanies an eligible farmer to a market to pick out a cow to fatten, and WeGro pays for the cow. The farmer raises the cow and pays the associated costs. Four to six months later, the farmer and a WeGro representative take the fattened cow to the market and sell it. The farmer then pays back WeGro. The two split the difference between the purchase and sale price, with the farmer keeping two thirds. This profit split shares risk between WeGro and the farmer, akin to a sharecropping scheme.

The first element of the IFPRI-CGIAR evaluation is a randomized controlled trial. After the screening process takes place, participating villages are randomized into three groups. In the first group, eligible farmers use the WeGro scheme. In the second group, eligible farmers are offered a standard (microfinance institution-type) loan for the same purpose. The third group of villages is reserved as a control group, but after results are determined in the first two groups, eligible farmers in those villages will also be offered the WeGro scheme. The second group is one third the size of the first and third groups, as the first group is the main focus of study.

Women’s agency

A second component of the study examines how such financing innovations can also increase women’s agency. Livestock fattening in Bangladesh is primarily a task done by women; our baseline data indicate that women spend an average of three hours per day tending to livestock. However, it is men who overwhelmingly engage in the buying and selling and are thus more likely to control income related to cattle. As part of the study, those offered cows through either modality will be randomly assigned to have the offer made to the wife or the husband in the household. The designated household member is the person who will sign paperwork and receive payments into a bank account in their name.

Outcomes

The goal of the evaluation is to understand three families of outcomes. First, we study outcomes related to WeGro’s business model. It is important to understand take-up rates, and in particular whether they differ between the WeGro model and a more standard loan model. The WeGro model distributes risk more evenly between the financier (WeGro) and the farmer, but the farmer can obtain higher returns by taking a loan under the standard model. It is also important to know whether any presence of financing models leads to more livestock fattening or not, by comparing the share of eligible farmers fattening cattle in the two treatment groups versus the control group. We will also compare WeGro’s earnings across the two models.

Second, we are interested in the direct effects on household income from raising livestock. To study this, we measured livestock income in the last 12 months in the baseline survey, and we plan to study the same in a survey that will take place after at least one fattening cycle in each village. Downstream from livestock income, we plan to measure impacts of the two loan schemes on overall household income and related measures of well-being. By studying both overall household income and its components, we can understand whether the additional finance for livestock fattening allows households to complement their other activities, or induces them to substitute effort from those other activities. This includes study of labor allocation within the household. Finally, we will study measures of women’s agency and resource control to understand the impacts of directing the income from the livestock fattening to women.

Evaluation benefits

From WeGro’s perspective, the evaluation has three primary potential benefits. First, IFPRI’s evaluation team has substantial experience in data collection and management, and is working with WeGro staff to build robust monitoring tools that can help foster improvements among its field teams. During the evaluation, these monitoring tools are useful for both IFPRI and WeGro, but are being designed so WeGro can continue to use them after the evaluation ends. The efforts to collect baseline data have also helped introduce WeGro’s model to farmers in the study area.

Second, the randomized trial will serve as a rigorous business model validation, ensuring that WeGro's efforts yield positive results. If so, WeGro's case for expanding access to finance will be bolstered, propelling its growth and impact within the agricultural sector. On the other hand, the study will identify any areas for improvement, enabling WeGro to pinpoint and address them.

Third, the collaboration with IFPRI offers the potential for wider exposure of the WeGro business and brand in the context of expanding farmer access to finance. The evaluation will also help demonstrate to WeGro and its partners whether the model is either profitable or potentially profitable for the company. If so, the results can help it make a case for expanded access to finance; if not, then through careful study WeGro can identify areas of potential improvement of its business model.

Kate Ambler and Alan de Brauw are Senior Research Fellows with IFPRI's Markets, Trade, and Institutions (MTI) Unit; Mehrab Bakhtiar is a Research Fellow with IFPRI's Poverty, Gender, and Inclusion Unit; Mohammad Riad Uddin is an MTI Research Analyst.