From Soil to Stability: The Future of Smallholder Farming in East Africa
Agriculture in East Africa is more than an economic activity – it is a way of life. Contributing up to 40% of the region's GDP and employing over 80% of its population, it remains the primary livelihood for millions. Agriculture has not only ensured food security for local communities but also driven export revenues and supported agro-based industries. At the heart of this agricultural system are smallholder farmers, cultivating plots typically smaller than 10 hectares, yet producing up to 80% of the continent’s food. Despite their centrality to food systems and rural development, smallholders continue to face entrenched financial exclusion. Addressing this exclusion is not just a matter of social justice, but a strategic imperative for food security, economic stability, and climate resilience.
The Financing Gap
Smallholder agriculture faces a $170 billion global financing gap, with the shortfall most severe in Africa, Latin America, and Asia – regions where small-scale farmers are essential to food security. Yet, these farmers remain largely excluded from formal finance due to perceived high risk, lack of collateral, and institutional barriers within lending systems. Lenders often view agriculture as volatile – susceptible to climate shocks, pests, and price swings. Farmers' limited documentation, land titles or credit histories further complicates loan approvals. Many financial institutions also lack agriculture-specific products, trained staff, or rural infrastructure, making smallholder lending costly and unattractive.
However, context-sensitive approaches show promise. In Kenya, lenders like the Kenya Women Microfinance Bank offer seasonal repayment plans and group-based loans, achieving repayment rates above 90%. By contrast, rigid, one-size-fits-all models in parts of Uganda and Tanzania have led to defaults, borrower distress, and a loss of trust in microfinancing. Bridging the financing gap requires inclusive financial models that recognise the unique needs of smallholder farmers
Barriers to Financing
Smallholder farmers in East Africa face persistent barriers that limit their ability to sustain and grow their agricultural enterprises. One of the most pressing is the high cost of agricultural inputs - including quality seeds, fertilisers, pesticides, and tools – essential for boosting yields but often unaffordable for farmers operating on tight margins. With limited access to formal credit, many rely on subsistence-level farming, unable to invest in the improvements needed for consistent productivity. These financial constraints are exacerbated by climate-related risks. Increasingly erratic weather patterns, prolonged droughts, floods, and crop diseases regularly wipe out harvests. According to the Intergovernmental Panel on Climate Change IPCC 2022 report, agricultural yields in Sub-Saharan Africa could decline by up to 20% by 2050, a projection that threatens both livelihoods and regional food security.
Market instability adds further pressure. With fluctuating prices and weak bargaining power, smallholders often face uncertain returns, making lenders even more cautious. At the same time, geographic isolation - including poor roads and lack of nearby bank branches – makes it difficult and costly for farmers in remote areas to access financial services. As a result, many turn to informal lenders, who often charge exploitative interest rates and offer little borrower protection. Together, these challenges reinforce a cycle of financial exclusion, preventing smallholders from adopting modern technologies, managing risk, or scaling their operations.
Microfinance Institutions
Microfinance Institutions (MFIs) have played a pivotal role in extending credit to smallholder farmers in rural East Africa, often filling the gap left by traditional banks. Early enthusiasm for MFIs stemmed from their potential to empower underserved populations and improve agricultural productivity by financing inputs and technologies. In some cases, this promise has materialised: group-lending models in Kenya and Ethiopia, for instance, have achieved repayment rates above 90%, and helped smallholders access resources to increase yields and incomes.
However, the model has significant limitations. Many MFIs offer rigid loan products with high interest rates and repayment schedules that ignore the seasonality of agriculture. This mismatch often results in loan defaults and growing debt burdens for farmers who cannot repay during lean periods. Rather than fostering resilience, such practices risk exacerbating poverty. There has also been growing mistrust in MFIs, especially in Tanzania and Uganda, where borrowers have accused lenders of exploitative practices and exorbitant interest rates – as high as 30%.
The profit-driven motives of some MFIs have led to prioritising portfolio growth over borrower well-being. A key concern is over-indebtedness. Without robust credit assessment mechanisms, many borrowers take multiple loans from different providers, often beyond their repayment capacity. Some MFIs, in pursuit of profit, neglect due diligence, issuing loans to financially vulnerable clients and contributing to systemic debt traps. In extreme cases, debt recovery methods have involved public shaming, damaging the social fabric of rural communities.
MFIs have also been criticised for targeting financially illiterate populations, who may not fully grasp the loan terms. This undermines the core mission of microfinance as a tool for empowerment and financial inclusion. There is growing consensus that to remain relevant and ethical, MFIs must offer more tailored, flexible, and affordable products that align with farmers' cash flow cycles and financial realities. In Uganda, for example, interest rate caps introduced in 2024, 33.6% per annum, aimed to protect borrowers but inadvertently shrank formal lending to high-risk rural populations. As formal lenders withdrew, informal lenders and loan sharks filled the vacuum, charging exorbitant rates and operating outside any regulatory framework. While these lenders offer fast and accessible funds, they often trap borrowers in cycles of dependency, fear, and financial instability.
Solutions
Blended finance – combining public and private capital – can effectively de-risk agricultural lending and incentivise financial institutions to lend to smallholder farmers often perceived as high-risk. Public sector contributions in the form of guarantees, subsidies, or insurance reduce financial exposure for private lenders, encouraging their participation and expanding access to credit.
Donor-backed mechanisms are central to this approach. The Global Agriculture and Food Security Program, for instance, has a $2.5 billion portfolio spanning 300 projects and has reached over 20 million people. Its loan guarantees have helped unlock private credit for smallholders, boosting productivity. Similarly, the World Bank’s Global Index Insurance Facility supports index-based insurance schemes that provide payouts during climate-related crop failures. Alliance for a Green Revolution in Africa (AGRA’s) risk-sharing programs also enable local banks to offer lower-interest loans by covering part of the risk. These efforts collectively improve smallholder access to finance and support long-term resilience.
Digital Financial Services
Mobile banking, e-wallets, and digital credit scoring have transformed financial access for smallholder farmers in East Africa. These technologies account for roughly 75% of the total increase in agricultural income by reducing costs and improving access, especially in remote areas. Platforms like M-Pesa in Kenya, launched by Safaricom, let users send, receive, and store money via mobile phones—removing the need for bank branches or long travel. In Tanzania, services like Tigo Pesa and Airtel Money offer similar benefits, enabling farmers to buy inputs, receive payments, and access microloans through fintech partnerships. Digital lenders such as Branch use phone data and SMS behaviour to assess creditworthiness, opening access to finance for thousands previously excluded from formal systems.
Farmer Training and Financial Literacy
Improving financial literacy among smallholder farmers is essential to ensure that access to credit translates into long-term benefits. Many rural farmers lack the skills needed for budgeting, saving, and loan management, increasing the risk of debt cycles and poor financial decisions. Without targeted training, even well-designed microfinance programs can fall short. Delivering practical, culturally relevant financial education – through farmer cooperatives, mobile platforms, or local extension services – can significantly improve outcomes.
In Kenya, digital platforms like WeFarm and Safaricom’s DigiFarm offer farmers bundled services via mobile phones, including access to quality inputs, credit, insurance, and agronomic advice, all tailored to local languages and needs. In Uganda, organisations like TRIAS East Africa train farmer groups in cooperative governance, financial planning, and market navigation, using participatory methods such as peer learning and hands-on demonstrations. These efforts help farmers shift from subsistence to agribusiness mindsets.
To further boost financial resilience and bargaining power, strengthening community-led cooperatives is crucial. Cooperatives allow farmers to pool resources, access bulk discounts, and qualify for group loans. They also improve farmers' negotiating positions with buyers, suppliers, and banks. For example, Solidaridad supports over 1,000 cooperatives across East and Central Africa, linking them with financial institutions and providing agrobusiness training. Beyond economic advantages, cooperatives foster shared accountability and long-term planning – key to moving smallholder farming from survival to sustainability.
Conclusion
Smallholder farmers in East Africa hold the key to food security, climate resilience, and inclusive growth. However, their potential remains constrained by outdated financial systems and poorly designed lending models. Among the most impactful solutions – blended finance, cooperatives, digital platforms, and training programs – each offers unique strengths: blended finance unlocks capital at scale, cooperatives boost collective bargaining, digital platforms improve market access, and training enhances productivity. While no single approach is a silver bullet, their effectiveness often hinges on local context, with blended finance and digital tools gaining traction in Kenya, while cooperative models thrive in Uganda. What unites them is a bottom-up approach that builds power and resilience. With the right financing tools and support, smallholders can move from surviving to thriving, and agriculture can evolve from a poverty trap to a pathway for prosperity. It is time to rethink the rules of rural finance – and place smallholders at the centre of East Africa’s development future.
