Smallholder farmers are the backbone of agriculture – a key sector in Cambodia’s sustainable development. As more and more new technological innovations help improve farms’ efficiency and productivity, the agricultural sector will continue to develop. 

However, most smallholder farmers cannot pay for these technologies out of pocket, so they turn to their local banks for loans. Banks consider agriculture a risky business, so they require loan collateral that is far beyond the reach of smallholder farmers. This leads to farmers’ loan applications being rejected because farmers cannot provide said collateral for loans. When farmers cannot obtain bank loans, they resort to high-interest credit from other sources.

This challenge and the barriers smallholder farmers face when pursuing external financing, brings to light the question, how can we fill the financing gap to integrate smallholder farmers?      

In this blog, Agrosolar shares their solution to  filling the financing gap. 

Why do you offer solar-powered irrigation systems?

Agrosolar believes that renewable energy is one of the solutions to reduce global warming, as climate change is challenging the fact that food production needs to double by 2050 to continue to feed the planet. Across Southeast Asia, millions of smallholder farmers face three main problems: low yields, low profitability, and financial exclusion. The good news is that all of those can be solved with one solution: affordable and sustainable solar irrigation systems. This allows them to save on fuel monthly and irrigate more of their landholding at zero operational cost. We have new customers monthly, showing that smallholder farmers are willing to replace their conventional fuel pumps, especially during times of global crisis [like] fuel shortages and higher fuel prices.

What end-user financing product/model do you offer?

[A couple of different] financing products are offered to our farmers. Our first entry point is to calculate the fuel savings and the payback period based on those savings. Once the payback period is attractive, we will try to sell the product in cash. 

However, [if] the farmer doesn’t have the cash on hand but still can afford to pay it off quickly, then Agrosolar offers a “Pay After Harvest” plan. [T]here is a partial payment at the moment of installation, and the remaining amount is paid after the next harvest, within 4 months. If the farmers still struggle to pay the remaining amount within the next 4 months, we work with local microfinance institutions (MFIs) and non-banking financial institutions (NBFIs) to provide loans or leasing plans for up to 18 months. Depending on the farmer’s future cash flows, these can be paid monthly or per season.

If the farmers still struggle to pay the remaining amount within the next 4 months, we work with local microfinance institutions (MFIs) and non-banking financial institutions (NBFIs) to provide loans or leasing plans for up to 18 months. Depending on the farmer’s future cash flows, these can be paid monthly or per season.

Was there a need to be innovative in designing/implementing your end-user financing model?

The innovation is found in two main aspects of the end-user financing model: (1) [the] structuring [of] payment terms to align with farmers’ seasonal income, and (2) the developing [of] automated underwriting systems to align with the nature of our business and clients. 

The products must be affordable and reliable, so our target customers may purchase the system at reasonable prices. To reduce the risk and cost of financing, we must broaden the financing options by providing internal financing rather than relying on external loans or MFIs, which will undoubtedly assist farmers in purchasing the system at a lower cost and in a shorter period of time. 

[Our customer-focused innovation] doesn’t end there. On a daily basis, the team talks to farmers and sees how to improve our finance offering. The key is to match it to [farmers’] cash flows to guarantee affordability and high repayment rates. The advantage of financing productive use appliances is that there is an increased income, which can be used – and almost guaranteed – to repay the financing [product]. This makes it very attractive to launch these financing plans, even in developing countries.

What sort of complementary value was brought in by the partner to implement the end-user financing model?

Having [our] partner implement the end-user financing model brought us better coverage and capacities over existing market segments by providing longer-term payments to those farmers who need the financing. Sales traction and market penetration have increased through the qualified leads, and [it]is easy to launch new operations with low start-up costs. Also, farmers can take advantage of income savings and invest more in the lands. Getting the sales team up and running in minimum time helps to ensure t[that we start to profit from the partnership and get a head start in boosting sales and marketing. This will effectively reduce the workloads on extensive credit assessment and follow on payment risk. Meanwhile, we can focus on improving after-sale service and product development to meet the market requirement.

Agrosolar provides products and services that enable farmers to double their income and reduce their carbon footprint to zero. Agrosolar is the pioneer in providing affordable, reliable and customizable solar solutions that allow farmers to continue producing food for the growing population. In addition, their last-mile distribution ecosystem tackles climate change and alleviates energy poverty in developing countries in Southeast Asia.