The impact of microfinance on smallholder farming households in Africa: Evidence from Zambia

By Alana Stewart

Analysis in brief: The main objective of this paper is to investigate whether increasing access to microfinance institutions can help smallholder farmers in Africa achieve certain key development priorities. Based on a Zambian case study, the results of this analysis found that increasing access to microcredit helps foster improvements in both income and financial stability among smallholder farming households in Africa. However, the results show no evidence that increased access to microfinance helps to generate livelihood improvements. As such, this paper suggests that microfinance services in Africa could be much more effective in improving livelihoods if they started introducing more flexible programmes that are better suited to local needs.

According to recent estimates approximately 70% of Africans are involved in agriculture, with small-holder farms accounting for nearly 80% of farms and contributing up to 90% of food production in sub-Saharan Africa alone. However, access to agricultural financing remains largely unmet, as is the case in Zambia, where more than 70% of the population is engaged in agriculture without adequate financial support. In Zambia and elsewhere across the continent agricultural financing remains a key priority for achieving key development goals, including poverty reduction and financial stability. In this regard, the following analysis shall assess how increasing access to agricultural finance can aid in the achievement of core development priorities by improving productivity and increasing income for smallholder farmers. By focusing on the role of microcredit in Zambia, it will be demonstrated that despite the risks accompanying ‘bottom-up’ approaches to development, African economies can nonetheless benefit immensely by granting smallholder farmers increased access to basic financial services, if properly implemented.

The Importance of Agriculture in the Zambian Economy
Data Courtesy: Glacier FarmMedia

Current state of smallholder farming and agricultural financing

Zambia remains one of the poorest countries in the world, with 70% of the population depending on the informal sector for their livelihoods. With so few formal jobs available, much of the population has turned to agricultural businesses for profits. Small-scale farming is thus the primary source of rural income. However, profits of this kind are often small, risky, and offer little opportunity for expansion. Consequently, financial service providers often devalue smallholder farmers as commercially viable customers. Thus, with the exception of high-income households, or those who are employed by larger companies or the government, most Zambians lack access to basic banking services (i.e. savings, insurance, and/or credit). This particular challenge, which primarily affects small business owners and smallholder farmers, is consistent across many African economies.

Improving access to financial services has thus been an ongoing challenge in Zambia and elsewhere across Africa. Consequently, a number of microfinance institutions (MFIs) have been established in an effort to enhance the degree of financial inclusion in these countries. However, MFIs in Zambia, much like the rest of the continent, have had difficulty reaching remote locations due to the high expense of service provision outside of urban areas. Microfinance in Zambia, therefore, remains underdeveloped, and MFIs have not yet seen a stabilised growth pattern. This limited progress can, among other things, be attributed to the poor credit culture, the potential for fraud, and the high expense of service provision in a country with poor transport and communication services.

That being said, significant challenges remain in the African microfinance sector. Should regulatory frameworks be put in place to facilitate increased access to basic financial services among smallholder farmers, it would enable small businesses to expand, which in turn can create employment opportunities, reduce inequalities, and contribute to the overall development of the continent.

Microfinance as a tool for development

Like many African countries, Zambia hosts a large farming population. As such, MFIs are seen as an opportunity for increased agricultural productivity and enhanced economic development. This potential was demonstrated in a two-year study which took place in Chipata, Zambia. The research covered 3,139 smallholder farmers from 175 different villages. These villages were randomly assigned to three groups: one which was offered cash loans, one which was offered food loans, and a control group which did not receive any loans. The study found that the overwhelming majority of households (94%), regardless of the type of loan received, were committed to repaying the loan, with interest. In terms of agricultural output, in villages that had access to loans, farming households were able to produce around 8% more on average when compared to households in villages without access. Furthermore, households that had access to loans were far less likely to engage in casual labour. This resulted in more time invested in their own fields and, consequently, a greater increase in daily earnings. Overall, this suggests that increasing access to financial services can help smallholder farmers in Africa allocate labour more efficiently, which in turn can lead to significant improvements in both productivity and economic well-being.

Similar results were discovered within the Peri-Urban Lusaka Small Enterprise Project (PULSE). The PULSE programme was designed to allow low-income self-employed individuals access to credit services in Lusaka, Zambia. Given that most of Africa’s poorest populations are self-employed and lack access to financial services, Zambia included, the programme was implemented to offer small loans (microloans) to these rural populations in an effort to improve productivity and increase income. Once borrowers repaid the first loan in full, they would become eligible for a second credit line. While their study found that there was no significant effect on profit growth upon receipt of a first loan, they did find a significant relationship between profit growth and the receipt of a second loan with monthly profits increasing by 4.5%. Participants of this programme signalled that their ability to access credit also facilitated their ability to carry more stock and diversify into more expensive yet stable economic activities, such as trading imported goods from South Africa. They also reported that due to an increase in income, they were able to transfer roughly one third of their profits into their household budget. This number was significantly higher than those who had not borrowed and highlights that some of the excess income from loans can be reinvested into establishing a foundation for other livelihood improvements among farming households in Africa, including education, health and employment. This is an important step in reducing the likelihood of transgenerational poverty and encouraging financial stability within African nations.

Strict repayment contracts fail to meet the investment needs of smallholder farmers, who have seasonal and irregular income.
Image courtesy: Rod Waddington

In this regard, microfinance has been widely praised for being an innovative tool for fighting against poverty and enhancing economic development across African nations. However, despite its popularity, a growing body of literature still points to the limited impact on people’s livelihoods. This is particularly concerning given that there is substantial evidence indicating that borrower’s returns to capital in small enterprises are generally high, as noted by the studies presented above. The limited effects of microfinancing can, in some cases, be attributed to the rigid structure of microcredit contracts. Microcredit contracts, often characterised by strict repayment obligations, have frequently failed to meet the investment needs of the poorest borrowers, who have seasonal and irregular income. Smallholder farmers in Africa would be a prime example of this type of borrower. If confronted by a lack of rainfall, or inadequate soil in any given season, they could end up selling productive assets or borrowing from informal money lenders at a relatively high interest rate. The repayment successes seen in Zambia, therefore, do not necessarily signal that citizens are doing well, nor do they indicate that they have not struggled in repaying their debts. A recent study which compared rigid weekly repayment schedules with two more flexible alternatives; the first alternative being a longer-term (monthly) repayment schedule, while the other is a flexible plan that accounted for the needs of the borrower. The study found that both of the alternative approaches increased the amount that borrowers could invest in their own businesses by roughly one-third. The findings suggest that although MFIs have been relatively successful in promoting development and alleviating poverty under certain circumstances, the overall efficacy of their services to African populations could be greatly improved by allowing for more programme flexibility.

As such, there is an evident need for MFIs to offer financial services that are better tailored to the needs of African populations without moving away from their core objectives of reducing poverty and promoting economic development. This could mean a variety of things, from working more closely with consumers to better understand their needs, to using technology to lower access costs for rural farming populations. Regardless, the case of Zambia illustrates the enormous potential for the microfinance sector in Africa as a whole. However, in order to properly leverage these resources and increase sustainable economic well‐being, it may be wise to shy away from the “one-size-fits-all” approach and instead implement programs that are more attuned to local needs.


The case of Zambia illustrates how increasing access to financial services can improve productivity, contribute to income growth, and enhance the lives and livelihoods of low-income farming populations in Africa. Increasing access to microcredit helps foster improvements in both income and financial stability among smallholder farming households in Africa, and as such, increasing access to MFIs can be viewed as an important step toward building the foundation for other livelihood improvements, including proper nutrition, increasing access to education and employment, and decreasing the risk of transgenerational poverty. However, although an increase in productivity and profit is apparent in these cases, it remains unclear whether access to microfinance actually translates into real livelihood improvements. Accordingly, there is an increasing need for MFIs to start offering more effective services to ensure that the benefits of microfinance do extend beyond their direct financial outcomes.

Past studies have shown that MFIs tend to be more successful when they implement programmes that are more flexible and better suited to local needs. Future financing strategies should look to explore the possibility of longer loan periods that could accommodate rural farming populations with seasonal or irregular income. It is also recommended that more technologies are incorporated into financing programmes in order to lower access costs for populations who reside outside of urban centres. These small changes could help some of the poorest borrowers significantly in meeting their investment needs. Once these challenges are addressed, MFIs in Zambia, and Africa more broadly, would be able to close the gap between financial service providers and smallholder farmers and be in a much better position to farm more, earn more, and significantly improve their livelihoods.

Once MFIs address the gaps in their structures, smallholder farming in Africa is bound to see significant improvement.

Key Points

  • Increasing access to financial services (ie. microcredit) helps smallholder farmers in Africa allocate labour more efficiently, which in turn can lead to significant improvements in both productivity and economic well-being.
  • Microcredit contracts, often characterised by strict repayment obligations, have frequently failed to meet the investment needs of the poorest borrowers in Africa (ie. smallholder farmers).
  • The overall efficacy of microfinance services to African populations could be greatly improved by tailoring their programmes to specific needs.