96284 FOCUS NOTE Early Insights from Financial Diaries of Smallholder Households R enato and Hecinta are raising six young children in a rural area of Mozambique’s northern Nampula Province. On just half a hectare, they grow rice, maize, Renato and Hecinta’s household is part of the Smallholder Households Financial Diaries project (the “Smallholder Diaries”) launched by CGAP in beans, cashew, peanuts, cabbage, and tomatoes, June 2014.2 The Smallholder Diaries are designed selling what they can and eating the rest. But, like to enhance the understanding of the financial lives many of the 475 million smallholder households of smallholder families by capturing the cash flows worldwide, agricultural production is just one of their of 270 households in Mozambique, Tanzania, and many income-generating activities. They balance Pakistan over one year of their lives. At the end several sources of income, within and outside of of the research, the extensive data will generate agriculture, while juggling a range of family needs and a balance sheet for each family that details all using an equally diverse portfolio of financial tools.1 their sources and uses of income, highlighting the interplay among cash flows, the role of in- Smallholder households like Renato and Hecinta’s kind agricultural income, the financial tools in use, represent the largest global segment by livelihood and the pain points where additional or improved of people living on less than US$2 a day. They are financial tools could add value. a financial inclusion imperative, facing a unique set of financial needs that are not yet fully understood The Smallholder Diaries will provide a holistic and are far from being met. Smallholder families picture of the financial lives of smallholder have specific financial needs arising from agricultural households not only as agricultural producers, production that are complicated by a number of but also as consumers, laborers, and off-farm factors: income from farming is often erratic and entrepreneurs. The ultimate goal of this research infrequent; agriculture requires costly inputs and is to translate the insights from the Smallholder investments at specific times of the year; and families Diaries into financial tools and provider practices involved in farming are exposed to risks from pests, that more effectively respond to the needs and droughts, floods, and other environmental shocks. preferences of this important client group. Drawing However, smallholder families have other financial on initial data, this Focus Note shares early needs as well, particularly since very few of them are insights from the Smallholder Diaries, providing able to earn enough from agriculture alone. Most a first look at how smallholder households weave households typically earn income from a variety of together agricultural and nonagricultural sources nonagricultural sources as well, including the sale of of income and employ a range of financial tools their labor and management of off-farm enterprises. to meet their families’ needs. A nuanced picture No. 102 Smallholder households are also consumers, giving rise of smallholder families will continue to emerge March 2015 to a yet another set of financial needs, as they manage as more data are collected, with increasing focus common issues such as paying regular expenses, on how they anticipate and manage risk, make Jamie Anderson and covering school fees, responding to emergencies, and household financial decisions, and leverage a range Wajiha Ahmed financing family milestones such as weddings. of financial tools. 1 Estimates of the number of smallholder farms range from 400 million to 500 million, and most recently at 475 million (Lowder 2014); estimates of the number of people living in smallholder households lie between 1.5 billion and 2.5 billion. See Christen and Anderson (2013); Conway (2012); Hazell (2011); Hazell, Poulton, Wiggins, and Dorward (2007); IFAD (2011b); World Bank (2007); and Nagayets (2005). 2 CGAP retained the services of Bankable Frontier Associates to manage the Smallholder Diaries. 2 I. Overview of the During regular financial diaries visits, interviewers Smallholder Diaries capture a complete set of individual cash flows from the preceding two-week period.4 Over the course of Methodology the discussion, interviewers ask household members about their various income sources, expense The financial diaries methodology examines categories, financial tools, and transactions; one in granular detail how low-income households of the goals is to arrive at a balance between the manage their cash flows. Since many of these 3 sources and uses of money in this period. After the cash flows are small, they are captured through interviewer has asked about the sources and uses of a tailored survey instrument. At the start, money, if the respondent then mentions that he or interviewers guide households through three initial she purchased some fertilizer, for example, then the questionnaires that register their demographics interviewer would probe to understand where the and known income sources, assets, and financial money came from to make that purchase, working to tools. This baseline information generates a reduce the gap between sources and uses of money. tailored Smallholder Diaries questionnaire for each Since in-kind transactions can make meaningful family (see Figure 1). contributions to household well-being, interviewers Figure 1. The Financial Diaries Process Recruitment Enrollment Usually purposive to 1st iniƟal 2nd iniƟal 3rd iniƟal maximize range of quesƟonnaire: quesƟonnaire: quesƟonnaire: HHs of interest for the Living standards, HH Income sources for all Financial instruments study roster, physical HH members (Split over two 1- assets (1 hour) (1 hour) hour interviews) Use iniƟal data to generate on-going diaries quesƟonnaires Open or close financial instruments as needed Record major household events Record changes in (e.g., death, birth, On-going income sources wedding) quesƟonnaires with supplements (on edge) as needed; automaƟcally updates diary Record Change household aquisiƟon, loss, roster as or sale of physical individuals leave assets and join 3 For background on financial diaries research, see Collins, Morduch, Rutherford, and Ruthven (2009), Rutherford (2001), the FinMark Financial Diaries, and the results from financial diaries exercises in India, Kenya, Mexico, Rwanda, South Africa, and Uganda (Financial Sector Deepening Kenya 2014, Bankable Frontier Associates 2013). 4 To give a sense of how much data financial diaries generate, a household with two adults and two children and an average number of financial tools would have about 200 data point observations of cash flow over about one month, or 2,400 data points over one year. 3 also record the amount of select in-kind transactions they are perceived and prioritized and how families and their approximate value. cope with them. Financial diaries track the multiple streams of The Smallholder Diaries data application tool also income that fall within the major categories of includes a crop tracker that allows the research team income sources, such as “agricultural production to capture household consumption of agricultural income” and “odd job income.” For example, products, such as eggs and milk, in addition to if a particular income source temporarily stops any other changes in stock (e.g., sales, loss due for a family, but then restarts later in the year, it to pests). This information will paint a picture of continues to be tracked but is not double-counted crop fluctuations in households over the course of as a new income source. When a family earns a year and illuminate household dependence on income from a variety of agricultural production the in-kind consumption of their production and activities, for example, each different crop and type the magnitude and implications of crop loss they of livestock production is considered a separate experience. source of agricultural production income. Making these distinctions is important as each crop and The initial findings presented in this Focus Note are livestock activity may have distinct production costs, based on a preliminary phase of the Smallholder timing considerations (e.g., preparation, planting, Diaries and focus on household characteristics harvest), markets, payment modalities, and risks. that are unlikely to dramatically change over the Elucidating these differences is an important step course of the research, such as their surrounding in better understanding the financial management landscape, household composition, and major challenges facing smallholder households. crops and livestock (see Table 1). That said, the reported data are subject to modification as the Financial diaries also collect information on major research continues and households experience income, health, and other shocks that households changes in their income sources, use different face, and the related strategies they use to cope financial tools, have children, cope with unforeseen with them. Over time, when households experience emergencies, and so on. It is also important to change—in their employment, as they start using bear in mind that the methodology and sample new financial tools, and births, adoptions, and size of a financial diaries exercise are designed to other important life events—interviewers record generate a rich pool of detailed information and “change questionnaires”; this information is insights on a targeted population, but they are then used to update the regular financial diaries not intended to be statistically representative of questionnaires used for that household going smallholder families in participating countries. The forward. Smallholder Diaries will instead, through intensive, biweekly interviews about the sources and uses Building on the standard biweekly data collection, of household income over the course of a year, the Smallholder Diaries also include deeper paint a rich picture of the financial lives of relatively exploration of key topics to provide further prevalent profiles of smallholder households in information and important context. One module Mozambique, Tanzania, and Pakistan. explores the aspirations of smallholder households, including both farmers’ aspirations and their hopes Smallholder Diaries Site Selection. CGAP chose to for their children. Another module builds on the implement the Smallholder Diaries in Mozambique, knowledge of each household’s financial portfolio Tanzania, and Pakistan because of the variations and asks about its use of and preference for in their agricultural sectors and the potential various financial tools. There will also be a range for a wide range of smallholder households to of targeted questions examining how households participate, with various degrees of engagement make agricultural production decisions and in agriculture, a wide range of crops and livestock, another detailed inquiry on the various risks facing distinctions in market relationships, and different Smallholder Diaries households, including how levels of digital finance development. 4 Table 1: Household and Agricultural Profile of Smallholder Financial Diaries Families Mozambique Tanzania Pakistan Nampula Province Mbeya Region Bahawalpur District (North) (West) (Central) National GDP per capita (USD) 2014a 605 695 1,275 Household characteristics Number of villages 3 2 2 Total number of households 95 91 95 Average family size 5 4 6 Average landholding size (hectares) 1.5 0.8 1.2 Percentage of female-headed 20 31 0 households Percentage of households with 10 3 93 electricity Percentage of households with at least 76 66 90 one mobile phone Percentage of households with roof type Grass or thatch 78 31 20 Iron or sheet metal 21 69 1 Tiles/other 0 0 79 Percentage of households experiencing major events in previous year Livestock death 51 28 21 At least 1 member was hungry or went 65 16 0 without food Lost home or land, or were evicted 2 7 0.01 Percentage of households growing various crops Cotton 0 0 34 Wheat 0 7 100 Rice 38 33 96 Peanuts 92 0 0 Potatoes 0 50 0 Maize 50 98 0 Cassava 96 7 0 Beans 93 37 0 Other vegetables 35 6 18 Percentage of households with at least one of various livestock Poultry 54 59 26 Goats 10 21 48 Pigs 3 12 0 Buffalo 0 0 87 Cattle 0 21 36 Donkeys 0 5 25 Percentage of households reporting usage of inputs and rain-fed agriculture Use pesticides 11 62 100 Use fertilizer 5 60 100 Rain-fed irrigation only 98 43 0 (no irrigation access) Average monthly expenses per 21 38 132 capita (USD) a. See the World Development Indicators (2014). 5 Within each country, the specific sites selected for in the past year. In the three villages where the the Smallholder Diaries reflect CGAP’s focus on the Smallholder Diaries are taking place, only the relatively lower-income segments of smallholder poorest village has a river nearby, which families households: Noncommercial smallholders and can channel to their plots in informal irrigation commercial smallholders in loose value chains, as schemes; in the other two villages, farmers have opposed to the small percentage of smallholders no access to irrigation and are entirely dependent in tight value chains.5 Reflecting the difference in on highly variable rains. the national context, the three Smallholder Diaries sites vary in terms of the vigor of their agricultural In Tanzania, the Smallholder Diaries sites are economy. The Nampula Province in Mozambique located in the region of Mbeya, home to one is characterized by subsistence farming, while of the largest farming populations in Tanzania. agriculture in Mbeya, Tanzania, demonstrates Mbeya sits within the Southern Agricultural greater diversity and stronger economic activity. Growth Corridor of Tanzania (SAGCOT), a region Punjab, Pakistan, has the most robust agricultural known for a productive agroecological climate, an sector of the three, even in the relatively remote array of crops and livestock, and relatively good district where the research takes place. infrastructure and market connectivity. Maize is the most common crop in the region; coffee, When selecting the research sites in each of the tea, rice, potatoes, pyrethrum, and cassava are three Smallholder Diaries countries, the goal also widely produced. To explore the diversity was to locate at least two villages no more than within this region, Smallholder Diaries sites were 40 kilometers apart. The villages needed to be selected in Mbeya in two different districts that accessible by a paved road so researchers could show important differences in their economic reach them throughout the year, and they also activity, climate, harvest seasons, crops, and usage needed to present distinctions in at least a few of agricultural inputs. In both sites, approximately important aspects, such as prevalent varieties two-thirds of the Smallholder Diaries households of crops and livestock, access to irrigation, and has access to irrigation and has used pesticides average household income levels. and fertilizer, though none of the households is connected to the power grid. In Mozambique, based on strong recommendations from local stakeholders, the Rapale district, located In Pakistan, the Smallholder Diaries are working 20 kilometers outside Nampula town in northern with households in southern Punjab, within the Nampula Province, was chosen. Some large country’s breadbasket. Rice, wheat, and cotton companies do buy cash crops in the province, but are commonly grown and typically sold through this is rare in Rapale, where smallholders tend to a network of local commission agents (known as practice the subsistence, rain-fed agriculture more arthis) and village traders. Given the dominance commonly found throughout Mozambique. Crop of agricultural middlemen in Pakistan, the goal production is notably diverse in this area, even was to identify a district with looser connections on small landholdings, with an average of five to the value chain. Visits to a number of districts different crops per household, including maize, in Punjab and key informant interviews indicated cassava, beans, and a range of vegetables. The that smallholder households in Bahawalnagar, a use of agricultural inputs is rare among Smallholder relatively poorer district, had looser connections Diaries households in Rapale, and families consume to agricultural middlemen, thus leading to its a significant amount of their production at home; selection. Since a vast, sophisticated system of many consume whatever they produce, generating canals in Pakistan irrigates more than 70 percent little if any surplus to sell. Hunger is prevalent, of the country’s farmland, it is not surprising with two-thirds of families reporting that they that all households in the Bahawalnagar sample had experienced major periods of food insecurity have access to some form of irrigation. Almost all 5 For background on the global segmentation of smallholder households, see Christen and Anderson (2013). 6 households in the sample are also connected to II. Initial Insights the national power grid, though electricity may be available for only a few hours each day. The 1. Agriculture Is Just One of research team selected two villages about 25 Many Income Sources kilometers apart: the first primarily grows rice and wheat and accesses the canal year-round, while in Smallholder households generally earn income from the second cotton and wheat are prevalent and a range of sources, including agricultural production, the only irrigation comes from semi-perennial odd jobs from both agricultural and nonagricultural canals that have water about six months out of the activities, self-employment, and transfer payments year. All of the Pakistani households use chemical such as private remittances and public income- pesticides and fertilizers. support transfers. The composition of this portfolio of income sources and the relative importance of Smallholder Diaries Household Selection. Once agricultural production within it can vary widely villages for the Smallholder Diaries were selected, among smallholder households and change over the research teams used a screening process time, influenced by income-generating alternatives to help identify a range of families with varying outside of agriculture, the quality of the resource income sources, access to agricultural inputs, base, and access to markets, among other factors wealth levels, and crops and livestock to participate (Christen and Anderson 2013, Jayne 2012, IFAD in the research. In Tanzania and Mozambique, 2011a, Davis et al. 2010, Valdés et al. 2009, for example, households were selected using Winters et al. 2009, World Bank 2007, Ellis 1999). a participatory rural appraisal wealth-ranking Agricultural income is also seasonal and weather- technique. Working with committees of village dependent and even in the best of circumstances representatives, a wealth-ranking exercise with it alone may not generate enough income to community representatives was conducted to meet household needs. In response, smallholder assess the relative wealth of households in village households tend to maintain various sources of hamlets or subareas. Using wealth ranking, eligible income, from both agricultural and nonagricultural households were selected based on landholdings, activities, to help mitigate the risk of a shock to number of crops and harvests per year, use any one source (Davis et al. 2010, Morduch 1995). of inputs, and integration with local markets to select a variety of families that were generally Agricultural production can also offer families an representative of prevalent profiles of smallholder important source of in-kind income, alleviating at households. least some of their need for cash income to meet consumption needs and to fulfill social obligations In Pakistan, the sample was selected using a to family and friends. For many smallholder families, traditional screener survey with questions related their own production represents a significant to household demographics, crops and livestock, proportion of their consumption. Working with main income sources, and wealth indicators. As household income data from 15 low-income a supplement to this process, village leaders and countries, Aksoy et al. (2010) found that the share community representatives were consulted to help of household income originating directly from ensure local ownership and eliminate households agriculture (i.e., crop and livestock production but with large landholdings. not wage income) is generally high, approximately 37 percent on average, and that it makes a In all three countries, the research teams began significant contribution to household consumption. visiting the Smallholder Diaries households in On average, almost half the value of household June 2014, using tablet computers to record their agricultural income came from subsistence financial information. This Focus Note includes the production. A range of literature also suggests information collected between these first interviews that most smallholder households are engaged in June 2014 and December 2014. in agriculture at the subsistence level, generating 7 neither the volume nor the quality to regularly in improving their financial inclusion, as different engage with markets (IFAD 2011a, Davis et al. 2010, livelihood strategies may call for different portfolios Jayne 2010, Valdés et al. 2009, Winters et al. 2009). of financial tools. The relative importance of agricultural production Sources of Income in the Smallholder Diaries. The as a household’s source of in-kind income may also sample in the Smallholder Diaries includes only reflect a household’s choice of crops and varieties, households that self-reported agriculture as their tolerance of risk, if and when they purchase most significant source of income, cash or in-kind. inputs, and if and how they store their harvest and Yet even at this preliminary stage of data collection, prevent post-harvest loss, maintaining quality and it is clear that Smallholder Diaries households are timing sales to when markets are most favorable balancing a range of income sources, in and out (see Box 1). Understanding this varied landscape of the agricultural sector, that vary in importance of smallholder households is an important step over the year. Box 1. Smallholder household consumption of agricultural production Adam and his wife Mary grow rice, maize, beans, and eggplants on nearly a hectare of land in Tanzania, and Mary has a side business ploughing land for others. The couple relies heavily on their own crops and livestock to feed their family, including three school-aged children. To date the Smallholder Diaries show the value of the crops that they have consumed exceeds the value of the food they have purchased. But crop and livestock production remains uncertain: Last year, strong winds killed three of the goats and destroyed their maize, as well as the roof of their house. Figures B1-1 and B1-2 provide an overview of the various ways in which Adam and Mary’s family has harvested, consumed, sold, or given away the crops it has grown. Figure B1-1 depicts how rice stocks declined each month and for what purpose. In July, for example, the family gave away approximately US$24 of rice as a contribution to the funeral for Mary’s aunt. Figure B1-1. Fluctuation of rice stores for Adam and Mary, Tanzania June to October 2014 (USD) $320 $24 given away during July $300 $21 sold during July $280 $3 consumed during July $260 $240 $220 $200 June July August September October Stocks Consumed during the month Sold during the month Given away during the month 8 Box 1, continued Smallholder families rely more on certain crops for consumption, while reserving others to sell for income. As indicated in Figure B1-2, Adam and Mary sold most of their eggplant and consumed some of their maize and beans. Eggplant is a higher-value, highly perishable crop, and the family consumed very little of what they grew to earn more from its sale. Growing multiple crops, Adam and Mary, like many smallholder households, make portfolio judgments about a diverse set of crops, avoiding the risk of one single agricultural income source and attempting to maximize their income. Figure B1-2. Fluctuation of bean, maize, and eggplant stores for Adam and Mary, Tanzania June to October 2014 (USD) $140 $120 $100 $80 Note that a $60 harvest adds to the stock $40 $20 $0 Beans Maize Eggplant Beans Maize Eggplant Beans Maize Eggplant Beans Maize Eggplant Beans Maize Eggplant End of June 2014 End of July 2014 End of August 2014 End of September 2014 End of October 2014 Stocks Consumed Sold Given away Harvested Spoiled The experience and results of financial diaries of course be considered agricultural production exercises in India, Kenya, Mexico, Rwanda, South income. Africa, and Uganda indicate that the following • Regular employment refers to salaried income categories for sources of income are easily received on a regular basis. understood by households and also demonstrate • Odd job income includes irregular income important differences in their cash flows (see from short-term employment, such as work on Figure 2) (Financial Sector Deepening Kenya 2014, construction sites or helping with the harvest Bankable Frontier Associates 2013). on other people’s farms. People employed in odd jobs use only their labor and are not • Agricultural production income is money earned making management decisions or investments, from the production and sale of agricultural goods, distinguishing it from self-employment income. such as crops and livestock. • Nonemployment income includes grants and • Self-employment income refers to sole-proprietor other institutionally provided support from microbusinesses in which someone is managing an charities, hospitals, and government. enterprise and investing money in inputs, stock, • Resources received are monetary or in-kind and tools; the activity may be formal or informal, contributions or remittances provided to and the work may be full-time, part-time, or respondents through their social networks. occasional. Self-employment income does not • Rental income is usually linked to the lease of land come from agricultural production, as this would or property. 9 Figure 2. Percentage of households reporting each income source, by country June to December 2014 100% 80% 60% 40% 20% 0% Agricultural Resources received Odd jobs Self-employment Nonemployment Regular/waged Rental producƟon Mozambique Tanzania Pakistan Initial Indications from the Smallholder Diaries. The total number of income sources and the Initial analysis of the income sources among blend of agricultural and nonagricultural income households in the Smallholder Diaries indicates sources vary across the sample as well (see that, as expected, almost all families in the sample Box 2). In Mozambique and Pakistan, the mean generated income from agricultural production. number of total income sources is eight, while in Many families also earned self-employment income, Tanzania sample households reported an average mostly through selling food or woven mats and of nearly 11 different sources (see Figure 3). baskets out of the home. Approximately 60 percent Disaggregating between income earned from of Smallholder Diaries households in Mozambique, agricultural production and income earned from 80 percent in Tanzania, and 40 percent in Pakistan nonagricultural production, households in Tanzania are earning self-employment income. On average, reported on average the most nonagricultural Smallholder Diaries families have about two production sources of income (8.1) as well as businesses per family in Mozambique and Tanzania, the fewest agricultural ones (2.8). Many of these and one in Pakistan. In each country more than nonagricultural production activities include odd two-thirds of sample families also depend on odd jobs related to farming, such as being paid to jobs for their livelihoods, and regular employment harvest crops on another’s land; other households is rare in all three countries. buy crops from producers and then re-sell them. Figure 3. Average number of agricultural production and nonagricultural production income sources, by country June to December 2014 PAKISTAN (8.0) 4.1 3.9 TANZANIA (10.9) 2.8 8.1 MOZAMBIQUE (7.9) 4.5 3.4 0 2 4 6 8 10 12 Agricultural Nonagricultural 10 Box 2. Smallholder households juggle agricultural and nonagricultural sources of income Revenues from agricultural and nonagricultural sources overlap and complement each other regularly in smallholder households. Consider the income flows for Renato and Hecinta in Mozambique: September was a relatively good agricultural month for the couple, with the household having sold tomatoes and cabbage for just over US$30 (see Figure B2-1). But in all other months in this time period, income came from nonagricultural sources of funds. Remittances from their daughter have been helpful in times of scarce income from agriculture, and in August, Renato brought in some income by helping to care for cattle in a nearby village. In addition, the household also received a gift of thanks for participating in the Smallholder Diaries research.a Similarly, Daniel and Mariam in Tanzania rely on earnings from both agricultural and nonagricultural sources (see Figure B2-2). They live in a village with rich soil and no irrigation, where households harvest potatoes (the primary cash crop) once or twice a year and harvest maize (the main consumption crop) once a year. Household members also engage in odd jobs on surrounding farms, brick making, and the sale of local beer. From time to time, they supplement these revenues with remittances received from family and friends. To date, the relative importance of these income sources have varied from week to week. In July, Daniel and Mariam relied on odd jobs, remittances, selling local beer, and selling potatoes, but in August they generated their income through a mixture of odd jobs and remittances. The motivation behind diversifying income sources between harvests is clear. For Daniel, Mariam, and many other smallholder households, expenses cannot wait for income from the next harvest. Daniel was recently fined US$175 for allegedly renting out family land that he did not own and moreover Mariam is pregnant. Daniel knows how much he needs to pay for the fine, and to pay it he has relied on remittances from family, income from odd jobs and selling local beer, and savings. . . . But the amount they will need to support the baby is unclear, and Daniel has been taking on as many odd jobs as a casual laborer as he can to generate extra income. Figure B2-1. Income sources and values for Renato and Hecinto’s household, Mozambique July to November 2014 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $0.00 July August September October November Casual work RemiƩances from daughter Sells tomatoes Sells beans Sells cabbage CompensaƟon for Diaries parƟcipaƟon a. The research firms provide small gifts, representing a very small share of income for most, throughout the study to thank respondents for their participation. These are also tracked as income as are the expenditures that were enabled by these extra inflows. 11 Box 2 continued Figure B2-2. Income sources and values for Daniel and Mariam’s household, Tanzania July to November 2014 $120.00 $100.00 $80.00 $60.00 $40.00 $20.00 $0.00 July August September October November Selling potatoes Casual labor #1 Casual labor #2 RemiƩances Selling local beer Examining the average number of nonagricultural Tanzania. Smallholder Diaries families in Tanzania production income sources per household (among obtain resources received from an average of four households reporting that source of income), separate individuals, and together these income the significance of resources received is notable streams contribute, in cash and in-kind, almost (see Figure 4). This category of income, which 19 percent of their total household income. includes money transfers received from family members working at a distance, gifts of money Income from odd jobs also plays a meaningful role from friends and relatives, and child care services in household income sources. Smallholder Diaries provided for free, seems particularly important in families in Mozambique, Tanzania, and Pakistan Figure 4. Average number of income sources per household, for those households reporting that source of income June to December 2014 6.0 5.0 4.0 3.0 2.0 1.0 0.0 bs t l t Ɵon jo en ged nta ived en uc d ym wa Re ce ym rod Od pl o lar / sr e pl o r ep n em eg u urc e f-e m ltu R l u No so Se ric Re Ag Mozambique Tanzania Pakistan 12 have reported to date an average of 1.7, 2.6, of their risk by “making conservative production and 2.7 different odd jobs, respectively, in their or employment choices and diversifying economic households, and these numbers are expected to activities,” and was also evidenced by the increase as data collection continues. financial diaries exercise in Kenya (Financial Sector Deepening Kenya 2014). In this initial phase of the research, the Smallholder Diaries included a specific set of questions Looking ahead, further data collection will allow exploring how and why households choose to analysis of the relative value of this range of income engage in agricultural and nonagricultural income- sources and their fluctuations over the year, adding generating activities. When asked why they deeper insights to our understanding of how and engage in nonagricultural activities, for example, why smallholder households diversify across a a top answer was that the income from agriculture variety of income sources and balance agricultural alone does not cover their household expenses and nonagricultural income sources. The results (see Figure 5). As would be expected, there is from a forthcoming series of questions on the array also an important dimension of seasonality; in all of risks facing Smallholder Diaries households will three countries, early Smallholder Diaries data also shed light on their priority concerns and their indicate that families struggle the most, both strategies to mitigate and manage them. Ongoing financially and in terms of food consumption, in the data collection will complement this deeper inquiry, months before harvest. Nonagricultural income- capturing any production and income shocks in the generating activities offer smallholder families months to come. an income stream that may be less sensitive to seasonal fluctuations, weather shocks, and periods 2. Smallholder Families Use a of uncertainty and can be maintained throughout Range of Financial Tools the year, to varying degrees of intensity. This reflects the income-smoothing behavior described A rich literature has uncovered important by Morduch (1995), where families mitigate some information about how poor households use Figure 5. “Why does your family do nonagricultural work?” “Why Percentage of the selected does that households the non-agricultural family do work?” top three answers, by country 100% 90% 86% 80% 74% 70% 60% 50% 44% 45% 40% 30% 21% 20% 12% 10% 10% 5% 6% 0% Agriculture alone doesn’t It’s beƩer to diversify There isn’t enough land to keep cover our needs income sources all family members busy Mozambique Tanzania Pakistan Note: The full question asked: “If family members are engaged in work not related the household’s own agricultural production, why do they do these jobs?” The verbatim top three answer options were (1) They do this work when they need extra money since agriculture alone does not cover household needs; (2) It is better for the household if some members do nonagricultural work and others do agricultural work; (3) There is not enough land for all members to do agricultural work. Respondents could select multiple answers. 13 financial tools to work toward multiple objectives.6 accumulate interest. A share-out typically occurs Based on this research, it is expected that once a year when members divide the savings and smallholder households also work toward several earned interest among the group. different objectives, including but not limited to • Savings at home typically includes cash stored in a their crop and livestock production. And just as safe, readily accessible place. Note that strategies they juggle a range of income sources, smallholder such as storing gold and raising livestock are not families also employ an array of financial tools. classified as savings at home, but rather household Using several avenues, through both formal and assets. informal providers, they pay, store, transfer, • Borrowing from friends and family includes and invest. informal borrowing from their social network. • Lending to friends and family recognizes that The Smallholder Diaries trace the use of both household members can also provide others with informal and formal financial tools among financial services, such as lending to friends and participating families. Informal financial tools— family. including informal savings groups and borrowing • Borrowing from an informal group includes from personal contacts—operate within social borrowing from ASCAs and other community-led circles of families, friends, and neighborhoods; savings and credit groups. they are flexible and reciprocal, though also • Informal credit at a store is an arrangement unpredictable and limited. Formal financial tools whereby the shopkeeper lets a household member are provided by institutions and groups, such take goods now and pay later. A household as banks and microfinance institutions that are member may buy a sack of flour from a shopkeeper subject to government regulation and supervision. on credit, for example, and promise to pay for it on Though these institutions can handle more complex his or her next visit to the shop. transactions and more substantial amounts than • Layaways are financial tools in which a person pays informal financial tools, they also present higher in installments for a good, and acquires it only once barriers to entry and a different level of risk all payments are made. (Ledgerwood 2013, Conning and Udry 2005, • Agricultural middleman credit is a loan from an Nagaranjan and Meyer 2005, Adams and Fitchett input supplier, usually with the understanding that 1992). repayment will be in cash or in-kind, after that crop has been harvested. In Pakistan, these middlemen Financial Tools in the Smallholder Diaries. To date, are known as arthis. Farmers sell produce to arthis the Smallholder Diaries households have reported and obtain fertilizer and pesticides on credit. using several financial tools: They can also rely on arthis to finance other major expenditures, such as weddings or emergencies. • Checking accounts are current accounts with a formal commercial bank. Note that each tool is distinguished by both its • Rotating Savings and Credit Associations financial function and its source. For example, each (ROSCAs) are informal savings groups in which account at a financial institution is a separate device. members generally combine their savings together Each savings group is a different device and if it at regular, recurring meetings and take turns giving has separate functions—such as merry-go-round, the entire pot to one member. accumulation, lending, and welfare—then each of • Accumulating Savings and Credit Associations those functions would be registered separately. (ASCAs) , somewhat more complex informal Each source of informal borrowing, including each savings groups, allow members to build up savings individual moneylender and each individual lender over time, lend the group fund to one another, and among friends and family, is also tracked separately. 6 See Collins, Morduch, Rutherford, and Ruthven (2009), Rutherford (2001), the FinMark Financial Diaries, and the results from financial diaries exercises conducted in India, Kenya, Mexico, Rwanda, South Africa, and Uganda (Financial Sector Deepening Kenya 2014, Bankable Frontier Associates 2013). 14 Figure 6. Most popular financial tools reported by Smallholder Diaries households Percent of households, by financial tool and country June to December 2014 100% 80% 60% 40% 20% 0% Savings at home Credit at a store Friends and Friends and Agricultural ASCA Borrowing from ROSCA Microfinance Checking account Layaway family borrowing family lending middleman informal group loan credit Mozambique Tanzania Pakistan Initial indications from the Smallholder Diaries. in all three countries to date, households have Savings at home, including storing money under the typically been active in a ROSCA and an ASCA proverbial mattress, is clearly the most prevalent simultaneously. The use of checking accounts, in savings tool across all three countries (see Figure 6). contrast, is relatively rare, even in Pakistan, where Lending to family, often used as a savings tool their use to date was most significant (16 percent for families, is also relatively common (26 percent, versus 7 percent in Mozambique and 3 percent in 46 percent, and 51 percent, respectively, in Tanzania). Mozambique, Tanzania, and Pakistan). Clearly there is no single, perfect financial tool Credit from agricultural middlemen is nearly universal that could meet all the needs of each smallholder in Pakistan, reflecting the country’s relatively robust, household, and many financial tools are also used long-standing relationships in agricultural value chains, to accomplish a number of different objectives. but practically nonexistent in Mozambique and rare Echoing the findings of other diaries research in Tanzania among Smallholder Diaries households. (Collins, Morduch, Rutherford, and Ruthven 2009, Informal credit at a store is a more significant financial Rutherford 2001, the FinMark Financial Diaries), tool in Mozambique and Tanzania, and equal to the households in the Smallholder Diaries sample are importance of agricultural middlemen in Pakistan active across a busy universe of financial tools, among families in the sample. The Kenyan Financial from the informal to the formal, putting a variety Diaries pointed out that people keep sources of credit of products and relationships to work in their “open” by borrowing just a little or even purposely financial lives. The needs of smallholder families to make sure they have the credit on hand if and for financial tools are more nuanced and diverse when they need it (Financial Sector Deepening Kenya than would be satisfied by a narrow approach to 2014).7 Tanzanian families using shop credit have so only their agricultural activities, and opportunities far kept an average of over four lines of credit open for improving their financial inclusion go well with distinct stores. Similarly, from early data, families beyond formal credit products for agricultural who borrow from their social network have typically inputs. borrowed from six different sources. A common example is school fees. Paying them is Participating in ROSCAs and ASCAs is most a challenge for many households, and especially common among households in Tanzania. And for smallholder families who earn a substantial 7 Mas (2014) refers to the practice of nurturing potential sources of future liquidity as liquidity farming. 15 portion of their income from a harvest that may fall In one Smallholder Diaries family in Tanzania, for months before or after school fees are due. This example, Fatima quickly needed to find US$17 to pay presents a significant cash flow challenge, as well her son’s school fees, so she borrowed it from an as a tension between what may be a significant agricultural agent with the promise to pay him back income stream for the household and its top with five sacks of rice. When she repaid the loan months investment priority. To respond to this need, a later, Fatima estimated the value of these five sacks of relevant financial tool would not need to directly rice at US$21. Her experience points to the potential support the household’s agricultural activities, but value-add of a financial tool that links harvest income could instead direct agricultural income when and to the payment of school fees, or other significant, where needed. predictable, and high-priority expenditures. Box 3. Smallholder households use a wide range of financial services One of the Smallholder Diaries families in Pakistan—Arham, Shamaila, and their three young children—draws on a range of credit tools in a broad portfolio of financial services. Like almost all Pakistani households in the sample, this family relies on informal middlemen, or arthis, who provide agricultural inputs on credit and interact between farmers and buyers. But arthis alone do not meet all of the family’s agricultural borrowing needs, nor are these services tailored to the family’s circumstances. Even with its relative flexibility, there are clearly limitations to informal trader credit. The family borrows heavily from the local arthi to afford fertilizer and labor expenses, but it also borrows from a number of other sources as well. Figure B3-1 focuses only on the range of the family’s credit portfolio. Between 27 July and 19 December, Arham and Shamaila used shop credit from three different businesses on a total of 24 different occasions. The total current outstanding balance for all three is $66.56. The family also has borrowed from three different friends and family members a total of four times. When the Smallholder Diaries started in June, they already had US$295 of debt with an arthi for their cotton crop, which had not fared well due to water issues. As of 19 December 2014, Arham and Shamaila had accumulated US$221 more in arthi credit for the new wheat season, putting the total outstanding balance at US$516. But since they were unable to pay back the arthi credit for the previous cotton crop, the arthi did not extend the full amount they needed. They were then forced to also seek about US$30 for seeds from Arham’s aunt. Normally, the family would be unable to service this debt using agricultural revenues alone, but Arham has two stable jobs as a milk chiller and as a milk collector, which allow the family to meet most of its financial needs. Figure B3-1. Credit portfolio with current balances and number of transactions for Arham and Shamaila, Pakistan 27 July to 19 December 2014 Friends/Fam Friends am Borro /Fam ds/F Borrowing Frien wing No. 2 No. 3 wing Borro Sh a ge e No. 1 No op C W anc . 1 red v it Ad Sh 6 $39.31 $29.4 op $19.6 8 No Cr ed t Cr gen $8. . 2 edi it 8 8.2 A 2 85 t $9 1 1 7 $1 6 9. Sh No. 1 5 66 $5 op 3 Cre 13 T EN 8 d UM it CE $37 LAN TR .05 INS BA 4 #TX 16 Box 3, continued Even in the Mozambican sample, in which beyond saving at home, smallholders use other informal financial tools (such as savings groups and borrowing from friends and family) relatively infrequently compared to those in Tanzania and Pakistan, a more robust portfolio has its advantages. Claudia and Ercilio, who live with their two biological children, three adopted children, and two grandchildren, are one of the more financially active families in the Mozambican sample. As shown in Figure B3-2, the family has used a total of 10 financial tools so far during the course of the study. For each financial tool, the corresponding balance and number of transactions are also given, and the figure is arranged with assets on the left, liabilities on the right, and more formal tools in a darker shade. In addition to this classification of savings and credit, and formal or informal financial tools, the family’s portfolio also reflects the various amounts held over different periods of time from a range of sources. Layaway is placed under assets because it has already been paid off (the balance is US$0). When the family needed to make purchases before the harvest (from late October to early November), it relied on savings and informal credit to cover its expenses (clothes, food, petrol for the son’s motorcycle, etc.) because it was unable to earn revenue from selling crops at that time. Interestingly, the current account and layaway are Ercilio’s, while the rest of the tools are Claudia’s. Claudia has three shopkeeper credits, though she has used them infrequently and the balances are low. In addition, she is keeping about US$640 for other community members in a lock box, while also placing some of her own savings in this ASCA and taking out loans. As the ASCA manager, Claudia has the unique ability to tap into her own savings in the ASCA when she needs money. Answers to the next module on financial tools will help shed important light on why particular tools are more important to the households than others. Figure B3-2. Financial tools, current balances, and number of transactions for Claudia and Ercilio, Mozambique 15 July to 30 November, 2014 ts Asse Lendin Lia bi Credit to g Friend to Bor ROSCA liƟ Clients s& r A Family fro ow ASC ASC m Sho wa y -$0 $0.29 A p No Cre es ay a $0.20 . 1 dit L 01 $0 $1. Sh No 5 8 1 op . 2 co nt 12 $0 Ac urre t Cr $0 un 5 ed C it 1 3 Sho No. 3 $0 $0 .0 pC NT 9 5 E red UM 1 CE it $0 TR N LA .09 INS BA #TX 1 III. Conclusions ASCAs, to MFIs, agricultural traders, and family and friends—as well as in some cases products from Early data from the initial phase of the Smallholder formal financial service providers. Diaries outline the complexity of the financial lives of smallholder households. They manage a However, gaps remain. Not all of their needs are being variety of income sources, both connected to and met, and no smallholder family needs just one magic- independent of agriculture, and employ an array of bullet financial tool. More agricultural credit alone is informal financial tools—ranging from ROSCAs and insufficient and, for some smallholder households, 17 this is irrelevant or even unadvisable. Instead, the Christen, Robert Peck, and Jamie Anderson. experience of the Smallholder Diaries to date echoes 2013. “Segmentation of Smallholder Households: the diversity of the 475 million smallholder households Meeting the Range of Financial Needs in worldwide, with variations in the resource base, the Agricultural Families.” Focus Note 85. Washington, relative importance of agricultural income, their blend D.C.: CGAP. http://www.cgap.org/sites/default/ of crops and livestock, how they engage with markets, files/Focus-Note-Segmentation-of-Smallholder- and how those markets are organized. Recognizing Households-April-2013_0.pdf the various profiles of smallholder households, initial data from the Smallholder Diaries signal that different Collins, Daryl, Jonthan Morduch, Stuart Rutherford, combinations of financial tools will be relevant to and Orlanda Ruthven. 2009. Portfolios of the Poor. different segments of smallholder families. Princeton, N.J.: Princeton University Press. But what does a robust financial portfolio look like, and Conway, Gordon. 2012. One Billion Hungry: Can We how specifically do these portfolios and services vary Feed the World? Ithaca, N.Y.: Cornell University. across the segments of smallholder households? As the http://www.canwefeedtheworld.org/ Smallholder Diaries continue to capture cash flows, the ebbs and flows in income and consumption, household Davis, Benjamin, Paul Winters, Gero Carletto, shocks, and important qualitative context, a richer Katia Covarrubias, Esteban J. Quinones, Alberto picture of the financial lives of smallholder families will Zezza, Kostas Stamoulis, Carlo Azzarri, and Stefania emerge with responses to these key questions. DiGiuseppe. 2010. “A Cross-Country Comparison of Rural Income Generating Activities.” World Smallholder Diaries data will elucidate the diversity Development 38 (1): 48–63. http://www.fao.org/ of smallholder households, their various livelihood fileadmin/user_upload/riga/pdf/cross_country_ strategies, the range of agricultural and nonagricultural comparison_2010.pdf income sources and their relative proportions, and the distinct financial mechanisms in use. These insights Ellis, Frank. 1999. “Rural Livelihood Diversity will also, most importantly, identify opportunities for in Developing Countries: Evidence and Policy financial service providers, policy makers, funders, Implications.” Natural Resource Perspectives, and other stakeholders to improve and innovate in Number 40. London: Overseas Development the financial tools used by smallholder households, Institute. http://www.odi.org/sites/odi.org responding specifically to their household profile and .uk/files/odi-assets/publications-opinion-files/ needs and advancing their financial inclusion. 2881.pdf References Financial Sector Deepening Kenya. 2014. “Kenya Aksoy, M. Ataman, Javier Beverinotti, Katia Financial Diaries: Shilingi Kwa Shilingi—The Covarrubias, and Alberto Zezza. 2010. “Household Financial Lives of the Poor.” August. http://www. Income Structures in Low-income Countries.” In fsdkenya.org/new/our-work/financial-diaries.html M. Ataman Aksoy and Bernard M. Hoekman, eds. 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CGAP 1818 H Street, NW MSN P3-300 Washington, DC 20433 USA Tel: 202-473-9594 Fax: 202-522-3744 Email: cgap@worldbank.org This Focus Note was written by Jamie Anderson of CGAP and Wajiha Michael Hamp (IFAD), Ajai Nair (World Bank), Maria Pagura (World © CGAP, 2015 Ahmed of BFA. The authors wish to thank Dana Boggess (Bill & Melinda Bank), and Lindsay Wallace (The MasterCard Foundation) for their Gates Foundation), Janine Firpo (Bill & Melinda Gates Foundation), valuable support and insight in reviewing this paper. The suggested citation for this Focus Note is as follows: Anderson, Jamie, and Wajiha Ahmed. 2015. “Early Insights from Financial Diaries of Smallholder Households.” Focus Note 102. Washington, D.C.: CGAP. Print: ISBN 978-1-62696-068-8 epub: ISBN 978-1-62696-070-1 pdf: ISBN 978-1-62696-069-5 mobi: ISBN 978-1-62696-071-8 UKa from the British people