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Applying the Pathway Model: The Micro Level

A major challenge to the rural agricultural finance sector is the lack of a common understanding of the impact-return tradeoff. By taking a pathways view of impacts and returns, we can shed more light on the impact-return tradeoff and enable more efficient capital allocation.
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Rural agricultural finance was long considered a standalone agenda with the primary goal of generating productivity and resilience outcomes. But more recently, providers have come to see rural households as a meeting point for a number of critical global agendas, including climate, gender, youth, nutrition, and employment.

The rural pathways model enables a new way of considering the range of impact outcomes that can be generated for rural populations as they move through different transitions, creating clearer links between service and capital providers. Over time, we hope that service and capital providers will be increasingly specific about the impact outcomes they are pursuing and will establish appropriate benchmarks for success, including standardized indicators that can be used across the sector.

Rural transition pathways - outcome map

On the other side of the impact-return equation, it is similarly difficult to understand and compare the financial returns of different service delivery models. Many privately-owned providers are not subject to public disclosure of this data. At the same time, given the often small size of their smallholder portfolio, many providers conduct limited product and segment level profitability analysis.

To illustrate the range and prevalence of different profitability profiles and capitalization needs found in the rural and agricultural finance space, the capital orientation map below lays out how different types of financial service provider models align to profitability profiles, types of capital, and transition pathways. In this mapping, service provider profitability is considered the current profitability of a provider excluding any subsidy—and capital types are aligned with the profitability profiles on that basis. The prevalence of service provider models is depicted as a bell curve that shows the alignment of demand for different forms of capital based on the underlying profitability of the model.

Viewing the demand for, and supply of, types of capital in this way shows the necessity of capitalizing multiple service delivery models with very different profiles.

Rural transition pathways – capital orientation map

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As shown in the capital orientation map a large number of service provider models continue to have sub-commercial or grant-aligned profitability profiles — meaning they require some amount of subsidy to deliver services. However, the objectives of providing subsidy to service providers can vary, and may include:

  • Buying long-term impact in impact-first provider models that are unlikely to transition to higher levels of financial sustainability. In these investments, smart subsidy means the highest possible level of impact per donor dollar.
    Applications of this type of subsidy are often seen in pathway #1: developing a resilience buffer, where subsistence livelihoods limit the capacity of clients to pay for services and the primary desired outcome is protection of vulnerable populations.
  • Subsidizing innovation in the short term in provider models with a clear plan to transition to higher levels of financial sustainability. In these investments, smart subsidy means identifying high-potential business model innovations and an efficient path to scale and sustainability.
    Applications of this type of subsidy are most often seen in pathway #2: farm intensification, #3: land consolidation, and #5: transition to service provision, where a number of innovators require short-term subsidy to develop and pilot technology-driven “base of the pyramid” service delivery models.
  • Creating capital leverage through subsidy to enable the participation of more commercially oriented funding. In these investments, smart subsidy means high levels of capital leverage.
    Applications of this type of subsidy are often seen in pathway #4: transition to formal enterprise, where investment funds or service providers use credit guarantees and other blended finance models to crowd commercial capital into their investments.

As subsidy approaches become more diverse, the sector will require more sophisticated models and benchmarks in order to define capital needs and pathway-aligned outcomes; understand the objectives and role of smart subsidy; and discuss the impact-return trade-offs involved in these transactions.

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By using a common terminology and set of frameworks based on a pathways view of the market, there is an opportunity to more efficiently channel the right capital to the right service providers at the right time.

To that end, we envisage a future market state where both providers and funders are more clearly articulating their positions to make capital intersections more obvious. In doing so, service providers will be better positioned to pursue right-fit capital, while capital providers will ensure that their subsidy is utilized in a smart and efficient way.

Aligning capital needs with capital supply

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The impact investment theses provide an integrated, holistic perspective of each pathway, service needs, outcomes, typical service providers, and types of capital. Our hope is that this integrated view will give financial service providers, funders, and policymakers a richer basis from which to formulate strategies for working with different rural client segments.

Click to explore the investment theses below:

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