ISF Advisors Launches Global Report on $200B+ Smallholder Finance Gap Amid Rising Climate Pressures

13 October 2025

PRESS RELEASE

New York, [13 October 2025] – ISF Advisors today released the 2025 Rural and Agricultural Finance State of the Sector Report ‘Beyond the Frontier: Decoding viability in smallholder finance,’ a landmark global study revealing that smallholder farmers—who produce nearly 30% of the world’s food—face an annual finance gap of more than USD 200 billion.

The report warns this gap is set to widen as climate change drives rising adaptation needs while lenders retreat from risk, threatening global food security and rural livelihoods.

Globally, more than 285 million smallholder households farm up to five hectares and remain chronically underfinanced. The report finds that demand for credit exceeds USD 323 billion annually, while supply stands at just USD 95 billion. While climate change raises the stakes for rural finance, the report shows a clear opportunity: by shifting the viability frontier, up to 60 million additional households could access finance, unlocking USD 110 billion annually.

Matt Shakhovskoy, Director of ISF Advisors says, “For years practitioners have struggled to understand the differences between markets and models in a way that is comparable, in both commercial and impact terms. This report is a major step forward in establishing these differences and a set of benchmarks that can help guide investments for years to come.”

The report highlights the scale of the challenge and sets out strategies to shift the viability frontier and expand smallholder finance. Building on more than a decade of ISF Advisors’ research, the report is developed with global partners including Small Foundation, IDH, CGAP, Ceniarth, The Gates Foundation, SAFIN and UNDP as sponsors, plus a network of over ten industry practitioners. Together, they bring deep expertise across finance, policy, food security, and climate resilience, shaping the report’s insights and recommendations.

Introducing the concept of the “viability frontier”, the report offers a new framework for understanding the balance between the benefits and costs of lending to smallholder farmers. It shows that viability is not fixed but can be shifted through market transformation, business model innovation, and improved enabling environments.

Carolijn Gommans, Director of IDH Intelligence & Business Analytics says: “Smallholder financing is key to transform agricultural markets. ISF’s Beyond the Frontier report provides clarity on how improvements in market viability, business model adaptations and stronger enabling environments can unlock finance. It sets a clear way forward on how catalytic capital can be used.”

Analysis of more than 50 provider models reveals stark differences in economics:

– MFIs and banks typically achieve modest but positive lending margins (10% with no shock; 7% with shock). With government bonds in some African markets offering returns over 15%, smallholder finance struggles to compete with alternative investment opportunities available for commercial financial institutions.

– Offtakers sourcing from farmers such as traders, processors and commercial producers, by contrast, often lend at a loss (–13% with no shock; –42% with shock), driven by low pricing (up to 1.5-2x more affordable than pricing by MFIs and banks), high cost of funds and a high cost of risk when a climate shock hits.

– Yet this picture changes radically when the indirect sourcing benefits enabled by the lending overtime are factored in, with offtakers making up over 30% margin on their lending activities (3x that of MFIs and banks).

The report also underscores that concessional capital remains essential but must be applied more strategically, distinguishing between:

– Permanent roles in the form of e.g., social protection in markets that will likely remain unviable with little incentives for either offtakers or commercial financial institutions to lend to smallholder farmers.

– Catalytic roles in transitional markets, to build the market fundamentals (e.g., farmer aggregation, offtake formalization or digital and financial public infrastructure) that attract private lenders over time.

– Tactical roles in emerging models, where e.g., concessional equity or guarantees can lower the cost and risk of lending for emerging models with potential for scale up, enabling them to mobilize private capital themselves.

Clara Colina, Director of ISF Advisors adds,“Climate change is creating a double squeeze — increasing adaptation costs for farmers while pushing lenders away from risk. Smarter concessional capital is critical, not as a blunt instrument but as a precise tool to unlock private investment where it matters most.”

The report concludes that shifting the viability frontier will require coordinated action across governments, donors, investors, providers, and farmer organizations. It highlights that progress depends on aligning capital with context, embedding climate adaptation into finance models, and deploying concessionality with greater discipline to unlock private investment.

Liz Wilson, Deputy CEO of Small Foundation says, “This year’s report takes the global conversation to a new level, offering sharper tools to help align capital with market context, dynamics, and incentives. Small Foundation will draw on its findings to strengthen our use of catalytic capital and deepen our support for ecosystem initiatives within smallholder finance systems.”

Download the Report here

About ISF Advisors
ISF Advisors is the leading strategic and financial advisory group committed to mobilizing capital for a more sustainable, equitable, and productive global food system. Building on over a decade of industry research, the ISF team combines experience from top-tier strategy, investment banking, and corporate finance firms to help public and private sector partners design practical, profitable, and sustainable financial solutions. ISF Advisors’ research on agriculture and food systems generates insights that inform investment strategies for donors, investors, and practitioners. In addition to issues affecting smallholder farmers and rural enterprises, ISF Advisors has experience in adjacent areas including technology, youth, gender, nutrition, climate change, forestry, and land use. ISF Advisors is a trusted partner to leading institutions across food systems, including many of the world’s largest investors, donors, companies, NGOs, and foundations.