Three Lessons for Unlocking Rural Credit with Digital Ag Solutions
Farmforce – 3. June 2021. By Laura Johnson Blair
At Farmforce, we’re always excited to share our experiences enabling innovative NGOs and agribusinesses with our digital agtech solutions to overcome supply chain challenges and empower smallholder farmers. I had the pleasure of speaking to the World Bank/IFC’s SME Finance Forum – Agrifinance Community of Practice in April 2021, focusing on enabling digital finance in agriculture.
Here are 3 lessons and insights based on our experiences serving clients across Africa, Asia, Latin America, and Europe from 10 years on leveraging digital farmer data to enable access to finance.
1. Collecting Field Data Takes Effort – Are You Incentivized?
To access the credit risk of farmers and cooperatives, financial institutions require transparent data on financial and transactional histories:
- Has the farmer repaid past loans?
- Is there a history of harvest sales?
- Does the farmer have relatable income from her agricultural production?
Such data can easily be collected in Farmforce and already is collected for any agribusiness or NGO using our digital sourcing management platform, but there needs to be a core operational incentive to collect such data. In Farmforce’s experience, the organizations buying directly from farmers are best placed to collect and manage this data, but it’s quite an expensive and time-consuming ask to think that banks/MFIs would collect this data themselves just so they have the credit history to more easily extend rural credit.
Overcoming this ‘digital economic identity’ hurdle requires collaboration and trusting data sharing relationships between the agribusiness, NGOs, and the farmer cooperatives who already collect digital transaction data on harvests delivered, and internal loans repaid with the formal financial sector. This also provides opportunities for further bundling products, such as climate resilience agricultural insurance, lowering the outreach and transaction costs associated with delivering financial products to smallholders.
Through robust digital platforms, like Farmforce, such data sharing and then product distribution is now much easier. We hope that as we continue to expand our platform functionality to enable such sharing, it will unlock more access to rural credit.
2. Who is Actually Providing Rural Credit… and Do They Want To?
When you think of farmers accessing loans and credit, the natural assumption is that it comes from banks or MFIs in the formal financial sector. However, in Farmforce’s experience and my own implementing agricultural crop insurance solutions across Africa and Asia, many agribusinesses and NGOs (such as impact organization Acceso) sourcing from smallholders are actually internally financing input and other loans to farmers since without a credit history, it is challenging for those farmers to access loans or the loans are at prohibitively high-interest rates. However, since organizations buying from farmers have an incentive to ensure farmers reach high productivity from using improved seed and inputs, it often falls on them to extend loans (either cash or in-kind in the form of physical products).
Yet, from speaking with our clients, they would prefer if the formal financial sector could step up and take over much of this lending if appropriate financial products are available at reasonable rates. They would prefer to not have to self-finance or be the intermediary for credit. This is where having robust digital transaction data in Farmforce is helpful – this can be exported and shared with interested financial institutions to bring down the barriers to loan evaluation and ideally enable the formal financial sector to extend more credit directly to farmers involved in value chains.
3. What are the Actual Barriers to Rural Lending?
I have attended and spoken at numerous conferences across Africa and Asia over the past decade, all trying to address and understand why there is still such limited access to rural finance for smallholder agriculture. What are the real reasons on the ground that only a few percent of farmers in Africa have such access? Is it:
- High transactional and outreach costs for reaching individual farmers with seasonal loans of USD30-100?
- Repayment and default risks with unsecured value chains?
- Lack of aggregation driving an inefficient sales/recruitment process?
- No insurance to protect investments/harvests against increasing erratic climate events?
- A lack of understanding of agriculture production for tailored loan timing/repayment structures?
While unfortunately, we don’t claim to have a simple answer that applies broadly across all smallholder farmers and financial institutions, nor do we have the silver bullet that will magically resolve these issues, but we are exploring how wider-scale user of digital data with our clients and partners can address many of these issues.
There are layers of benefits that unlock when an organization (an ethical processor like FairOils or a multinational corporation like Cargill) starts to digitize its value chain. When deploying Farmforce, the first step is to create a digital database of all the farmers engaged with demographic data and GPS field maps (or upload if you already have). From this foundation, our clients can then fully and digitally manage their interactions with farmers:
- From carrying out surveys on pest and disease outbreaks in the fields,
- Tracking planting dates and yield forecasts by group/area,
- Data collection for organic, Fairtrade, GlobalG.A.P., and Rainforest Alliance certification audits,
- Tracking loans disbursed and repaid by farmers, and
- Purchase the harvest at the end of the season (with bag-level traceability options available).
This routine, operational data can then provide the backbone to create Digital Economic Identities for individual farmers, now in formalized value chains with transparent agreements to sell to certain buyers (usually through their farmer cooperatives). As they are in farmer groups or cooperatives, on a digital platform, this provides the vital data and services aggregation element that is essential for bringing down the transaction costs of reaching farmers. The farmer/field location data and planting varieties/dates are exactly the data required for agricultural insurance products to accurately price the risk for a given area – all digitally available in both a granular and aggregated format. We see huge potential to leverage this information for the benefits smallholders and the organizations working with them.