Shine a light on the gaps (2)

Digital innovations are helping to bridge the gap

Digital technology has the potential to address multiple demand and supply barriers by offering a new delivery platform to reach underserved clients. Mobile connectivity is rapidly expanding across sub-Saharan Africa; a 2014 Pew Research Centre survey in seven African countries found that roughly 80 percent of people own mobile phones. Mobile platforms can allow clients to access bank accounts more easily, and also reduce delivery costs for service providers.

To effectively close the gap in the availability of financial services, it is essential that digital products meet the unique financial needs of smallholder farmers. Digital by itself is not enough. Therefore, a complete understanding of these households’ financial needs must be a priority. The Consultative Group to Assist the Poor (CGAP), housed at the World Bank, has focused much-needed attention on smallholder farmers. Through its Financial Diaries of Smallholder Households project, CGAP aims to better understand how farmers in Mozambique, Tanzania, and Pakistan use financial services. Initial findings show that while smallholder households rely on multiple sources of income, including wage labour and off-farm businesses, agriculture accounts for 40 percent of earnings.

However, findings also suggest that income from agriculture is seasonal, creating unique cash-flow challenges. Farmers receive a bulk of their income at harvest, making it difficult to cover expenses for school fees, health care, and religious celebrations throughout the year. Farmers require capital at the start of the planting season to purchase seed and fertilizer. During the growing season, households must stretch available resources until the next harvest. Income from agriculture can also be risky; crops are susceptible to weather fluctuations, pests, and disease. Considering these diverse needs, financial services for smallholder farmers must move beyond credit for agriculture and include insurance, savings, and transfers to smooth consumption. This approach can help ensure financial instruments have a transformative role on the lives of smallholder farmers.

A suite of digital financial innovations for smallholder farmers has cropped up across the continent. These examples are neither exhaustive nor fully proven in their impact. But they nevertheless highlight the tremendous potential to connect Africa’s smallholder farmers to financial services by addressing both demand- and supply- side barriers.

In one model that addresses demand-side constraints, financial institutions are rolling out branchless banking to serve rural clients. For example, Opportunity International hires agents who drive to rural areas and use mobile phones to register new clients, deposit savings, and collect loan payments. In addition, mobile bank accounts are expanding across the continent, most rapidly in East Africa. M -Shwari in Kenya and M-Pawa in Tanzania allow M-Pesa clients to take out loans and make interest-earning savings deposits. Using a secure and familiar platform, rural clients do not have to travel to access accounts, pay fees, or meet minimum balance requirements. These are all important factors that can underpin widespread adoption.

But there are still challenges in reaching the rural poor, including limited network coverage and low financial literacy. Furthermore, recent evidence shows that although account ownership has increased, regular use has lagged. Therefore, products should be designed to meet smallholder farmers’ needs to help ensure that that they adopt and use them. To address low financial literacy, for example, the nongovernmental organization TechnoServe trains smallholder farmers in Tanzania on how M-Pawa accounts work in order to encourage the farmers to use them.

Other programs are using mobile platforms to deliver credit and savings products specifically designed for smallholder farmers. For example, One Acre Fund has developed an asset-finance model with a flexible repayment schedule that helps over two hundred thousand farmers in Kenya, Rwanda, Burundi, and Tanzania purchase high-quality inputs at the start of the planting season. Farmers make a prepayment (10 percent of the loan) prior to receiving inputs and have the flexibility to repay the remaining loan amount in any increment on any schedule, as long as they repay fully by harvest time. In countries like Kenya, where the mobile money infrastructure is well developed, farmers make repayments via M-Pesa. This loan product has helped farmers increase their earnings per acre by 50 percent.

In addition, access to savings can play an important role. MyAgro, a mobile platform, offers a commitment savings device to farmers in Mali and Senegal. Rather than paying a lump sum to purchase seeds and fertilizer at the start of the planting season, farmers save small amounts throughout the year. Clients buy MyAgro scratch cards from local stores and make deposits into their savings accounts, just like buying credit for a mobile phone. Clients of MyAgro have increased their harvests, and raised their incomes by more than 70 percent compared to non-client farmers. Both these uniquely tailored products could serve as effective models for financial service providers.

Digital technology can also be leveraged for payment transfers. Nigeria’s mobile wallet program, established in 2012 by the Central Bank and Ministry of Agriculture, has digitized voucher distribution for subsidized fertilizer. The platform’s fourteen million subscribers can use electronic vouchers to buy subsidized fertilizer from local agro-dealers. This platform is playing a critical role in connecting farmers to the formal banking system, and it has helped reduce corruption in fertilizer distribution by wiping out middlemen. Between 2013 and 2014, Nigeria’s Ministry of Finance also provided additional budgetary incentives that enabled the Ministry of Agriculture to scale up the mobile wallet program’s reach to an additional 2.5 million women farmers.

According to CGAP, the mobile wallet platform reaches twice as many farmers as the previous distribution system at one-sixth of the cost. The Nigerian government has also established a mechanism to encourage financial institutions to lend to the agriculture sector. The Nigerian Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) addresses an important supply-side constraint by providing a credit risk guarantee that covers between 30 and 75 percent of incurred losses on loans. NIRSAL enables the financial sector to expand its client base, and smallholder farmers and small and medium-sized agribusinesses gain access to financial services.

Keeping up the momentum

Promising innovations across the continent are leveraging the broad reach of digital technology to connect farmers to the formal financial sector. Ongoing research is providing rigorous evidence to better understand how these services are affecting smallholder households. There is no silver bullet and the gaps are still large, but there is tremendous international momentum around the issue of financial inclusion. Bringing Africa’s smallholder farmers into the spotlight and expanding their access to financial services will be critical to achieving universal financial inclusion and accelerating smallholder farmers’ contribution to the continent’s economic growth.

Ngozi Okonjo-Iweala & Janeen Madan