July 3rd, 2020

A platform take on fixing agricultural challenges
The agricultural sector in Africa is yet to take off despite being the dominant employer and the key contributor to the gross domestic product (GDP) for most countries on the continent. According to the African Development Bank (AfDB), the continent’s annual net food import bill is in excess of $35 billion and is expected to hit over US $110 billion by 2025. This is a paradox given that the sector employs way over 60% of the adult population in most African countries and the continent holds over 60% of the world’s unused arable land. AfDB estimates that transforming the initial set of agricultural value chains will require approximately US $280-340 billion over the next decade. While access to capital is certainly not a panacea for all agricultural sector challenges, it is a critical factor in unlocking all other relevant functions. Other key focus areas like effective production and marketing models, use of efficient technologies that increase productivity and mitigates risks better, coupled with the right policy support, would spur agricultural sector growth. The mechanisms for private investors to efficiently allocate capital to the agricultural sector has not been very efficient.

“Productivity and incomes for Kenyan farmers are among the lowest in the world despite agriculture being a dominant sector, contributing close to 30% directly to GDP (over 50% including indirect) and employing over 60% of the labour force.”

In Kenya for instance, the sector attracts less than 3% of private credit and less than 1% of households have access to agricultural insurance. Financial service providers face various difficulties, like accessing suitable user data to help them make accurate lending decisions, inherent risks like production and markets risks, and high operational costs among others. Digital credit innovations are attempting to solve major challenges such as the lack of scoring data and operational challenges faced by agricultural lenders. However, current digital loans are mostly short tenure, aimed at meeting day to day needs and funding emergency cases. Less than 1% of formal borrowers finance their agricultural operations from such sources, necessitating a paradigm shift to avail the much-needed financial solutions to the sector.

For efficient capital allocation to the sector by the financial sector, most of the production and marketing functions need to be performing well. For instance, farmers’ know-how and risk mitigation mechanisms are critical factors in supporting increased production. Finance could play a big role in organising knowledge transfer, risk mitigation, as well as access to markets, besides supporting access to crucial factors of production like inputs, land and labour. Traditionally, finance has focused on supporting inputs, land and labour acquisition and to a limited extent risk mitigation. We have limited cases of financial models targeted at developing marketing models. Some value chains like tea, coffee, export horticultural goods and dairy, which have a higher per capita capital allocation, have streamlined production and marketing models.

The DigiFarm platform innovation and promise

FSD Kenya partnered with DigiFarm to innovate solutions to challenge that face smallholder farmers. DigiFarm, a Safaricom subsidiary, initially partnered with inputs suppliers iProcure via a franchisee model; Arifu, a digital learning platform; and FarmDrive for loan management. FSD Kenya, in partnership with Mercy Corps, invested in the design work as well as the first seed and risk capital to test the lending model for smallholder farmers. The core challenges that the DigiFarm innovation seeks to solve include low farmer productivity due to poor access to agronomic knowledge, inadequate and poor-quality inputs as a result of capital constraints, low incomes due to inefficient markets, and losses due to production risks. The platform has close to a million registered farmers with about 100,000 either accessing inputs through an e-voucher system, or better markets, extension services and insurance.

This is how it works. Farmers apply for credit through USSD (scoring powered by Safaricom data) and redeem e-vouchers at iProcure agro-dealers in exchange for inputs. Arifu’s digital learning platform offers agronomic trainings to farmers with the support of a light touch e-guided ground extension service (which doubles as mobiliser, educator and market access coordinator). The platform has an e-market component, DigiSoko, that links farmers to markets through partnership with produce buyers. DigiFarm provides production risk insurance to some farmers who access credit and benefits from the government’s 50% insurance premium subsidy. Credit offerings have evolved from a 30-day credit product, to 60 days, then 90 days, and now to the current full season balloon payment credit product.

Early evidence of positive impact

Early evidence suggests that the use of quality inputs and know-how increases productivity. Risk transfer through insurance is an effective risk mitigation tool against adverse weather. This is especially the case for smallholder farmers with low capabilities to use alternatives mechanisms such as irrigation to manage the risk. There is enough demand for input credit as evidenced by a high number of applicants. The ability of digital platforms to coordinate end-to-end facilitation for farmers has been tested, but more work is required to refine credit scoring and collections models to enhance performance. Moving farmers from predominantly informal markets to contracted farming requires innovation on several fronts including aggregation, pricing and storage, among others. DigiFarm can surmount these identified challenges through continued innovation and partnerships. Currently underway efforts for improved aggregation models will enhance market linkages. Just like transport, accommodation and other sectors have been digitally disrupted, agriculture is no doubt a suitable candidate for beneficial disruption.

As FSD Kenya gears up support to partners like DigiFarm and other innovators to develop robust and scalable financing models for the agricultural sector, the need for collaboration is a key plank. Whereas fintechs may have the technology, focus and flexibility to undertake functions that traditional financiers like banks may lack, they may need to tap into the traditional lenders’ capacity to mobilise reasonably priced capital. Most fintechs in the country that have scaled have raised capital from sources outside the country. Some mainstream lenders like banks may have diverse ways of spinning off internal innovations, while others may opt to collaborate with fintechs.

Michael Mbaka is Senior innovations specialist at FSD Kenya.

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