Digitalisation of the financial sector, or fintech, has greatly advanced with payment solutions such as mobile money, which contribute to increased levels of financial inclusion. Despite these, agribusiness still needs to invest in digitalisation to increase productivity and value addition, storage and marketing of agricultural produce so they benefit smallholder farmers and pastoralists.
Investing in ICT-supported agribusiness solutions in ACP countries can be profitable as the examples below from CTA-supported initiatives indicate:
- ICT supported supply chain management to track production and financial and input services in the tea value chain.Using digital profiles of farmers in the management and planning of the supply of tea to the Igara Growers Tea Factory in southwestern Uganda has led to higher yields, increased payback rates for input loans to producers, and reduced side selling. It has also helped the company to digitise payments, and facilitated other financial services such as loans and savings. Plans are in hand to leverage the profiling data to control the quality and traceability of the tea to develop further value addition opportunities.
- ICT supported supply chain management for coffee certification and value addition.The National Union of Coffee Agribusiness and Farm Enterprises (NUCAFE), a Ugandan umbrella national coffee farmers' organisation representing more than 200,000 households, has helped producers gain better prices for their produce through digital profiling. Buyers pay a premium for traceability, which has contributed to the union obtaining fairtrade certification. Other opportunities include leveraging the digital profiles to extend additional services to coffee farmers, especially access to savings and loans, with training in business plan development offered by NUCAFE to help coffee cooperatives access credit from financial institutions, and better manage their financial resources.
- Mobile wallet for livestock rural markets in Kenya.Financial services for traders and pastoralists, such as savings, credit and transfers, could help to facilitate trade in Kenyan livestock markets. Lack of access to these services has resulted in most sales in livestock markets being cash-based, creating personal risk to traders and pastoralists with limited opportunities to access other financial services, due to a less visible financial transaction trail or history. Opportunities exist to develop mobile wallets with funds linked to formal financial service providers, marking a first step in increasing financial literacy and inclusion, with the possibility of subsequently introducing direct banking and other financial services.
- Agricultural insurance and advisory business services.In Uganda, CTA is working with partners to develop a business model to deliver weather index-based crop insurance bundled with agricultural advisory services, which include and weather information, using digital profiles and other remote sensing data. The aim of the Market-led, User-owned ICT4Ag-enabled Information Service (MUIIS) is to reduce risks related to climate change and poor farming practices, shielding farmers from drought and enabling them to increase productivity. For financial institutions providing credit, the bundled service increase farmers’ credit worthiness.
De-risking agricultural value chains
Scaling these successes is much more challenging. Perceived and actual risks in the agricultural sector are key reasons for financial service providers’ reluctance to invest in scaling ICT-supported innovations for agriculture. Often, these providers lack information about the sector, resulting in limited financial products being made available to agricultural value chain actors.
Some agricultural companies, traders and larger businesses with greater access to financial services have created formal and informal mechanisms to provide financing for smallholder farmers and pastoralists. Examples include agricultural value addition companies providing linkage services by making produce payments to farmers through financial institutions – banks and cooperatives. By using digital payment channels, value chain actors create a trail of transactions for farmers, which can help financial institutions to better understand their businesses and develop more suitable financial services.
Other innovative de-risking mechanisms include guarantee arrangements between value chain actors, such as the issuing by financial institutions of electronic vouchers, reducing the risk of credit diversion. Farmers taking out loans receive in-kind products, such as inputs from farmer organisations or traders partnering with the financial institutions utilising electronic voucher systems. This increases the appetite of lenders to provide more credit, due to the higher prospects of payback, while simultaneously increasing farmer productivity through access to higher quality inputs.
Digital profiling of farmers and pastoralists, together with the use of other digital information on weather and other external factors, has strong potential to further de-risk value chain investments in ICT-supported solutions to upgrade value chains.
Successful scaling of ICT-supported solutions requires an approach to de-risk investments for business models, so as to attract major investments. The examples highlighted here show that this is mostly achieved through specific arrangements in the value chain, together with high and preferably short-term returns.
Market segmentation and value chain coordination is key to increase return on investment, since farmers, input dealers, traders, processors, transporters and other agricultural value chain actors all have unique financial requirements.
Last but not least, an enabling environment, with the right infrastructure and policies, is critical to unlocking systemic change. In practical terms, mobile digital innovations rely on an effective telecommunications infrastructure, and coordinated policies will help to increase the appetite for investments in digitalisation, and consequently, to transform agribusiness.
This article was created through a CTA-led process to document and share actionable knowledge on 'what works' for ACP agriculture. It capitalises on the insights, lessons and experiences of practitioners to inform and guide the implementation of agriculture for development projects.