Understanding the digital and financial solution market for smallholders in Kenya

MercyCorps' recently launched Agrifin Accelerate program commissioned a market study on digital and financial solutions for smallholder farmers in Kenya to be published in a forthcoming white paper.  Dalberg's Christabell Makokha provides a preview of some of the emerging findings:

Agriculture is the most important economic activity in Kenya, yet the agriculture sector has experienced marginal growth both in production volume and value in recent years. These low productivity levels force smallholder farmers (SHFs) to rely on other sources of income to supplement their agicultural income.

To address farmers' needs, service providers have invested in over 100 agri-specific financial and non-financial products. The most common financial products include working capital loans, asset financing, and season-based lending. Non-financial products include platforms to provide agronomic information, supplier management tools, and trading platforms. A brief overview of these products is offered in the figure below.

Landscape analysis of agriculture and specific financial and non-financial services and products

Source: 

Dalberg research conducted for Mercy Corps’ AgriFin Accelerate program April – July 2015

Despite these investments, many products have yet to reach significant scale.  While a number of factors are at play, this trend raises several questions around uptake at MercyCorps' Agrifin Accelerate (AFA) program recently set out to answer with Dalberg's assistance:

• Do farmers actually need these products?
• If farmers do need these products, why are the products not scaling?
• If farmers do not need these products, what do they need?

Dalberg kept these questions in mind when it recently conducted a ecosystem review of Kenya for AFA, which will be the subject of an upcoming whitepaper. We sought especially to understand farmer needs and attitudes to financial and non-finacial products through conduct interviews with a variety of actors. In addition to speaking with farmers in Eldoret, Bungoma, Kiambu, and Murang'a to understand demand-side challenges, we also interviewed cooperatives, agricultural institutions, and service providers.

In this preview, we present our key findings: 

1. There is a gap in understanding the full range of smallholder needs
2. Providers tend to avoid risky, unstructured value chains
3. Smallholder farmers lack financial savvy

There is a gap in understanding the full range of smallholder needs

Most providers are focused on offering financial products that are specific to agriculture, yet smallholder farmers have many varying needs that cannot be fully met by agri-specific financial products. These needs can be categorized into:

• Agri-specific financial needs: Most farmers indicated needing funding for inputs and for purchase of additional assets. In addition, farmers we interviewed complained that the loan repayment periods are not structured to take into account the cyclical nature of farmer i.e., farmers are expected to repay loans monthly if the crops being grown are seasonal crops (increasingly SPs are offering seasonal loans to address this need).
• Agri-specific non-financial needs: Key unmet needs are centered on production, distribution, and marketing. They include poor access to high value stable markets forcing farmers to sell to middlemen who tend to be exploitative; lack of information on good agronomic practices; over-dependence on rain-fed agriculture, lack of land tenure and security; poor infrastructure (both for storage and transport) leading to post-harvest losses. These challenges then result in poor productivity, low return on investment, and income volatility.
• Other non-agriculture household needs: Farmers in Eldoret indicated that they take loans primarily to pay school fees or medical bills. Similarly, they sometimes re-purpose agri loans for other needs.

Dalberg found that sometimes products were not sufficiently tailored to the end user.  For example a leading subscription service aims to help farmers enhance their productivity.  However the farmers we spoke to in Bungoma were unwilling to pay KES 3 for a text since the information provided was generic and did not address their specific needs – they wanted an interactive platform where they can ask specific questions. Similarly, a warehouse receipt system proved a bit challenging for farmers to use since the majority live far away from the warehouses.

Key learnings from this review were twofold: (i) products need to be centered around farmer needs and agriculture production cycles in order to drive uptake, (ii) making finance accessible and helpful for SHFs require complementary non-financial interventions i.e., bundling of services that meet the different challenges that SHFs face.

Providers tend to avoid risky, unstructured value chains

Most service providers and funders primarily work in structured value chains, yet most SHFs are members of unstructured value chains or involved in informal parts of the structured value chains. For example, there are about 780,000 SHFs in potatoes, 1,300,000 in poultry, and 800,000 in dairy, yet 80% of all milk is marketed through informal channels. The top banks (by deposit accounts) tend to have 5-6 agri-specific which are value chain specific, targeting structured value chains like dairy, tea, and coffee.

Service providers need to be innovative in order to reach farmers in unstructured value chains. For example, Syngenta and TechnoServe understand that reaching potato farmers can be challenging given it is a highly unstructured value chain. However, in Eldoret, potato farmers also tend to be dairy farmers, which is a more organized value chain. As such, they are using dairy COOPs as aggregation points to reach potato farmers. In addition, milk is used as collateral to get credit for potato inputs – this is settled at the end of the month through a “check system.”

Smallholder farmers lack financial savvy

Most smallholder farmers lack the levels of financial literacy necessary to engage effectively with service providers. There is a lack of understanding of the insurance products and how they can be used to reduce a farmer’s vulnerability to crop loss. SHFs also generally lack a firm understanding of the variety of credit products that are available and how to evaluate which are best suited to their particular needs. This knowledge gap leads to the under-utilization of the financial products that are already available in the market for some SHFs, while for others it may lead to the acquisition of financially unsustainable levels of debt.

To resolve this issue, service providers need to either invest in more financial literacy training or partner with third-party providers of such knowledge. Doing so would help ensure that SHFs are fully aware of the ways in which access to the menu of financial products that service providers offer could enhance the productivity and profitability of their farming operations. Additionally, such training would help SHFs provide service providers with effective feedback.

In conclusion, understanding smallholder farmers, their needs, their income cycles, their beliefs and attitudes remains critical to unlocking agriculture and agri-finance in Kenya.