The Role Of Digital Financial Services In Producing Improved Agricultural Outcomes
When Tavneet Suri and William Jack published their landmark study on the impact of mobile money in Kenya in 2016, there was great enthusiasm amongst the financial inclusion community. Here was robust, empirical evidence suggesting that M-PESA had lifted 2% of Kenyan households out of poverty. This was a remarkable finding, and has laid the basis for significant investments in projects supporting Digital Financial Services (DFS) for poverty reduction. Just as interesting as the result itself was how this process worked. The majority of people moving out of poverty were women, for whom mobile money provided agency and opportunities to work in businesses beyond subsistence agriculture. Digital financial services were helping rural people escape poverty, not by improving their current incomes (e. g. by increasing farm productivity) but by substituting in new income streams. But this raises a question for those of us working in agricultural development – what is the role of digital financial services in producing improved agricultural outcomes, such as increased output and reduced hunger?
The evidence on this is much more limited. It makes sense that technology can reduce transaction costs, help overcome information asymmetries and improve product targeting for financial service providers, but we don’t know much about how this leads to improvements in livelihoods for smallholder families. For the past few months, mSTAR has been taking a look at the evidence around what has worked (and what hasn’t) in DFS for agriculture.
One Acre Fund and MyAgro are two organizations that are commonly referenced as success stories in this space. Though working in different geographies with different products, both have achieved scale and acclaim for their efforts. They have a few more things in common too, that are shared with a number of the models that have been shown to be most effective in achieving impact.
Firstly, finance is only a part of what they do. Both have found that finance (a loan or a savings tool) is more effective when combined with extension services, access to inputs and solutions to some of the other challenges faced by farmers. They recognise that rural poverty is complex and financial services are only ever going to be one part of any solution.
Secondly, they use technology as a tool, not as a driver. The critical touch point with the consumer is still a human one. Both organisations work through field staff who, rather than being replaced, have been made more productive by digital tools. In fact, much of the benefit of digitization comes in making back end processes more efficient rather than enabling a digitally-connected customer. Thirdly, their services are built up from the needs of the rural customer rather than trying to re-purpose an urban tool with some tweaks. R&D processes are deep and research-intensive.
Similarly, Musoni (a tech-enabled MFI in Kenya) developed its successful Kilimo Booster product with grace periods and repayment schedules tailored to the farmer’s unique income flows. Finally, they still rely heavily on donor money many years into operations. The models are heavy-touch, capital-intensive and commercial viability remains a way off. MyAgro and One Acre Fund are social enterprises, with the emphasis on social. Six years into operations, MyAgro still receives 80% of its income from philanthropy. Similarly, despite some exciting results from trials, digital index-based insurance for farmers has only achieved any impact with significant subsidy. When insurance is sold to farmers at market prices, take-up is extremely low.
All of this isn’t to say that a new innovation isn’t around the corner that can rapidly scale a commercially viable model that overcomes some of the challenges that keep smallholder farmers poor. Maybe blockchain is the answer, or machine learning will render our current approaches obsolete. However our best bet for now is to be humble about what we know (very little), study the channels through which financial services can impact the livelihoods of the rural poor and then understand the leverage points through which digital technology can improve the effectiveness and delivery of these services.
