Can digital credit and payments change the dairy sector?
This post was written by CEGA faculty affiliate Alfredo Burlando, Associate Professor of Economics at the University of Oregon, in collaboration with co-investigators Silvia Prina (Northeastern university) and Jessica Goldberg (University of Maryland). Their research on digital credit and payments in Uganda is supported by a grant from CEGA’s Digital Credit Observatory.
Chiruhura, Uganda, May 2019
The tarmac road entering Rwemikoma Kazo, in the Western Ugandan district of Chiruhura, is dotted with shiny metal crates containing the morning’s milk supply. Every day, milk collectors transport the crates in the back of their motorcycles from nearby dairy farms to Kabubu Cattle Marketing Cooperative. The crates are lifted so the milk can pass through a giant colander, then a flow counter, before ending up in a large, glistening chilling tank. After the milk has been properly chilled, it is transferred once again to a mobile tanker and moved to a milk processing facility. As milk moves from one vessel to the other, digital flow meters calculate quantities of milk, which are in turn used to calculate financial IOUs — i.e. the amount of money owed to each farmer, milk collector, cooperative, and milk processor along the value chain. Every fifteen days, these IOUs are settled — often in cold, hard, bulky, sticky cash.
Chiruhura is in the middle of the milk producing region of Western Uganda. Our research team is here, along with a small team from Innovations for Poverty Action and a local fintech company, to oversee the implementation of a study, funded by CEGA’s Digital Credit Observatory (DCO), in which a random sample of cooperatives will be encouraged to adopt a digital payment system offered by the local fintech company. The system will allow cooperatives to pay dairy farmers directly into their mobile money wallets. Farmers in all cooperatives enrolled in the study — some of which have adopted digital payments and some of which have not — will then be introduced to mobile loan products offered by the two telecommunications companies in Uganda.
The first question we seek to address is quite simple: is the demand for mobile loans different among farmers paid digitally versus those paid in cash? While it is easy to imagine potential benefits from digital credit in rural areas, we don’t actually know how farmers are using digital credit (i.e. to finance investments or deal with adverse shocks) and whether the imagined benefits are indeed real. We also do not know what factors drive adoption and repeated use of such products. With this project, we intend to shed light on these questions.
The manager of the cooperative we are visiting has already begun to transition away from cash, citing difficulties managing and protecting cash. Seven in ten farmers have already received payments directly deposited into their bank account or their Savings and Credit Cooperative Organization (SACCO). We believe that existing relationships with local financial institutions may help to facilitate farmers’ access to low interest loans collateralized by future cooperative payments.
Why are Mobile Money Products Valuable?
The link between credit and payments is not unique to the Kabubu Cooperative. Many cooperatives have established partnerships with local SACCOs. For example, one cooperative opened their own SACCO to provide loans to farmers. Despite the prevalence of direct deposit payments into bank accounts, every cooperative manager we talked to saw added value in the mobile money products. Many pointed out that members with direct deposit would like to receive a portion of their payments into their mobile money account so they could use it to pay for airtime, school fees, and other expenses that are often made through the mobile money network. In addition, farmers (especially those living farthest away from banks) said they would prefer switching away from cash entirely.
The mobile loans in our study have potential benefits even for farmers who already have access to credit. While a mobile loan from MoKash is three times as expensive as a SACCO advance, the digital loan is received immediately. In comparison, the SACCO loan requires multiple visits to the branch and two to three days to process. Traditional banking has created financing gaps in the agriculture sector, so digital credit as a pathway for agricultural financial inclusion is promising because it does not require brick and mortar bank retails, it is immediate, and it is automated.
Learning by Doing: Insight into How Researchers Change Course
In addition to these informative interactions with cooperative managers, the visit provided two insights that forced us to modify our study design. First, we realized that our initial focus on one digital product only (MoKash, by MTN) was limiting. Many farmers in Western Uganda use Airtel mobile products and would be unlikely to switch to MTN. Airtel operates a digital credit product called Wewole. While the product features of Wewole are somewhat different from MoKash (most notably, Wewole lacks a savings component), the credit components of MTN (which we focus on in our study) and the credit component of Wewole are very similar. Moreover, our fintech partners support payments both to MTN and Airtel digital wallets. For this reason, we decided to include both MoKash and Wewole in our digital credit evaluation.
The second realization was that we lacked a shared understanding of the meaning of “digitization of farmer cooperatives.” Just as “take-up” of savings accounts means something different from “utilization” of savings accounts, we learned that there is a difference between “digitization” and “utilization” of digital payments. Historically, our local digitization service provider considered cooperatives “digitized” when their leaders had signed up for the service, even if few or no subsequent payments were made using the digital platform. Thus, we built a process for digitization that includes training both cooperative leaders and members how to utilize digital products effectively..
Our field activities are moving quickly now. We look forward to using this study of MoKash and Wewole in Uganda to better understand whether utilization of digital credit impacts dairy farmers’ production, income, assets, investments, and consumption smoothing ability, and whether facilitating access to digital payments — beyond digital credit — boosts impacts.