Can digital credit work for agriculture? Lessons from Kenya and Uganda
Research teams faced challenges evaluating the impact of digital loans in rural settings, finding that too few farmers adopted digital credit to measure its impacts.
In this post, CEGA Program Associate Marisa McKasson asks Alfredo Burlando and Sarah Janzen to share takeaways from their experience studying digital credit for agriculture, with contributions from co-authors Nick Magnan, Conner Mullally, Silvia Prina, and Jessica Goldberg.
Marisa McKasson (CEGA) chose to interview Alfredo Burlando (University of Oregon) and Sarah Janzen (University of Illinois at Urbana Champaign) in tandem about their research projects funded by CEGA’s Digital Credit Observatory (DCO) because both pilot studies faced challenges evaluating the impact of digital loans in rural settings. The researchers found that neither Ugandan cooperative members nor Kenyan smallholder farmers adopted digital credit products at high enough levels to measure impacts. In the interview below, they instead hypothesize about the fundamental reasons for farmers’ lack of demand for digital credit and ways to potentially increase uptake and repayment.
Marisa McKasson: Can you start by each briefly summarizing the context of your DCO research study?
Alfredo Burlando: We implemented a pilot study among 44 milk cooperatives in Western Uganda. As we pointed out in our previous blog, the specific objective of the pilot was to understand whether getting paid in mobile money made farmers more willing to take digital loans, and if these loans could improve dairy farmers’ production and financial wellbeing.
In the Ugandan context, cooperatives play an important role in the lives of farmers: they connect farmers with bulk buyers, provide inputs, facilitate loans, disperse advice, and so on. They are run by savvy businesspeople, staffed by professional workers who have computer skills and experience with financial products. Our research team implicitly bet that we could leverage the help of the agricultural cooperative system to increase demand for digital payments and loans.
Sarah Janzen: In March 2019, we partnered with insurance provider Acre Africa to pilot a new tailor-made digital credit for agriculture product in Kenya. First of all, we estimated a half acre plot of maize production in Kenya requires a $50 investment using best practices, which is 5 times larger than the typical consumption loan available. So we designed the product to be large enough to purchase the recommended agricultural inputs. Secondly, typical digital loans must be paid off within 30 days, but agricultural loans need more time to accommodate the months-long time lag between planting investment expenses and the realization of harvest revenue, so we made the product repayable after harvest. Lastly, without insurance covering potential crop loss from bad weather, farmers (and lenders alike) may understandably be unwilling to take on debt to invest in crop production, so we backed it by weather index insurance.
MM: While digital credit seems like it would be beneficial — because it is instant, automated, and remote, decreasing the cost to reach rural populations — we lack evidence about whether farmers use and benefit from these loans. You both tried to overcome some of the aforementioned challenges by working with an insurance provider or cooperatives. What did you find when you offered digital credit to farmers?
SJ: Farmers were quite reluctant to borrow; only 6% of farmers offered the product took it up. With such low take up rates, it is hard to learn about the viability and potential welfare impacts of digital loans. And our data shows that only about half of the farmers made payments on time, confirming concerns we heard from lenders about the difficulty of screening and monitoring borrowers digitally.
AB: We also found limited appetite for digital loans in our context.
We assumed that cooperatives would quickly adopt the digital payment platform given their capacities. To be sure of it, we engaged in extensive outreach to the leadership, provided a laptop to run the mobile payment platform, and trained employees on mobile payments.
Farmers seemed interested in receiving part of their income through the mobile money system; however, only 2 out of the 22 targeted cooperatives in our pilot (10%) had set up a digital payment platform in the five months after our intervention.
MM: Despite the fact that take-up of the digital products was low and you were not able to study impacts in either context, what can others learn from your experience?
AB: While the remaining cooperatives reported plans to sign up in the future, we see that cooperatives are not in a rush to jump on the digital finance bandwagon. The lack of demand for digital financial products extends beyond digital credit; we saw surprising pushback against digital payments, too. We can only hypothesize about the fundamental reasons for their lack of demand for digital credit, though some cooperatives reported facing impediments to adopting technology such as bad internet or poor platform management. Perhaps after careful cost-benefit analysis, including investments in money and time to learn about the technology, they ultimately did not see enough value to make the switch. Or perhaps cooperative leaders’ choices reflect the preferences of those farmers who lack trust in the specific technology or are unsure about operating without cash generally.
SJ: This pilot project has certainly dampened our optimism about digital credit for agriculture. However, we see many ways to potentially increase uptake and repayment that merit consideration. Lenders can partner with agricultural insurance providers to better predict agricultural risk. Partnerships can be established along the agricultural supply chain to ensure loans are used for productive investment. Credit scoring algorithms can be improved. Apps can be developed to provide financial literacy training at low cost. Better screening mechanisms can be used to match borrowers with appropriate products. The industry is currently pursuing all of these approaches.
MM: Thank you both for your insights into the challenges evaluating the impact of digital loans in rural settings. We will need to see sufficient take-up of a viable digital credit products to identify the impact of access to digital credit on farmers’ livelihoods. We look forward to learning more from two additional DCO-funded studies exploring the effect of digital credit on investment decisions, yields, and profits in Ghana and piloting picture based credit and insurance to female farmers in India.
