Pilot Insights | Fast and Affordable DeFi-enabled Credit for Smallholder Farmers in Kenya
This post is the second of a two-part series; the first blog shared details of the pilot launch and the hypothesis we set out to prove. Written by Victoria Clause, Pilot Manager for Mercy Corps Ventures and Manager at Mercy Corps AgriFin, and Ken Kou, Web3 and Pilot Lead at Mercy Corps Ventures.
Insights in brief
The pilot enabled access to quick, affordable credit for smallholders through a feature phone, for those who do not have access to viable alternative
The decentralized finance (DeFi) integration into the product enabled a 50% reduction in the cost of interest — the product interest rate was 8% APR, less than half of what was available on the market — and led to a drastic reduction in the administrative burden for the end borrowers
The salary advances led to a significant positive impact on the lives of the borrowers. Over 50% of the borrowers used the loan for business purposes and many others to pay school fees for family members
Smallholders had an overwhelming preference for loans to be deducted from salary payments (instead of self-repayment) and would do so again in the future as wage garnishment allowed for ease in repayment
Opportunities to improve the product offering for employers will be explored in a scale-up pilot, including a reduction in collateralization requirements, deeper integration to DeFi platforms, and a simpler user interface (UI)
“I was able to start my own [livestock] business through the salary which is now helping me to generate extra income and has also helped to plan for my finances.”
Pilot Participant — Female Landowner, 67 | Nanyuki, Kenya
Access to affordable credit can make a significant difference to smallholders looking to invest in their own productivity.
An estimated 500 million households (2.5 billion people) depend on smallholder farming for their current and future livelihoods, a number that will most likely increase in the future. Yet $170 billion — or 70% — of the smallholder demand for agricultural and non-agricultural finance goes unmet.
Traditional financial institutions are often reluctant to offer credit products to smallholders and agricultural workers as it’s both expensive and unprofitable to lend small amounts of money to groups deemed ‘risky’ with a higher likelihood of defaulting due to limited and low-income streams. Other credit options require guarantors or savings or come with predatory terms.
In April 2022, we launched an employer-based lending pilot in Nanyuki, Kenya with Cinch, Celo, Kotani Pay, and Moola Market. Cinch, a land aggregation business driving economies of scale for smallholders, had been offering payroll advances to employees as a value-added service. This pilot set out to test the potential for scale when integrating a decentralized finance (DeFi) solution into Cinch’s offering to enable fast credit at affordable rates and reduce the administrative burden for end borrowers.
At launch, the pilot offered 69 local landowners, casual laborers, and full-time employees of Cinch DeFi-enabled income advances. Of this group, 38% were women and the average borrower was 38 years old, living in a household of four people.
During the onboarding day, almost all participants opted to have the loan repayments automatically garnished from their next wages, with only three people preferring to self-pay via M-PESA. The total amount that was issued in salary advances via Cinch during the pilot was $9,697.
- For landowners who earn around $107 per month the average loan taken was $128.00.
- For full-time employees who earn around $135 per month the average loan taken was $58.5.
- For casual laborers who earn between $91 and $280 with Cinch, the average loan taken was $28.7.
Most participants were excited to use these funds for school fees, household expenses, and livelihood needs, and were very happy with the 8% interest rate offered by Cinch — significantly lower than the next best alternatives available to the borrowers in the market. Over 9 in 10 borrowers said they could not find a good alternative to the Cinch income advance.
“I wanted to clear the rent for my shop because I had gone a few months without paying my outstanding balance. So I had to take the income advance from Cinch.”
Pilot Participant — Male Landowner, 70 | Nanyuki, Kenya
We had two hypotheses:
- This pilot will provide quick, affordable access to credit for landowners and employees, increase borrower satisfaction with Cinch, and drive financial resilience for smallholder farmers.
- This pilot will significantly reduce the administrative burden for Cinch to provide credit to its landowners and employees, allowing it to attract and retain landowners and casual laborers.
Through interviews with farmers during product launch and monthly feedback sessions we discovered:
The pilot enabled access to quick, affordable credit for smallholders who do not have a viable alternative to borrow equivalent amounts of credit at a similar interest rate, and led to significant positive impact on the borrowers’ lives.
Ninety-six percent of participants were accessing an income advance like Cinch’s for the first time and said they could not find a good alternative to the Cinch salary advance. Nearly 100% of borrowers had not taken a loan or income advance from an alternative provider in the past year, and only 4% reported access to a good alternative such as Kenya Commercial Bank, Equity Bank, or Tala. Over 50% of the borrowers used the loan for business purposes, most using it to buy livestock and inventory to build additional income-generating revenue sources. Those who utilized the funds for nonbusiness purposes mostly used it to pay school fees for their children and grandchildren.
The onboarding process and credit disbursement took place over a single day without focusing on the complexities of DeFi and instead communicating how much individuals could borrow, their repayment commitments, and what salary they’d have left each month after being paid. This onboarding was carefully designed with accessibility in mind, reflected in the fact that 97% of borrowers were ‘very satisfied’ with the onboarding process and the use of USSD and M-PESA (via Kotani Pay) to access the loan.
“I have been able to start my own business and educate my children without much struggle, as I can now afford to pay their school fees on time.”
Pilot Participant — Male Laborer, 34 | Nanyuki, Kenya
“Thanks to the Cinch income advance I was able to start rearing chicken, and now I no longer have to buy eggs hence I can save that money or use it for something else.”
Pilot Participant — Male Cinch Employee, 32 | Nanyuki, Kenya
Smallholders had an overwhelming preference for loans to be deducted from salary payments (instead of self-repayment). This led to high repayment rates and a desire to use this service again for ease of repayment and better household budgeting.
We assumed that most participants would want to dictate how and when they paid back their loan. The high preference for salary garnishing offers an interesting insight into how farmers perceive the act of making repayment — some commented on “not wanting to have to think about it”, and others mentioned the temptation of spending the money before they repay their loan. This is a win-win for both the borrower and the lender — for the lender, there is a lower risk of default and a higher likelihood of repayment, and for the borrower, there is less to think about and no late fees.
Seven in 10 borrowers did not find their Cinch income advance repayments a burden or have to reduce their household’s consumption of food to make repayments. Default rates were highest amongst casual laborers and lowest amongst landowners, full-time employees, and women. In observing borrower behavior, we learned that several borrowers had other outstanding loans and the casual laborers could have been more strictly screened for eligibility based on their work attendance history. This highlighted the need to develop a much tighter credit policy with stricter requirements for each borrower type, excluding anyone with pre-existing outstanding loans.
The DeFi integration into the product enabled a reduction in interest cost — the product interest rate was 8% APR, less than half of what was available on the market — and also led to a drastic reduction in the administrative burden for the end borrowers (as against applying for a loan from a local bank or cooperative).
The DeFi integration into the product did not reduce the administrative burden for Cinch, which was a decision made at launch stage. However, the borrower experience was greatly streamlined and the administrative burden was drastically reduced as compared to applying for a loan from a local bank or cooperative. Previously, borrowers needed to approach the Cinch community manager one by one and then the loan was disbursed via MPESA — in contrast to credit delegation via Moola.
This contributed to the high demand for the product on launch day with many people trying to join the pilot even though they had not been called to participate. Of the final group, 43 out of 69 borrowers surveyed loved the easy application process, payment flexibility, and speed of disbursement, with only two borrowers wanting a longer repayment period and flexibility on when to repay. Participants greatly valued this product and we expect these loans to be an important retention and acquisition strategy for Cinch.
“I have not met an employer that cares about its people’s financial well-being like Cinch does.”
Pilot Participant — Male Landowner, 35 | Kenya
Overall, the pilot got an excellent net promoter score of 62 which is 20 points higher than the Global Financial Inclusion Benchmark. The score was based on how the pilot participants valued the ease of application, payment flexibility and quick disbursement — clearly illustrating that the focus of the pilot on ensuring easy access to credit to participants was achieved.
When examining the DeFi integration, we see learnings and opportunities to optimize in the following areas that could support in scaling this product:
1) Collateralization requirements
Moola Market is a lending protocol that allows users to earn compound interest on deposits or to take out over-collateralized loans, delegated loans, and flash loans. The over-collateralization requirement makes it difficult for underbanked, lower-income groups to effectively use. Cinch provided the collateral in this pilot, not the individual borrowers, but this would inevitably become a barrier to scale.
To offer an under-collateralized product, DeFi lenders can secure their loans against Cinch’s expected future cash flows. By underwriting Cinch, the lender can have confidence in the employer’s ability to repay. Given Cinch’s close and long-term relationships with its borrowers, Cinch can scalably extend affordable, uncollateralized loans to smallholder farmers who otherwise would not have access to such products. In the future, on-chain credit rating protocols could also give individual borrowers the ability to build credit history. This would gradually allow for a reduction in collateralization requirements for credit-worthy borrowers.
2) Standardized product
In this pilot, loans were issued with varying amounts, repayment intervals and repayment methods. In the absence of full automation, this range of permutations created a suite of challenges in administering the product.
Given the borrowers’ overwhelming preference for repayment via salary garnishing, a next iteration of this model can exclusively offer this as the repayment method. A standardized and automated credit policy will also reduce complexity, until the product offering is ready to mature.
3) Simpler UI/UX
A simple Web3 plug-and-play lending solution for employers doesn’t exist yet. As Cinch is a non-crypto-native company, integrating with Moola Market and Kotani Pay to already existing internal finance and accounting systems introduced additional work outside of its core focus.
The next iteration of this pilot product can be an all-in-one solution where a DeFi protocol manages all required integrations on its own. Then, the employer (such as Cinch) simply has one connection point, simplifying their on-ramp to Web3.
There is no doubt about the demand for flexible finance at the smallholder level. As this pilot demonstrates, there is no shortage of evidence on the benefits and impacts on smallholder farmers through better access to financial services like credit. The question now is how to better support organizations, like Cinch, who clearly recognize these benefits for farmers but also see the opportunity for their own businesses in terms of retention and acquisition of new customers, to provide finance to farmers in an affordable, efficient, and scalable way.
Integrating with DeFi lending protocols represents an opportunity to offer low-interest credit sourced from global liquidity pools that also incorporates smart contracts to simplify the loan management process. We view several opportunities to improve this product offering by developing an un(der)-collateralized DeFi solution that seamlessly embeds into the back-end of non-Web3 platforms. Stay tuned for updates as we scale-up this initiative to provide affordable credit to smallholder farmers and other underserved groups.
Stay tuned for updates, evidence, and insights on our other Mercy Corps Ventures pilots, responsibly testing Web3 solutions for unbanked and underbanked populations in emerging markets.