Kenya is widely acknowledged to be a global leader in mobile money. Over two-thirds of its adult population uses M-PESA, the mobile money system launched in 2007 by Safaricom.
But even in Kenya, many are not using M-PESA. I know many smallholder farmers who are part of this group. They receive seed-and-fertilizer loans from the agriculture organization that I work for, One Acre Fund, and they repay their loans in cash.
One Acre Fund’s field operations team in western Kenya spends much of the year focused on farmer repayment, and a significant percentage of staff time is devoted to the labor-intensive work of collecting money from individual farmers. They are incredibly motivated to improve the efficiency of One Acre Fund’s repayment systems—because less time spent on repayment means more time available for farmer training and education. If they could have deployed M-PESA to streamline farmer repayment years ago, they would have. But the operational barriers were too high.
On paper, digital financial services can sound like a silver bullet to reach millions of rural, underserved smallholder farmers. In reality, the challenges can be greater than the deployment of a low-tech solution. When One Acre Fund staff investigated, they found:
- Many smallholder farmers did not have mobile phones. When One Acre Fund began operations in 2006, the majority of clients did not have mobile phones.
- If they had phones, they weren’t charged. Many farmers purchased used phones with terrible battery life. They didn’t have electricity at home, so they had to travel to a local shop and pay to charge the phone. This could be a 5-hour round-trip endeavor, and was a serious barrier to phone use.
- The mobile money agent network was lacking. Some areas were well served by mobile money agents, but others didn’t have a single agent. The spotty coverage meant that One Acre Fund couldn’t roll out a mobile repayment solution to its entire Kenya operation, a major deterrent to moving forward.
- Transaction fees were high. Some One Acre Fund farmers were making loan repayments as small as $3.00, and M-PESA transaction fees were about $0.30 per transaction. Farmers were not willing to pay the transaction fee, and it was not financially sustainable for One Acre Fund to pay those fees for all its clients in Kenya.
In the last five years, the situation has gradually changed. In 2012, the Kenya finance team changed the repayment process so that field officers were required to use M-PESA to submit farmer repayment to headquarters instead of submitting cash. By 2013:
- Many smallholder farmers had access to a mobile phone, even if they didn’t have one themselves. Some farmers had their own phones, and some farmers had SIM cards that they used in the phone of a relative or neighbor.
- It had become somewhat easier to charge a mobile phone. One Acre Fund offered solar lights on credit to its clients that were capable of charging mobile phones. Clients were able to charge their phones more easily, and also charge the phones of their neighbors (for a small fee).
- The agent network had improved dramatically. Across One Acre Fund’s 18 districts of operation in Kenya, an organizational survey found that 72 percent of sites (a village within a district) had three or more M-PESA agents. Only 6 percent of sites had no M-PESA agents.
- One Acre Fund had found a way to collect small payments with reduced transaction fees. In mid-2013, Safaricom introduced a new feature called “Buy Goods” that allowed customers to pay for goods and services without a transaction fee. One Acre Fund paid a fee of 1 percent to receive the payments.
In response to these changes, One Acre Fund began piloting mobile repayment with about 1,000 farmers in one district in mid-2013 (roughly 1.5 percent of Kenya clients at the time). In the initial trial, group leaders collected loan repayment from individual farmers, and then submitted an aggregate payment through M-PESA. This trial allowed the finance and operations teams to troubleshoot the repayment procedure and compare repayment to other Kenyan districts. The trial went well, and One Acre Fund decided to expand it in 2014.
The expanded trial included two configurations: group leader repayment (like the 2013 trial), and farmer repayment (new). The group leader repayment trial included 3,500 farmers (roughly 4 percent of Kenya clients), and the farmer repayment trial included 400 farmers (roughly 0.5 percent of Kenya clients). By mid-season, neither configuration showed a difference in repayment trajectory as compared to their respective control groups (One Acre Fund has a flexible repayment structure, so farmers have the flexibility to repay any amount at any time during the loan term. In practice, repayment tends to follow a specific trajectory over the course of the season, and both mobile repayment trials have a repayment trajectory that mirrors their respective control groups). As a result, the farmer repayment trial is currently being expanded to about 5,000 additional farmers in three different districts.
It’s too early to say exactly when One Acre Fund’s Kenya operation will be able to roll out mobile repayment to all its customers. And in Rwanda, Burundi, and Tanzania, the other countries where One Acre Fund operates, mobile repayment is still impossible due to less robust mobile money platforms as well as the challenges described above. Mobile money might be a powerful tool in the future to improve the efficiency of delivering financial services to smallholder farmers, but for now, reaching the last mile of farmers still requires good old-fashioned legwork.
The experiences at One Acre Fund give valuable insights into management of credit facilities especially to micro-enterprises and small holder farmer clients. I have Been working in partnership with Hivos to provide technical assistance to MFI's funded under their Microfinance Programme since 2012 and repayment collection has been a general challenge.
In my experience (Western Kenya), flexible repayments brought about challenges in repayments since clients got caught up in large instalments towards the end of the repayment period hence defaults (although this model has been preferred by the clients).
The farmer repayments model has been discouraged since it affected the cohesiveness of the groups (the independence of the farmer outside the group) and diluted the Group's loan policing efforts thus placing a strain on the institution in following repayments. In my opinion, clients should view repayments as an obligation to the group other than one to the 'One Acre Fund'.
As for paying the M-Pesa fees (before introduction of the 'Buy Goods' facility) it was observed to being cheaper than doing the '5 Hour round trip'; communication helped a bit in the uptake by letting the clients see this fact. However farmers still felt the transaction charges was high.
As much as mobile technology is crucial in provision of affordable financial services, we should keep in mind the effects to the groups, and the relationship between the clients and the financial service providers. We do not want to end up being just another till number at the end of the day, do we?
Albert K Ngugi
Lead - Business Advisory
Consumer Trends Ltd.