MANY developing countries are struggling to direct agricultural financing in more purposeful and moral ways. For instance, if contract farming was the main ticket out of poverty, most farmers who have been contracted to produce cotton, tobacco, sorghum and dozens of other commodities for generations would have completely moved out of poverty into sustainable self-reliance. The fact that progress has been unsatisfactory suggests a lot is still unknown. Rather than continue with traditional financing models where agricultural finance is put in banks, funders, including government, can consider alternative ways of directing capital towards improving communities as opposed to individuals.

CHARLES DHEWA

Towards informed targeting

Targeted agricultural financing can result from accurately assessing demand patterns which are increasingly becoming diffuse. Unfortunately, banks are still using traditional ways of assessing financing decisions. For example they continue to prioritise availability of land, water, labour and other tangible assets. Unknown to financial institutions is that the definition of off-takers is evolving from referring to formal institutions like processing companies to encompass relationship-based niche markets whose characteristics can only be understood through robust evidence pathways.

A decision to set aside a $50 million horticulture fund should be informed by evidence from the demand side. Without evidence, such a decision can see that facility going to less than 30% of farming regions where horticulture is prevalent at the expense of other deserving production zones. As if that is not enough, putting that facility in traditional banking institutions is like putting new wine in old bottles. Besides prioritising their own funding models, banks will ensure such financing is accessible to individuals, as opposed to farming communities and irrigation schemes which do not have individual financial identities. The fact that farming communities and irrigation schemes are not taken as private companies implies they will not access such funding although they may produce better outcomes.

Cash model for informal markets

Just as farmers involved in the production of cash crops like cotton, cocoa, sugar cane and tobacco get first preference in accessing cash, actors in the informal markets such as farmers and traders should have a similar facility extended to them. That will add more meaningful value because a lot of cash circulates in informal African food markets every day. The fact that cotton and tobacco farmers handle cash once a year means that money does not circulate as fast and efficiently as in informal markets. The absence of a cash facility is the main reason why cash is not flowing properly along informal market value chains. Traders end up keeping cash within their networks. The end consumer buys commodities in cash from the vendor, who also buys in cash from the trader who also buys in cash from the farmer. It means cash dominates the whole transaction process. Other means of transacting are not available to consumers.

The farmer is the one who needs cash due to the absence of appropriate systems that can facilitate the meeting of subsistence and other expenses such as school fees, medical expenses, transport and other uses which consume 70% of the farmer’s income. The other 30% goes to inputs. In the absence of appropriate transaction facilities, traders end up paying cash all the way.

Smoothening middle actors

There is need for a cash model that covers middle actors like traders. That can be an overnight or weekly facility, ensuring availability of cash when traders need it.
Currently, when a trader buys from the farmer using cash, s/he sells to the vendors using cash. By 10 am or noon every day, the trader will have finished trading and now keeping money which could be put in a bank if a facility was available. In some cases, traders who deal in bulk commodities like potatoes spend two to five days selling so that they build up cash for going back to the farmer. Ultimately the trader can go back to hoard commodities with $5 000. However, during the time the trader is trading, s/he could be putting his/her money in the bank and only withdraw when s/he needs to go and fetch the commodities.

A cash facility through banks can make this a viable option. The money should be in the bank and available on call. This model can sustain itself from the rate at which transactions take place (the velocity of transactions in informal markets). In this case, the speed of transactions becomes the main revenue stream. If such a facility is set up in informal agricultural markets, farmers who trade commodities like tomatoes over a week or two may see the wisdom of not taking money home every day but leave it in the bank. They can withdraw their money after a month when they want to buy inputs or invest in livestock. Eventually, farmers and other market actors see the convenience of paying school fees and meeting other requirements through the facility.

Building a sensible agency banking model

A financial facility in the market can lay the foundation for sensible agency banking models to be built from the market. For instance, tomato farmers from different production areas can become connected with banks and other actors through the market via this self-contained financing model. The facility can be membership-based in such a way that members are given special cards that entitle them to priority status like what happens in some financial institutions. If tobacco farmers who do not use cash regularly have a special facility that enables them to withdraw $1000 a day, what about traders and farmers who handle cash every day? Since there are limited online facilities in most African farming areas, it is currently difficult to see how cash received by farmers producing cash crops like cocoa and tobacco travels along value chains. That is why a special agricultural marketing fund will stimulate agricultural growth.

Financial institutions can easily identify farmers and traders in need of loans based on their special accounts with the fund. Ultimately farmers will bring cash into the banking system. Loans to farmers can be transferred into value chain actors’ accounts but repayment will be in the form of cash. Other options like buying inputs can be built into the facility. The model will have special rights that support sustainability. It will be membership-driven through subscriptions and enable purely cash-on-call. The facility will also make the introduction of plastic money smooth through nodes in the value chains.

Eventually farmers will see no need to continue carrying cash. A major value proposition for this facility is in the velocity of transactions. A super-agent or aggregator will be responsible for facilitating the process through, for instance, handling cash flow requests for each day. At the moment, most agency banking models are not connected to other value chain actors. For instance, there are no Point of Sale (POS) machines among the majority of service providers in most farming areas. That is why mobile money models are not reaching their potential. When traders send money to farmers and the farmers do not get that money through mobile money agents, the whole system is not worthwhile for actors. To avoid some of these challenges, the cash model can be backed by a revolving loan fund which anchors growth and sustainability. If the market has $50 000 in circulation, the revolving fund can inject another $50 000, thus planting the seed for growth.

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