When smallholder farmers deliver their farm produce to the buyers, evidence based studies have demonstrated that they often need instant payment for immediate use and reinvestment into their economic systems and livelihoods.
Delayed payments may mean they have to take a loan and incur interest costs to bridge consumption or invest in a new seasonal crop. The delays can also impact their profitability directly by increasing costs or indirectly by impacting their ex-ante market behavior.
It has further been observed that lack of trust in a buyer’s ability to pay on time can influence a farmer to side-sell or choose an option which offers favorable payment terms, but a lower return on the farm produce.
This was the gap AGRA through its Financial Inclusion for Smallholder Farmers in Africa (FISFAP) program in collaboration with Umati Capital Limited (UCAP) sought to bridge using digital solutions in a partnership that ended in 2018.
Umati is a financial services company based in Nairobi, Kenya that seeks to revolutionize access to finance through the innovative use of technology. Through a system called Supply Chain Finance (SCF), Umati allowed a supplier (smallholder farmers) at the time of delivery of farm produce, to access 80% of the invoice value through mobile money at any time before they are paid by the buyer.
The SCF system however, requires a formal contract or agreement between a supplier and a buyer. Payments are received directly from the buyer on behalf of the supplier with funds transferred via integration with bank and mobile money systems.
Umati’s initial assumption was that the possibility of getting spot cash on delivery gives farmers a reason not to side- sell to traders and opts for a professional buyer who offers a better price and other additional services like input credit and extension services.
By the end of the partnership, AGRA sought to understand developments in Umati’s business and service model and, more broadly, to distill lessons for SCF in smallholder finance, and document the key lessons encountered when piloting and implementing an automated procurement system alongside Invoice Discounting (ID) financing solutions for selected staple food value chains.
It is important to note that supply chain finance has rarely been tested with smallholders in loose value chains. As a result, a key lesson for AGRA is that due to the unstructured nature of the food crop markets and the dominance of cash-based transactions, the demand for supply chain financing solution is low in staple food value chains.
Unfortunately, just a few commercial banks offer bank supply chain finance products. Yet, the ones that do, tend to focus on larger buyers. Banks view working with SMEs as a challenge due to the absence of adequate information on which to base credit decisions, lack of collateral and high transaction costs.
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