the drumnet project : lessons learned from a microfinance initiative in kenya’s agricultural...
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The DrumNet Project:Lessons Learned from a Microfinance Initiative in Kenya’s Agricultural Sector
Tom Rausch, PRIDE AFRICA
European Microfinance PlatformNovember 2010
Lessons from a Microfinance Initiative in Kenya’s Agricultural Sector
Background DrumNet in the Field Lessons Learned
Agenda
Lessons from a Microfinance Initiative in Kenya’s Agricultural Sector
PRIDE created in 1988; one of the first to successfully utilize group solidarity microfinance approach in East/Southern Africa
Model designed in Kenya, then replicated in Malawi, Tanzania, Uganda and Zambia; network now serves 250,000+ clients
PRIDE established a microfinance model that scaled across several African countries, but model effective only in urban and peri-urban areas
Microfinance and PRIDE AFRICA Background
Source: PRIDE AFRICA
Traditional model inadequate when dealing with rural farmers facing long/risky crop cycles and poor group unity
PRIDE focuses on agricultural sector in 2003 to achieve larger organizational impact and design microfinance approach for smallholder producers
The PRIDE Network
Lessons from a Microfinance Initiative in Kenya’s Agricultural Sector
We found weak linkages between key actors in Kenya’s agricultural sector; made the design and deployment of mutually-beneficial financing products extremely difficult
What We Found… Background
Source: PRIDE AFRICA
ProducersProducers BuyersBuyers
Rural Broker Urban Broker
1. Due to smallholders’ low productivity and geographic dispersion, most buyers choose to work through brokers. This reduces the price farmers receive for their produce.
2. Banks face high transaction costs and risk when trying to deliver financing products to poor, isolated farmers. Products either not right for farmers or not profitable for bank.
3. Agro-Dealers forced to take on input credit burden, so cannot provide other key services.2. 3.
BanksBanks Agro-DealersAgro-Dealers
Lessons from a Microfinance Initiative in Kenya’s Agricultural Sector
The DrumNet Project
BanksBanks
ProducersProducers BuyersBuyers
Agro-DealersAgro-Dealers
DrumNet introduced a platform that facilitated and incentivised cooperation between supply-chain partners, thus making producer financing increasingly feasible
Background
Source: PRIDE AFRICA
Lessons from a Microfinance Initiative in Kenya’s Agricultural Sector
The DrumNet PlatformDrumNet’s Platform was two halves that made a whole; a rule-based business process made efficient by a central IT System
Business Process
IT System
End-to-end process with defined roles and responsibilities for supply-chain partners
Created a standardized, predictable, rule-oriented environment in which partners could engage and complete transactions
Single unified database (Postgres) connected to a web-based portal (Java)
Interactive with mobile phone technologies through SMS Gateway
Enabled business process by reducing communication and transaction costs
Background
Source: PRIDE AFRICA
Lessons from a Microfinance Initiative in Kenya’s Agricultural Sector
Background DrumNet in the Field Lessons Learned
Agenda
Lessons from a Microfinance Initiative in Kenya’s Agricultural Sector
Recruitment and Registration
0254 0102 000032Embu Farmers Group
Contract TIF andLoan
1 2 3
DrumNet Operations In the Field
After joining DrumNet, farmers gained access to a fixed purchase price contract from a large buyer; that contract, along with a TIF, secured a farm input loan from a bank
Source: PRIDE AFRICA
Lessons from a Microfinance Initiative in Kenya’s Agricultural Sector
eToken: 368293Seed:10kgDAP: 500kg
Bill of Materials and eToken Notification
4
Cashless Input Pick-up; Agro-dealer Paid Directly by Bank
5
DrumNet Operations (Continued) In the Field
Partner agro-dealers alerted to farmers’ needs and farmers alerted via SMS when inputs available; farmers collect inputs using a cashless transaction process
Source: PRIDE AFRICA
Lessons from a Microfinance Initiative in Kenya’s Agricultural Sector
Pickup scheduled for 27 March 2010
DrumNet Operations (Continued) In the Field
Farmers plant and progress is tracked via SMS scouting; when farmers confirm crop is ready, they receive pick-up date and aggregate produce at agreed collection point
Cultivation and SMS Scouting
6 7
Harvest
8
Collection Point
Source: PRIDE AFRICA
Lessons from a Microfinance Initiative in Kenya’s Agricultural Sector
9
DrumNet Operations (Continued) In the Field
Buyer has collected 7500kg seed
1)Yes 2)No 3)Call
Buyer Collection and Transaction Verification
BankBank
BuyerBuyer
10
Invoicing and Payment
Buyer takes title of produce at collection point; SMS verification process triggers payment invoice leading to repayment of bank loan and DrumNet/farmer payments
Source: PRIDE AFRICA
Lessons from a Microfinance Initiative in Kenya’s Agricultural Sector
Background DrumNet in the Field Lessons Learned
Agenda
Lessons from a Microfinance Initiative in Kenya’s Agricultural Sector
Key Lessons: Market Demand Lessons Learned
DrumNet was implemented across Kenya and provides a good basis to draw lessons; first is that demand for Ag finance services is high, but flexibility is also important
DrumNet active in five Kenyan Provinces in collaboration with two large agro-buyers, a commercial bank, several agro-dealers and 4,000+ farmers
Facilitated several different supply-chains, including baby corn, French beans, passion fruit, sunflower and others
As expected, farmers keen to join and take advantage of services; banks and agro-buyers also eager to get involved
Also as expected, common request for larger loans to acquire irrigation equipment, storage facilities etc
Less expected was that many farmers demanded smaller loans and, in some cases, no loan at all
Source: PRIDE AFRICA
Lessons from a Microfinance Initiative in Kenya’s Agricultural Sector
Key Lessons: Loan Repayment Lessons Learned
Repayment rates increased as project advanced, from nearly complete default to better than 70%
Increase largely due to improved production techniques, more flexible loan packages and better definition of rules/penalties
But repayment rates never approached target of 90%; primary culprits included poor weather and side-selling
Kenya hit by drought from ‘07 to ‘09, must bundle loans with crop insurance and procurement of irrigation technologies
Side-selling brought on by the entrenchment of brokers, but also due to bank apathy because of partial loan guarantee
DrumNet saw improved repayment rates as the project progressed, but never hit its target; need for crop insurance apparent, questions about loan guarantee utilization
Source: PRIDE AFRICA
Lessons from a Microfinance Initiative in Kenya’s Agricultural Sector
Lessons LearnedKey Lessons: Operating Environment DrumNet started in 2003 and faced many operating environment challenges; issues remain, but noticeable movement towards friendlier rural microloan atmosphere
Operations suffered from restrictive bank practices that forced farmers to travel great distances and DrumNet to submit an abundance of paperwork for each transaction
Also legal issues, e.g. SMS not considered a legal document, leading to dramatic payment delays, etc.
However, with the introduction of Agency Banking, as well as innovative banking products like M-Kesho and Iko Pesa, rural, smallholder lending is becoming more practical in Kenya
Also have progress in policy space and technology infrastructure that improve the timeliness and reduce the cost of financial transactions
Source: PRIDE AFRICA
Lessons from a Microfinance Initiative in Kenya’s Agricultural Sector
Lessons LearnedParting ThoughtsDrumNet operated as a research project, but has the potential to run as a profitable service provider; this increasingly the case given Kenya’s current trajectory
Demand for financial services is rife among key agricultural players and the local environment is increasingly accommodating
With the integration of technology and other essential products, high repayment rates can be achieved without astronomical time/monetary costs
The (large) missing piece is the build of a more professional software that can handle volume and reduce the need for extensive human input
Source: PRIDE AFRICA
Lessons from a Microfinance Initiative in Kenya’s Agricultural Sector
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