Digital Loans in Kenya’s Farm Fields

Farmers like Theresia Wairuba can now receive and repay loans via mobile phones. (Photo: Riccardo Gangale/Grameen Foundation)

September 14, 2016 by Juan Guardado and Caitlin Burton

More than half a billion Africans are smallholder farmers, and many need financing to invest and grow their farms. However, less than 3% of credit goes to Africa’s agriculture sector; the unmet need for finance is estimated at $450 billion across the continent. By all appearances, farmers are too risky to be offered credit because their cash flows are irregular, their track record is unknown, they are too costly to serve, and their needs are not well understood.  

But our work in East Africa and Latin America is showing how digital innovations can overcome the challenges of rural financial inclusion: a farmer’s credit worthiness can be assessed, and agricultural financial services can be profitable and sustainable.  

Take, for example, Kilimo Booster, a mobile-enabled agricultural loan product for small-scale farmers that Grameen Foundation designed together with Musoni Kenya, the world’s first all-cashless microfinance institution. We created Kilimo Booster to enable smallholders to access affordable working capital, invest in assets, diversify and add value to their enterprises, and gain financial and business skills.   

Two years after the launch of the product, 28% of Musoni clients use Kilimo Booster, 60% of whom are women. Even more impressive, the portfolio quality (at 1.3% PAR30*) is better than Musoni’s general loan portfolio and grew by more than 196% in the first 8 months of 2016.

What Sets Kilimo Booster Apart

As groups or as individuals, clients can apply for a Kilimo Booster loan in the field, without ever having to enter a branch, via a Digital Field Application (DFA). With the DFA, a loan officer meets with clients, captures the information required for Musoni to verify his/her identity and make credit decisions, and initiates loan requests remotely for approval by the branch-based credit committee. When customers are approved, funds are paid to their digital wallet using mobile money, which can be cashed out at a mobile money agent or spent at one of the tens of thousands of local merchants that accept mobile money in Kenya.  

The basic product standardizes the recording of the types of crops and expected cash flows. These cash flows then determine a custom payment schedule that better matches farmers’ cash needs, so both loan officers and customers make fewer costly trips to/from the field.  Grameen Foundation is also using sophisticated analytical tools to increase the efficiency of loan processing and decision-making. We are testing the application of machine learning algorithms to define a risk-tiered loan monitoring process that allows loan officers to more efficiently service low-risk groups and thus focus more time originating new bank customers.  Lastly, a new parametric modelling technique is being used to analyze farmer crop cycles and resulting cash flows—better reflecting each farmer’s unique production calendar—using a simplified set of inputs that decreases the amount of data collected and time spent in the field. 

Armed with new-found operational strength and a ground-breaking digital loan product for farmers, Musoni was recently selected as a winner of The MasterCard Foundation’s Fund for Rural Prosperity Scaling Competition, one of only five institutions to receive the award across Africa. The funds will support work by Musoni and Grameen Foundation to exponentially grow Kilimo Booster’s client base over the next five years Kilimo Booster, while reducing delivery costs by 30% and maintaining Musoni’s stellar sub-5% PAR30. This work will include creating a partnership ecosystem that brings more value to farmers by engaging agribusinesses, extension service providers, and input suppliers to help Kilimo Booster customers make the most of their loan from Musoni.

Kenya’s booming mobile money industry is enabling Musoni to more efficiently identify and support credit-ready customers, craft customer strategies unique to each borrower, and improve loan officer productivity without diminishing the quality of its loan portfolio. This technology-enabled approach is extending financial and agricultural services to the rural poor while proving the business case for financial institutions to lend to last mile customers. Around the world, Grameen Foundation is developing solutions that address one or more of the success factors discussed in this article, with the goal of increasing banks’ ability to lend to this un- and under-banked segment. 

Stay tuned over the next few months as we publish more examples of these solutions, such as: using digital services to facilitate unlikely partnerships between the agriculture and financial sectors to lower the cost of doing business in rural Africa; enabling new business models using digital data flows for improved decision-making; and distilling powerful customer insights to design products that prove valuable to poor customers and are commercially viable for banks.

* PAR30 is the % of the outstanding loans (principal amounts) that are more than 30 days overdue