Digital Credit for Agriculture
A farmer checks his phone | Photo Credit: Acre Africa
Context
Financial institutions in developing countries lend a much smaller share of their portfolios to agriculture relative to agriculture’s share of GDP, due to a combination of high transaction costs, agricultural risks, and a lack of agricultural sector knowledge among lenders (World Bank 2015). The researchers worked with Acre Africa and Pezesha Africa Limited in Kenya to understand whether farmers could be reached using digital credit, i.e. a product designed to assess agricultural risks and reduce transaction costs when lending is instant, automated, and remote.
Study Design
The research had four objectives: a) to develop an agricultural risk score that assesses credit risk, b) to explore the feasibility of offering insured digital credit to smallholder Kenyan farmers, c) to assess demand for agricultural digital credit, and d) to analyze loan default rates. While the research team was able to develop an agricultural risk scoring system, digital credit proved difficult to implement in this context. After unsuccessful attempts to reach farmers via SMS, 1,131 farmers were reached by phone, but only 11% expressed interest in the loan. These 122 interested farmers were randomly assigned into two treatment groups: in one group farmers were offered a digital loan of $15, in the other group farmers were offered $50 loans. Both loans had a 6-month repayment period, a fixed interest rate of 3.16%, and included crop index insurance.
Results and Policy Lessons
Only half of the farmers who had initially expressed interest went on to actually take out a digital loan (61 farmers), too few to allow for analysis of the impacts of digital loans in this context. Among those who borrowed, roughly half of both treatment groups made late payments. The researchers conclude that smallholder farmers are either not credit constrained, or likely wary of digital credit even when loans are insured. High default rates on these digital loans designed for smallholder farmers regardless of loan amount further demonstrates the challenges of designing a viable digital credit product offering for smallholder farmers.
