Last mile partnerships for smallholder finance viability
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This document provides a baseline report on partnerships between last mile firms and financial institutions to improve smallholder finance. It details four partnerships being studied between agribusinesses, technology providers, and financial institutions. The report finds that such partnerships have the potential to improve viability by sharing costs, reducing risk for financial institutions, and providing alternative data on farmers. However, significant challenges remain such as financial institutions' lack of understanding of agriculture and reluctance to use alternative data from last mile firms. The report outlines areas to assess in future evaluations of the partnerships.
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Last mile partnerships for smallholder finance viability
- 2. 2 Executive summary (1/4) Key Question 1: How can last mile partnerships improve the viability and scalability of financial service provision? Ø Financial institutions (FIs) demonstrate interest in entering partnerships when approached by agribusinesses or technology providers who offer solutions that: - Share cost: Growing market share and the customer base was highlighted as a priority by most FIs interviewed. Last mile firms can provide value to FIs through their on-ground teams / infrastructure, connection with farmers and use of innovative technologies. This can significantly improve FI costs for: customer acquisition, distribution of products, product development and financial literacy training for farmers - Reduce risk: FIs have historically avoided lending to smallholders due to a lack of knowledge on agriculture and insufficient information on farmer activities. Agribusinesses, through aggregating of farmers, their off-taking activities and potential to share loss in the event of farmer default can significantly reduce FI risk - Provide alternative data: Last mile firms collect multiple streams of data that can be used for credit scoring, insurance assessments and customer understanding. This can help FIs reduce product development costs, increase customer base, reduce risk of lending and gain insight on products farmers use. To date, building trust in data remains a challenge Context and objectives: A deep dive study on progressive partnerships that improve the business model sustainability of smallholder finance Ø Dalberg was commissioned by the RAF Learning Lab to assess the motivation, process, business dynamics and results for farmers from partnerships between last mile firms (agribusinesses and ag-focused technology providers) and financial institutions over a period of 18 months. This report presents baseline study findings. Ø The study is based on interviews, field visits and other data from four FRP innovation competition winners: Prepeez, Kifiya, Empresa de Comercialização Agricola (ECA) and Biopartenaire. Stakeholders interviewed also included their potential partners and sector experts. 1 Throughout this report we will use “last mile firms” to refer to: (1) businesses working directly with farmers such as extension providers and off-takers and, (2) Technology providers who have developed platforms that reach smallholder farmers as a specific target market
- 3. 3 Executive summary (2/4) Key question 2: What are the impediments to partnership development? Ø Last mile firms experience significant challenge when searching for and leading partnership discussion, namely: - FIs don’t understand agriculture and therefore remain reluctant to go into partnership. Last mile firms must spend extensive time convincing multiple stakeholders within FIs of the value proposition - The commercial benefit of partnerships is not readily apparent. A lack of historical precedent or evidence of partnerships in agriculture impede development. A lack of precedent also creates difficulties when negotiating the operational model, cost and revenue sharing arrangements - Financial institutions don’t trust the data that last mile firms provide. FIs are risk averse and therefore reluctant to use alternate data provided by agribusinesses or ag-focused technology providers without significant verification of its integrity and quality Key question 1 continued… Ø Agribusinesses and technology providers demonstrate interest in partnering with FIs where they can lower the cost of capital for farmers and improve the monetization of the systems that the last mile firms have developed Ø Both last mile firms and FIs believe that the above elements improve the viability of providing financial products and services to smallholder farmers. To date, however, the partnerships in place remain in their infancy, meaning tangible results and evidence of improved viability for both businesses and farmers is still forthcoming Ø No evidence or discussion of improved scalability was given during the Baseline assessment. All partnerships remain in piloting and/or proof of concept stage. It is expected that evidence of partnership benefits for scaling will not occur until viability of partnerships are proven
- 4. 4 Executive summary (3/4) Areas that should be tested through the Mid-point check-in and Endline Evaluation Ø This baseline report has focused on the activities that both last mile firms and FIs have been undertaking to set-up partnerships and why both parties believe partnerships will be valuable. The mid-point check-in and endline evaluation (proposed for August 2017 and early 2018 respectively), should focus on: - Understanding where there has been progress on partnership negotiations and development - Whether beliefs on the benefits of partnership still holds - What the results have been, if any, from partnerships for businesses and smallholder farmers Key question 3: What enables partnership development and what should last mile firms look for when seeking FI partners? Ø In interviewing last mile firms and FIs, common enablers were evidenced supporting partnership formation: - FIs with stated goals or strategies in agriculture or the Base of Pyramid (BoP) are more likely to be interested in partnerships. These FIs often have little internal capability or knowledge on how to reach stated goals - Partnership teams within FIs improve the chances of partnership formation. Partnership teams are generally more open to innovative approaches and have experience that can expedite partnership negotiations - Existing relationships are important. Trust is crucial to partnership formation, existing relationships improve trust - Short term guarantees to support piloting, testing of alternate data and trust building can help. Underwriting risk in the short term increases willingness to adopt innovative approaches during the early stages of partnership
- 5. 5 Executive Summary (4/4) The structure of this report Ø This Baseline Report is set out into five sections: - Section 1: Context, Objectives, and Methodology including purpose and context of this Report - Section 2: Details on study participants including the partnership models they’re pursuing and the activities of both the last mile firms and FIs on developing partnerships - Section 3: Details on how partnerships are improving the viability of financial service provision, the associated challenges and enabling factors - Section 4: Lessons learned including ongoing challenges to partnership development and enabling factors - Section 5: Annex, including an outline of partnership results so far, brief details of complimentary studies being undertaken by other Mastercard funded organizations
- 7. 7 Context and objectives of the study • The scale of the smallholder farmer need for financing is huge, estimated at approximately $30bn in SSA • The recently released report – Inflection Point - proposed progressive partnerships as a key to addressing business model sustainability challenges in the industry. Building on this, Dalberg, with the Rural and Agriculture Finance Learning Lab, is studying the importance of partnerships for financial provision • This deep dive study focuses on leveraging the participation of the Fund for Rural Prosperity (FRP) grant winners to generate insightful answers for the broader rural and agricultural finance community on innovative approaches to overcome barriers to the provision of finance, specifically focused on the question of: • This question will be answered through an engagement that spans across 18 months with three major points of activity: baseline, midpoint and endpoint data collections. Data collection will focus on reviewing the motivation, process, business dynamics and results partnership formation • The FRP winners involved in the study include: Prepeez, Kifiya, Empresa de Comercialização Agricola (ECA) and Biopartenaire The objectives of this report are to: • Detail the partnerships investigated, including the process, methods and motivations of both the last mile firms and financial services institutions for forming partnerships • Outline the benefits from partnerships, the enabling factors that support creation and the common challenges • Outline the results and/or impacts seen to date from partnership formation ContextObjectives In what ways – if at all – do business partnerships driven by technology providers or innovative agribusinesses (“last mile firms,” distinct from models led by financial institutions) improve the viability and potential scalability of financial service provision to rural customers?
- 8. 8 Mid-point check-in Endline evaluation 2 3 The deep dive will be completed over 3 stages - this report details the findings from the pre-visit and baseline evaluation Pre-visit preparation Baseline evaluation • Review available documentation on FRP winners • Prepare interview guides for FRP winners and their partners • Conduct meetings via phone with FRP winners to gauge state of partnerships • Schedule initial field visits with FRP winners and their partners • Conduct field visits (meetings) with FRP winners and their partners • Finalize baseline Deep Dive report after meetings • Share finalized baseline Deep Dive report with Learning Lab team • Modify FRP winner interview guide • Hold calls with FRP winners to determine progress / any major changes in partnerships • Develop short Midline report outlining any major changes seen since Baseline study • Hold calls with FRP winners to prepare for endline field visits • Modify all interview guides as needed • Conduct field visits with FRP winners and their partners • Develop endline Deep Dive report that focuses on partnership results with Learning Lab team StepsTools • Pre-visit interview guide • FRP winner interview guide • FRP winner interview guide • FI interview guide • Beneficiaries interview guide • FRP winner interview guide • FI interview guide • Beneficiaries interview guide 1a 1b
- 9. 9 The study was conducted through interviews with FRP winners, their partners and experts, in addition to review of existing studies on partnerships Document review and preparation Interviews See annex of this report for further details on the activities undertaken to complete this Baseline report, in addition to recommendations for activities for the Midline and Endline studies Review past documentation on FRP grant winners Review reports and current studies on partnership formation Develop interview guides Pre-interview on phone with FRP winners on partnership activities On-the-ground interview and operational tours with FRP winners Phone and on-the-ground Interviews with FIs On-the-ground interviews with farmer groups Interviews with other experts and interested stakeholders x5 x3 x10 x4 x5
- 11. 11 Several partnership models exist to promote rural and agricultural finance; this study focuses on partnerships between FIs and last mile firms * Note that the three models highlight the core or minimum pair or partners that constitute a particular type of business partnership. The partnerships often involve more than these core pairs. FI + technical assistance (or extension) provider Partner roles • FI provides liquidity and loan origination • Technical assistance provides production risk mitigation and sector knowledge • TA provider often funded by donors or public sector • Production risk • Lack of agricultural sector knowledge • High cost to serve e.g. due to customer acquisition and data collection costs • FI provides liquidity and loan origination • Last mile firms provide a variety of services depending on location in the value chain. They have strong links to farmers and knowledge of the agriculture sector • High capital cost of serving rural clients (due to e.g. sparse population, cost of data collection etc.) • FI provides liquidity and loan origination • Mobile Network Operator provides a low cost communication, money transfer and data collection infrastructure FI + Last mile firms (agribusinesses, ag tech providers) FI + Mobile Network Operator Challenges addressed Partnerships provide the opportunity to leverage key strengths of partnering entities to increase business model sustainability and increase reach of smallholder finance. In the agricultural and smallholder finance space, multiple partnership models* emerge, as outlined in the figure below: • Production risk • Lack of agricultural sector knowledge
- 12. 12 Four last mile firms were the focus of the study - they operate differing business models across multiple value chains and countries in Africa Source: Dalberg interviews and analysis Who Where What Biopartenaire (subsidiary of Barry Callebaut) is a cocoa off- taker who also provides farmers with inputs and collects payment after harvest. Biopartenaire is looking to partner in a pre-financing scheme for quality agricultural inputs. Empresa de Comercialização Agricola (ECA) is an off-taker of maize working in Mozambique. They have been attempting to build a partnership with Vodacom to facilitate mobile money transactions. They also provide on-lending. Prep-eez, runs an information delivery and communication platform. The platform: (1) Provides information and extension support; (2) Collates data on farmers, and (3) Provides an avenue for FIs to connect with farmers and lend directly. Prep-eez also provides on-farm services and is an offtaker. Kifiya has developed a transaction platform and is partnering with farmer cooperatives, insurance companies and micro- finance institutions to provide mobile payment solutions to farmers. Kifiya has also developed a micro-insurance product for farmers that it is working with insurance companies to deliver. ECA * *Kifiya is best described as a technology provider rather than an agribusiness. For the purpose of this study, we have focused Kifiya’s agri-focused activities
- 13. 13 The last mile firms studied undertake a range of activities that can support the provision of rural and agricultural finance by FIs Customer acquisition and distribution channels are the main value-add the last mile firms in our study provide – at least as reflected by the demand from the financial institutions interviewed *Financial product design includes advising FIs on (i) how and when a product should be delivered, (ii) what products are needed and (iii) developing products, including provision of technical expertise Customer acquisition Distribution channel for products Data on customers Assess credit worthiness of farmers On-lending to farmers Financial product design* Technical assistance and farmer training Biopartenaire ECA Prepeez Kifiya Key: None Medium High Areas where last mile firms provide value to financial institutions through partnership
- 14. 14 A four slide loop is presented on each last mile firm, outlining partnership details and activities they are pursuing The slide loop outlines the details of each of the last mile firms and their partners who participated in the study, and the partnership features, motivations and activities Slide 1: Firm details and partnership model Slide 2: Details of partnership approach by firm, plus country context and potential impact on farmers Slide 4: Areas and questions for review in Mid-point and Endline studies Slide 3: FI partner details, including details of interest and partnership activities with last mile firm
- 15. 15 Biopartenaire is a Côte D’Ivoire based subsidiary of Barry Callebaut, a B2B chocolate and cocoa supplier and manufacturer Org. Type: Agribusiness Key contact: Project Manager: Andres Tschannen Location: Côte d’Ivoire Business details: Biopartenaire is a specialized village-to-port cocoa bean supplier. The firm: 1) Provides farmers with quality inputs for cocoa production and collects payment at harvest time by taking delivery of the cocoa 2) Delivers on-the-ground extension support - such as cocoa tree pruning, agribusiness and financial literacy training 3) Provides pre-financing for inputs to non-coop farmers from its balance sheet 4) Partners with Advans (MFI) to support farmer savings ,which Biopartenaire uses as collateral Barry Callebaut has been in partnership with Advans for three years, and aims to convince FIs to lend directly to farmers Biopartenaire current partnership model for saving product Savings Advans provides farmers with a savings product and a mobile channel for deposits Farmer groups - each farmer group has a village coordinator who acts as a distribution point for inputs Biopartenaire provides Advans with a customer base for their savings product Biopartenaire sustainability department Biopartenaire provides credit, using the savings as collateral Source: Biopartenaire documentation, field visit with Biopartenaire team, interviews with current and potential Biopartenaire partners, Dalberg analysis
- 16. 16 Biopartenaire has successfully brokered a partnership with Advans, and is looking convince the MFI to lend directly to farmers Source: Biopartenaire documentation, field visit with Biopartenaire team, interviews with current and potential Biopartenaire partners, Dalberg analysis Motivation for partnership Process on approaching FIs and value proposed Business and organization dynamics of partnership • Remove lending from their balance sheet and eventually hand it over to MFIs (promote direct lending to farmers) • Finance farmers outside coops who are excluded from formal finance • Leverage Advans’ branchless banking system to provide farmers with finance • Approached FIs with a finance product which they could implement (eased burden of developing a farmer-tailored product) • Leveraged the brand (and size) of Barry Callebaut to gain traction with potential partners • Focused on approaching MFIs rather than banks; MFIs are more flexible on the types of collateral they use, while banks are reluctant to work with farmers • Partnerships with FIs are handled within Biopartenaire’s sustainability department • Developed an an open-ended MoU with Advans, which allows for flexibility in implementation in order to draw learnings from the pilot phase • Biopartenaire communicates directly with the Director of Advans in addition to a Project Manager in the Cocoa Department at Advans Details of Biopartenaire partnership activities and negotiations: • The cocoa value chain in Ivory Coast is well structured and involves a large number of the country’s rural population. This has drawn the interest of MFIs, and creates the opportunity to promote partnerships • While the government has worked to promote finance for farmers, much of the task has fallen on off-takers. Moreover, few farmers have title deeds and can therefore not use their land as collateral, creating a need to promote partnerships How country context is impacting partnership development Potential impact on farmers • Most farmers have no access to formal financial services, and use expensive loan sharks. Biopartenaire’s model ensures that the finance goes towards input provision, therefore increasing yield and income. It is also more affordable that informal finance, reducing exploitation of farmers
- 17. 17 Advans partnered with Biopartenaire to increase its customer base, and expects provision of credit to occur through Biopartenaire Source: Biopartenaire documentation, field visit with Biopartenaire team, interviews with current and potential Biopartenaire partners, Dalberg analysis Details of Biopartenaire’s partnership with Advans: • [Motivation/role of partner] Biopartenaire acts as an acquisition channel and provides preselection of farmers through KYC information collected by on-ground teams. Advans has little visibility into the farmers e.g. on production, income and expenditure. • [Additional value propositions] Biopartenaire reduces risk by requiring farmers to save 20% of the loan amount before receiving credit. Biopartenaire also has a 50%-50% risk sharing agreement with the IFC to cover the remaining 80% of the loan, this was key to bringing Advans on board. Biopartenaire would like Advans to lend directly to farmers – negotiation is ongoing • [Organizational dynamics] The partnership was formed through discussions with the Director of Advans, and is managed by Advans’ Project Manager for partnerships in cocoa department. They have an open-ended MOU, and both describe the partnership as being in an “experimental phase” with the aim of determining what works best before scaling up. Biopartenaire works closely with Advans, e.g. they have organized co-training sessions with Advans for their staff and cooperatives Overview: Advans has entered the cocoa value chain due to its potential for impact. Their interest in Biopartenaire comes from i) a focus on enlarging the customer base, ii) the desire to increase the loan portfolio in the mid term, and iii) strong synergies due to Biopartenaire's involvement in some of Advans’ processes (Advans has seen increased productivity) Details Current partner
- 18. 18 The Midline and Endline study should focus on assessing the operational models between Biopartenaire and partnering FIs Source: Biopartenaire documentation, field visit with Biopartenaire team, interviews with current and potential Biopartenaire partners, Dalberg analysis At the time of the Baseline visit, Biopartenaire was looking to convince Advans to lend directly to farmers. As such, the Midline and Endline studies should focus on the following: Ø Are any of Biopartenaire’s partners lending directly to farmers? What influenced maintenance or a change in the party holding the lending portfolio on their balance sheet? Ø What were the key success factors for getting any new partnerships in place, if this has occurred? Ø If newly sought partnership agreements have not been achieved, what have been the major impediments, challenges and sticking points? Ø What has been the result of the partnerships? How many farmers have used the services on offer and what has been the volume – both number and size - of lending / insurance products?
- 19. 19 Empresa de Comercializacao Agricola (ECA) is an agro-processing company that works closely with Mozambican maize farmers *CDM is a subsidiary of SABMiller Source: ECA documentation, interviews with current ECA partners, Dalberg analysis Org. Type: Agribusiness Key contacts: Managing Director: Grant Taylor Administration and Finance Manager: Alison Taylor Location: Mozambique Business details: ECA is an agribusiness that: 1) Buys maize from farmers, and processes and sells it to both local and international off- takers like Cargill and CDM* 2) Provides input financing to farmers; ECA distribute and collect the money, which they deduct from the harvest to pay the input finance loan ECA receives a financing facility (loan) from Banco Terra Moçambique (BTM) that they use to finance input supply for its farmers. In 2016 ECA entered into an agreement with CDM to pre-finance the crops ECA looking to partner with Vodafone to implement mobile payment solution for its farmers to improve operational efficiency and reduce costs; also looking at Banco Oportunidade Initially envisioned ECA partnership model Loan facility Mobile money Farmers ECA deducts input loan payments after harvest, and pays farmers (currently pay cash but working towards mobile payments) Annual loan to ECA ECA ECA ECA buys and distributes inputs to farmers Off-taker purchases (under negotiation) Mobile payments solution for ECA farmers Purchase maize from ECA
- 20. 20 ECA has faced challenges in securing partnerships, largely due to the operating environment in Mozambique Source: ECA documentation, interviews with current ECA partners, Dalberg analysis Motivation for partnership Process on approaching FIs and value proposed Business and organization dynamics of partnership • To support improved working capital management by having banks or off- takers pre-finance inputs for farmers • To provide an efficient mobile payments solution for farmers that lowers transaction costs and improves security • Promote business to a broad range of banks and off-takers through in-person meetings and existing relationships • Utilize support from external platforms and donors - e.g. AgDevCo, Grow Africa - to develop connections and support partnership formation • Agreement with BTM is a standard contract with the agribusiness unit. It’s supported by a guarantee provided from Rabo Foundation • Pre-financing agreement with CDM was signed in 2016 and this covers the annual contract of product required by CDM Details of ECA partnership negotiations: • Mozambique is experiencing political turmoil; conflict in the region ECA operates has displaced 1000 farmers who were working with ECA and led to Cargill pulling out of an agreement to pre-finance inputs • The poor communication infrastructure and weak mobile money ecosystem has made Vodafone reluctant to enter into partnership with ECA, as they would have to take up the cost of setting up the infrastructure themselves • There has been major exchange rate depreciation and the central bank has extremely limited liquidity. This has driven up interest rates, increased commercial bank capital requirements and reduced the amount available for lending • All land belongs to the government; farmers do not own land and therefore have no collateral. This makes it difficult to structure a partnership where FIs will lend directly to farmers How country context is impacting partnership development Potential impact on farmers • Continued support from BTM and CDM would allow ECA to continue pre-financing agricultural inputs, thereby increasing farmer yield and income • Successful partnership with Vodafone would reduce the risk of farmers carrying cash around during the harvest season, particularly in the wake of political turmoil
- 21. 21 Due to the operational risks and investment required, ECA’s partners require assurances of a return on investment in order to consider partnership Source: Biopartenaire documentation, field visit with Biopartenaire team, interviews with current and potential Biopartenaire partners, Dalberg analysis ECA’s current and potential partners and the details of their interest: • [Motivation] BTM does not have interest in increasing activities with ECA at this moment, they do, however, highlight that the strength and unique value of ECA comes through the strong relationship and trust they have built with farmers • [Process – maintain relationship] BTM has a long relationship with ECA but will not deal directly with farmers as it is too risky. They advise that it’s difficult to generate profit in agriculture, which heightens reluctance to work directly with farmers • [Business dynamics] The bank provides ECA with an overdraft facility; ECA buys inputs, distribute them and collect the money, which they deduct from the harvest to pay the input finance loan. Rabo Foundation gives a 90% guarantee on the exposure on the loan. BTM finances ECA and other agribusinesses because there are guarantees in place to protect the bank • [Motivation] Vodacom is interested in supporting farmers and increasing transaction volumes of mobile money in Mozambique. They will be more willing to partner once sufficient opportunity to add value by going cashless is apparent • [Business dynamics – risks to partnership] Liquidity management for mobile money agents is a problem – a limited mobile money ecosystem results in farmers withdrawing all their cash at once, creating large peaks and dips in supply. This is in addition to the security concerns of handling large amounts of cash, and the logistical barriers to acquiring the cash necessary for daily operation since there is only one bank in ECAs area of operation Overview: Banco Terra Moçambique was started as an agriculture and food bank, but has since diversified its portfolio, with agriculture accounting for 40% of its portfolio. They have interest in working with all large agribusinesses like ECA Details Current partner Potential partner Overview: Vodacom is a mobile money provider in Mozambique. ECA has sought a partnership with Vodacom to support the use mobile money services to pay farmers. Negotiation has stalled with Vodacom citing connectivity challenges and insufficient development of the mobile money ecosystem as major impediments to investment Details
- 22. 22 The role of the challenging Mozambican context should continue to be studied in the Midline and Endline phases of the deep dive At the time of the Baseline visit, Cargill cancelled an agreement to pre-finance farmers due to political tension in Mozambique, while CDM has just come on board to do so. Considering these varying decisions in the same context, the Midline and Endline studies should focus on the following: Ø Which partnerships have been brokered or broken off since the baseline study, and what are the business dynamics of this agreement? Ø What were the key success factors for getting partnerships in place despite the challenging context? What factors made some partners get into partnership and others pull out? Ø If partnership agreements have not been achieved, what have been the major impediments, challenges and sticking points? Ø If partnerships are in place, what has been the result? How many farmers have used the services on offer and what has been the volume – both number and size - of lending / insurance products?
- 23. 23 Prepeez is a Ghanaian based agribusiness/tech firm focused on developing a platform to connect financial services to smallholder farmers Source: Dalberg analysis and interviews Org. Type: Technology platform provider Key contact: CEO: Kow A. Sam (called Sam) Location: Ghana Business details: Prep-eez runs an information delivery and communication platform. The platform: 1) Provides information and extension support using integrated voice recognition (IVR) 2) Collates data on farmers, such as farm size, crops grown, crop status and demographics 3) Provides an avenue for FIs to connect with and lend directly to farmers (still under development and negotiation) Prepeez also have field agents who deliver on-the- ground extension support - such as cocoa tree pruning - and use smartphones to collect data on farmers. Prepeez also act as an input provider and off-taker for the farmers it works with Prepeez is currently negotiating partnerships with the Ghana Agriculture Insurance Programme (GAIP), Fidelity Bank and EcoBank Pre-peez envisioned partnership model Other Prepeez BUs Prepeez platform Insurance (under negotiation) Credit and saving (under negotiation) Farmers Farm and farmer data Extension support Provide inputs Purchase produce Access farmer profiles Access farmer profiles
- 24. 24 Prepeez is seeking partnerships with multiple financial institutions in Ghana; negotiations remain ongoing Source: Dalberg analysis and interviews Motivation for partnership Process on approaching FIs and value proposed Business and organization dynamics of partnership • Capitalize on ‘Know Your Customer’(KYC) information being collected on farmers • Allow farmers to better afford inputs and extension support such as pruning services • To use platform to facilitate Warehouse Receipt financing (not currently available) that capitalizes on price changes in cocoa (govt sets annual price in October) • Has prepared a pitch and approached most FIs in Ghana. Specific focus given to FIs who are known to target smallholder farmers and be open to innovation • Leverage existing contacts to gain introductions to the correct people within FIs • Promote the market size and opportunity to capture that market as major selling point to FIs • Negotiation focused on the creation of MoUs. On-going negotiation on what form the product takes, the business model and who signs-off with FIs resulting in delays achieving final agreement • No formal structure for regular communication or liaison is in place. Sam (Prepeez CEO) is driving all liaison and negotiation Details of Prepeez partnership negotiations: • Ghana is private sector friendly with a competitive banking industry. This results in the need to promote the economic and business case for partnership formation • Ghana currently has high interest rates (circa 35%) which locks most farmers out of the market. Partnerships must be developed in order to create sufficient value so farmers still demand the financial services on offer • The government has monopoly buying power and sets and annual price for cocoa. This can impact partnership opportunities How country context is impacting partnership development Potential impact on farmers • Financial services currently unavailable. Will improve ability to purchase yield improving inputs and extension • WRS will allow delay of selling cocoa to capitalize on higher price whilst still getting access to some cashflow • Packaged insurance offering will allow farmers to delay sale of produce with greater piece of mind
- 25. 25 FIs are interested in partnering because Prepeez provides a gateway to a large customer base and access to useful farmer data Source: Dalberg analysis and interviews Potential partners Prepeez is in negotiation with and the details of their interest: • [Motivation] Prepeez provides acquisition channel through KYC, on-the-ground team and expertise on agriculture needs • [Process – approvals] Fidelity is currently seeking internal approvals in order to take the partnership forward • [Organization dynamics] Partnership is being negotiated by Fidelity’s ‘inclusive business unit.’ This unit focuses on the BOP • [Motivation and process] The market size of agriculture creates a compelling value proposition. Ecobank is currently assessing the business case and associated risk. Assessment by the Credit Department and Digital Transactions team • [Organization dynamics] The Digital Transaction team leads negotiation. They’re an entry point for other financial products • [Motivation] Prepeez brings large amounts of data which is valuable for GAIP in developing insurance products. Prepeez also an attractive partner for GAIP because they lower transaction costs by not only providing a channel to distribute insurance but also have an on-the-ground team who can educate and conduct due diligence on farmers • [Process] GAIP is currently negotiating product and revenue sharing details with Prepeez and also seeking internal approvals Potential partner Potential partner Potential partner Overview: Fidelity Bank strategy is focused on building the customer base and increasing level of deposits. They are seeking partnerships such as Prep-eez that support customer acquisition efficiently and with limited cost DetailsDetails Overview: EcoBank has a strategy directive to do more work in agriculture but don't have the systems, connections or structures in place to be able to do this. Prep-eez can provide data and connection to farmers Details Overview: GAIP was specifically set-up to increase insurance in the agriculture sector with all insurance companies mandated to contribute to GAIP’s pool of risk capital. They are actively looking for partners to help deliver insurance
- 26. 26 Prepeez has yet to lock-in partnerships, meaning outcomes have not been seen; this should be further assessed in the Midline and Endline study Source: Dalberg analysis and interviews At the time of the Baseline visit, no partnerships with financial service providers had yet been locked in, with the hope being that formal agreement would be achieved before the end of 2016. As such, the Midline and Endline studies should focus on the following: Ø Which partnerships are in place? What mechanism is being used for this partnership (e.g. MoU?) and what are the business dynamics of this agreement? Ø What were the key success factors for getting the partnership in place? Ø If partnership agreements have not been achieved, what has been the major impediments, challenges and sticking points? Ø If partnerships are in place, what has been the result? How many farmers have used the services on offer and what has been the volume – both number and size - of lending / insurance products?
- 27. 27 Kifiya has developed a transaction platform, agent network and micro- insurance product that they are scaling up across Ethiopia Source: Dalberg analysis and interviews Org. Type: Payment Service Provider and Enabler of Digital Financial Services* Key contact: Director: Myriam Said Location: Ethiopia Business details: Kifiya develops digital financial services infrastructure (transaction platforms and distribution channels) that: 1) Provide payment services (such as for utility bills and transit tickets) through agents and a merchant network 2) Partner with and enable MFIs to provide branch-less banking services through cooperatives 3) Develop and deliver micro insurance products to smallholder farmers The main area of interest for this study is the partnerships Kifiya is currently developing with Ethiopia’s largest insurance companies - Ethiopian Insurance Agency and Oromia Insurance Agency - to scale and deliver their micro-insurance product Kifiya partnership model Farmers Kifiya platform Multi-purpose cooperatives (contains Kifiya agent) Provide extension support, inputs, finance products etc. One-stop-shop for MPC to facilitate transactions Insurance Lending (7 MFIs) Transit companies Utility companies *As noted earlier, Kifiya is foremost a technology platform provider. They are currently developing agriculture focused products and partnerships in order to increase the volume of transactions through their platform
- 28. 28 Kifiya is currently increasing the depth of partnerships with insurance companies who can scale the micro-insurance product they’ve developed Source: Dalberg analysis and interviews Motivation for partnership Process on approaching FIs and value proposed Business and organization dynamics of partnership • Kifiya wants partners to create an ecosystem that can enable the delivery of financial services at scale by leveraging its DFS infrastructure • Kifiya is also looking for insurance companies who can underwrite the risk and scale up the micro- insurance product they have developed for farmers • Kifiya targets the biggest MFIs and insurance companies (by market share) as potential partners • Kifiya capitalizes on existing connections to gain an audience with potential partners and present a pitch deck to those interested • Kifiya has built a consortium that includes government agencies that have a stake in micro insurance development • A steering committee and working group have been formed which include: Kifiya, insurance companies and government reps. The committee determines roles and responsibilities in addition to areas of operation • Kifiya use MoUs with partners which stipulate revenue sharing arrangements Details of Kifiya partnership negotiations: • The private sector in Ethiopia is small. Most organizations have significant government ownership and involvement. The government stipulates where organizations can operate and what they can offer • All farmers in Ethiopia are members of cooperatives. Working with farmers requires working through cooperatives • The government has prioritized micro-insurance for farmers as an area for development. The government has a target of 5.6 million farmers receiving micro-insurance by 2021 • Recently reported unrest in parts of Ethiopia may impact where Kifiya is able to operate and with whom How country context is impacting partnership development Potential impact on farmers • Farmers will be able to access more products with greater ease due to multiple partners using Kifiya platform • Very few farmers have insurance (currently less than 10,000 farmers have agri micro insurance and these are pilot projects), a high quality and affordable micro-insurance product will mitigate the impact of unforeseen events
- 29. 29 Insurance companies are mandated by the government to insure over five million farmers, they believe Kifiya can help them achieve this Source: Dalberg analysis and interviews • [Motivation] EIC have limited internal capacity for innovation / product development (e.g. they employ no actuaries) and ability to rapidly grow customers numbers. They state “We see Kifiya as the brains of our organization“ • [Process for selection – suits needs] EIC is mandated by the government to increase the number of farmers accessing insurance. EIC have selected Kifiya as partner because: (1) Kifiya’s platform and agency network will allow insurance to be delivered more cheaply (EIC estimate 60% cheaper), (2) Kifiya has developed an insurance product that is superior to anything else on the market and (3) Kifiya have a proven capacity to successfully role out new and innovative products • [Organizational dynamics] The partnership is being led by EICs Director for Micro-insurance Kifiya’s major partners in the insurance sector and the details of their interest:* *Note that whilst Kifiya has a multitude of partners, during the field visit and for the purpose of this study we have focused on partnerships with FIs working in the insurance sector. These partnership negotiations are viewed as the most relevant for the deep dive question • [Motivation] Increasing sales of micro-insurance to farmers is a priority area for OIA. Their interest in Kifiya stems from the belief that the Kifiya platform and agency network will significantly lower the cost of delivering insurance products. In addition, the Kifiya micro-insurance product is deemed superior to the micro-insurance products OIA currently has on offer (Kifiya’s product uses satellite data working on a 1x1km pattern whilst OIA’s product works on a 10x10km pattern) • [Process] OIA is not concerned about the business case for partnership, customer acquisition is most important factor • [Organizational dynamics] OIA have a micro-insurance team who is in charge of leading and managing the partnership DetailsDetails Overview: The Ethiopian Insurance Corporation (EIC) is state owned and accounts for 40% of the insurance market. They seek partners such as Kifiya to help them provide insurance to the majority of Ethiopians Current partner Current partner Overview: Operating in the Oromia region, the Oromia Insurance Agency (OIA) is the second biggest insurance company in Ethiopia. They seek partners who can help them increase their customer base
- 30. 30 Piloting of Kifiya’s micro-insurance has occurred, the Midline and Endline should focus on the results from further roll-out of the product Source: Dalberg analysis and interviews At the time of the Baseline visit, piloting of the micro-insurance product by EIC and OIA had just been completing. Further scaling and roll out is expected to coincide with the beginning of the growing season in March 2017. As such, the Midline and Endline studies should focus on the following: Ø What have been the results from the partnerships that are in place? How many farmers have been served, what has been the payout ratios and what have been the revenue and cost implications? What has been the feedback from farmers? Ø Are there any new partnerships in place? Have any details around the existing partnerships changed? Ø Are there any new products or activities Kifiya is undertaking and are they working with new partners on these products? Ø What progress has been made on the expansion of Kifiya’s agency network and how is that impacting the development of partnerships?
- 32. 32 Viability versus scalability in the context of the deep dive study Scalability was not discussed by interview participants during the baseline, the Endline study should investigate the implications of chosen partnership models for scaling services SOURCE: Dalberg analysis • Viability focuses on unit cost, and centers on whether the proposed solution is feasible and sustainable • Viability looks at the ability to implement a solution with a reasonable chance of success, without necessarily taking into account the coverage of implementation • In this study, “viability” considers whether the value add brought by partners provides enough financial incentive for all partners to sustain the partnership Viability • Scalability is about the ease of increasing reach, and follows product of viability, i.e. a viable solution can potentially be scaled • Scalability is influenced by replicability of processes and ease of customer acquisition (how the economics of implementing the solution change with more customers) • Many of the partnerships studied in the baseline are at early / pilot stage, during which scalability is challenging to test. How partnerships improve scalability is therefore not reviewed in this report Scalability This section outlines initial answers to the question on whether last mile partnerships improve the viability and scalability of financial service provision. We begin with definitions of key terms
- 33. 33 Partnerships improve viability as last mile firms share (reduce) costs and risk through leveraging the activities they undertake with farmers Last mile firm activities Description of activity Customer acquisition Product distribution / collection Product development* Credit risk management Farmer aggregation Group farmers together to ease promotion and delivery of services Access to market / off-taking Provide a guaranteed market, ensuring farmers have income Technical assistance Provide training e.g. on agronomic practices, financial literacy etc. Interface with farmers Act as “feet on the ground” and handle farmer interactions Know-Your- Customer (Data) Collect data on farmers e.g. income, farm size, expenditure etc. ü ü ü ü ü ü Product development includes advising FIs on (i) how and when a product should be delivered, (ii) what products are needed and (iii) developing products, including provision of technical expertise Source: Stakeholder interviews; Dalberg analysis ü üü ü üü üü üü üü ü ü Key: Areas of cost reduction Areas of risk reduction ü üüDoes not contribute Somewhat contributes Strongly contributes Financial institutions reduce costs and risk for last mile firms by lowering the cost of capital and by providing additional means by which to monetize elements of their business models ü üü ü ü ü ü ü
- 34. 34 Details of how partnerships share (reduce) costs and risk for FIs Customer acquisition Product distribution / collection Product development* Credit risk management Farmer aggregation Group farmers together to ease promotion and delivery of services Provides access to large numbers of farmers, reducing sales and marketing costs Last mile firms act as channels through which to sell products and collect repayments Risk is diversified and consequently reduced by providing to groups, rather than individuals Access to market/ off-taking Provide a guaranteed market, ensuring farmers have income Off-taking provides knowledge of what financial products to offer which customers Off-takers can make repayments on behalf of farmers on collection of produce Knowledge of farmer income and crop cycles can influence how products are tailored Off-taking guarantees farmers a market and cash flow, thereby reducing risk of default Technical assistance Provide training e.g. on agronomic practices, financial literacy etc. Training on financial literacy / agribusiness promotes uptake of financial products TA can help increase farmer yields and cash management, reducing default risk Interface with farmers Act as “feet on the ground” and handle farmer interactions Interactions of field agents with farmers can be used to market financial products Assist with disbursing and collecting funds, reducing FIs’ admin and follow up costs Knowledge gained from farmers is used to influence product specifications / terms Farmer interactions can be used to educate on repayment terms and provide reminders Know-Your-Customer (Data) Collect data on farmers e.g. income, farm size, expenditure etc. Data provided to FIs helps them select high potential / priority customers for products KYC data helps FIs determine cash flow cycles and timing for cash disbursement Data provided to FIs is used to structure appropriate credit and insurance products Data on farmers helps select and gain approvals for the most creditworthy farmers Areas of cost reduction Areas of risk reduction Product development includes advising FIs on (i) how and when a product should be delivered, (ii) what products are needed and (iii) developing products, including provision of technical expertise Source: Stakeholder interviews, Dalberg analysis Key: Does not contribute Somewhat contributes Strongly contributes
- 35. 35 Observed examples of how last mile firms are sharing (reducing) costs and risk with FIs Source: Interviews with FRP winners and their partners, Dalberg analysis Customer acquisition Product distribution / collection Product development Credit risk management • Biopartenaire reduces customer acquisition costs for Advans by allowing them to access a large number of farmers at once. Advans would otherwise have to invest in marketing costs and work to build trust with these farmers • In Ghana, Prepeez intend to allow multiple FIs to view the records of farmers they work with; this reduces FIs’ costs of seeking out farmers whom they can offer financial services • Kifiya’s platform serves as a central channel that insurance companies can use to sell their products, reducing the costs of establishing distribution channels to reach farmers. • Vodacom has leveraged ECA’s on-ground presence and connection with growers to try and develop a distribution channel for mobile money and to grow the mobile money ecosystem • Biopartenaire serves as a distribution channel for Advans’ savings product • Kifiya has designed an agri-insurance product for farmers, which has reduced the cost for insurance companies to conduct their own research and development for farmer- tailored insurance products. • Biopartenaire uses its’ knowledge of cocoa agronomic cycles and farmer incomes to design financial packages and advise Advans on how products should be rolled out • Prepeez is educating farmers on WRS • Biopartenaire provides farmers with technical assistance (agronomic, agribusiness and financial literacy training), which increases productivity and finance management, thereby reducing credit risk • Prepeez is providing easy-to-access farmer and agriculture data • ECA provides on-lending services to farmers. As the lender and collector of credit, ECA conducts due diligence on farmers and absorbs a portion of the loss should a farmer default
- 36. 36 Strong interest exists in using last mile firm data to better serve smallholders; FIs remain unsure of how to best use data and whether it can be trusted Source: Interviews with FRP winners and their partners, Dalberg analysis Ø Last mile firms can provide an array of data that can be used to better assess farmers for credit and insurance products, such as data on farm size, crops grown, market prices etc. Ø FIs are interested in agriculture specific data because they often know little about these areas and have few other data sources by which to adequately assess of smallholder farmers “We don’t know much about farmers and have little data about them - any data that can be provided by a partner is useful” Ecobank, Ghana Financial institutions believe that the data last mile firms provide can improve the viability of assessing smallholders for financial products. Most FIs are currently unsure of how to best use alternative data and whether it can be trusted Types of data Examples Ø Prepeez is collecting significant amounts farmer data, including plot size and growing activities. FIs in Ghana have expressed significant interest in utilizing this data for farmer assessment Ø Outside of this deep dive, projects are being led by Mercy Corps’ Agrifin Accelerate and AGRA on the use of alternative data for credit scoring. Multiple financial institutions have expressed strong interest in utilizing alternative data for improving their ability to lend to smallholder farmers Use of alternative data (per FI) Pre- conditions Ø Financial institutions express interest in utilizing alternate data in order to better manage risk in lending to farmers and expand customer base Ø Financial institutions also demonstrate interest in using alternate data for product development: “The data collected shapes your thinking” – GAIP, Ghana Ø FIs have a lack of trust in alternate data provided by last mile firms. Before buying in, FIs require better understanding of how to best use alternate data and verification on the data's quality and accuracy
- 38. 38 Despite the potential benefits for improving viability of financial service provision, common challenges are experienced for partnership development SOURCE: Discussions with FRP winners and their partners, Dalberg analysis FI challenges • Trusting data integrity: FIs do not trust the data being provided by last mile firms. Internal risk management teams are reluctant to use this data without significant level of testing and analysis. A lack of unique identifiers within data also inhibits the ability to use it “We need to undertake due diligence with extension providers to ensure data integrity” – Opportunity International • Institutional and systems rigidity: FIs are generally highly risk averse resulting in multiple levels of hierarchy across multiple Departments that must approve any new products or partnerships. Even if buy-in exists, FIs find it difficult to adjust systems to integrate with last mile firms. Last mile firm challenges • Finding the right department within FIs: many FIs see work with smallholder farmers as sitting within CSR or ‘inclusive business’ units. These units may not offer the commercial products or terms that are best suited to meeting the long term needs of last mile firm or farmers • Proving commercial viability: FIs are often larger, more established companies than the last mile firms pushing for partnership. Consequently, it may take a lot of time for last mile partner to build credibility and grow into a size that is attractive for FIs. For example, Vodafone (a potential ECA partner) highlighted than when considering partnerships, “We look for the size of the company: the more payments they do the better” General challenges • Agreeing to the operational model – Partners may struggle to align on roles and responsibilities, which can be time-consuming and/or lead to dissatisfaction. For example, Advans has been working with Biopartenaire for three years but don’t feel they have the operational model right, “We did not do a good job of clarifying who does what in the beginning, we feel it would actually be more efficient to have our own foot soldiers on the ground because our solution is quite complicated” • Agreeing to cost and revenue sharing - Costs to educate and train farmers on the value of financial products can be significant. Last mile firms may look for support from FIs to help meet these costs which they may be reluctant to do without donor support
- 39. 39 Various enabling factors appear to be playing an important role in facilitating partnership formation (1/2) SOURCE: Discussions with FRP winners and their partners, Dalberg analysis Category Enabling factor Ways in which enabling factor promotes partnerships for financial provision FIs who have a strategy focused on agriculture or working with the bottom of the pyramid are more likely to be interested in partnership as doing so helps to fulfil their mandate FIs who have a team specifically dedicated to forming / managing partnerships are more open to innovative approaches, have experience in partnership brokering and are better able to deal with issues that pose challenges in partnership formation Existing relationships between last mile firm management and FI management can play an important role in gaining required approvals. These could take the form of having previously worked together, social networks etc. Policies that mandate / promote inclusive financial service provision are likely to boost partnerships. Likewise, policies that empower rural communities e.g. land rights allowing for land to be used as collateral increase willingness of FIs to partner A stable operating environment is predictable and low risk, which encourages FIs to take on partnerships and non-traditional avenues of providing finance that they would otherwise not consider in political /social / economic turmoil Markets with more competitive dynamics promote partnerships; FIs are more willing to take innovative approaches to increase their market share, as opposed to monopolies where a few key players have no incentive to serve rural populations External environment Government policies Socio- economic stability Private sector competition Partner characteristics FI strategy Partnership teams Existing relationships
- 43. 43 Annex 1: Few results are yet to be seen, the Midline and Endline studies should seek to highlight the impact from partnerships SOURCE: Discussions with FRP winners and their partners, Dalberg analysis Summary of results from partnerships so far: Given limited results to date, the Midline and Endline studies should give significant time to measuring results, namely: • How many farmers received financial products as a result of the partnership? • What was the financial impact on both the FI and the last mile firm from the partnership? • What was the impact on the farmers / beneficiaries from the partnership? • Were there new partnerships formed or partnerships that were absolved over time? What was the driver of change? • What are the other major issues that have been experienced through the life of the partnership? • Have the partnerships impacted the rural and agricultural finance ecosystem within the target market? Biopartenaire ECA Kifiya Prepeez • 1000 farmers are using Advans’ saving product as collateral for credit • Advans sees the partnership as being in an experimental phase, and is hoping to scale up services after drawing learnings from the pilot • More than 4,000 farmers receiving on-lending from facility provided by Banco Terra • Banco Terra is likely to keep working with ECA because their loan is guaranteed • Vodafone is willing to work with ECA if mobile money and communication infrastructure improves • ~2,000 farmers participated in micro- insurance trial with 75% receiving some form of payout • Program to be scaled up in early 2017; insurance companies see strong value in access to farmers, a strong product and the distribution channel Kifiya provides • Partnerships are not yet in place, MoUs are currently under negotiation • Fidelity and GAIP both see a strong value proposition in Prepeez (customer acquisition and farmer data, respectively)
- 44. 44 Annex 2: This study aligns with other partnership focused activities being undertaken by Mercy Corps and AGRA on improving smallholder finance * Patient Procurement Platform in Tanzania and DigiFarm in Kenya • AGRA is currently conducting a study looking at data being collected by agribusinesses and what FI require to be use and trust this data for credit assessments • Mercy Corps’ AgriFin Accelerate (AFA) program is supporting the development of two partnership based platforms* to bring multiple players (FIs, input suppliers, extension services and market buyers) together • Financial institutions seek partnerships for a range of reasons, including access to alternative data, customer acquisition and lowering transaction costs. What they value depends on the institutions strategy • Technical support can play a valuable role in supporting partnerships, particularly by underwriting risk whilst the value of the partnership and the data it brings is being verified. Technical support helps increase the confidence of FIs who lack knowledge on farmers and farmer-specific data • Partnership formation can be a lengthy process which requires multiple iterations and rounds of negotiation due to the amount of time it takes to build trust and align on the business model • FIs state a need for the data to be in a form that can be easily processed, and the difficulty of working with data provided when data needs and specifications of FIs have not been considered from the beginning A&B • FIs express strong interest in using alternative data but don’t trust the integrity of the data being collected. FIs are also unsure which data points provide the best decision making information • No clear systems or standards for data security and integration of data collection / sharing systems • Limited knowledge of agriculture within FIs • Building trust between partners in addition to determining roles and responsibilities takes time and delays partnership formation • Determining revenue share arrangements is difficult where no historical precedent exists • Partner reticence on sharing data due to concerns about losing IP and data not being ‘clean’ for use Recent Activities Challenges identified for partnership formation Where findings align with this Baseline Report
- 45. 45 Annex 2: Additional further, or upcoming reading • Learning Lab and ISF (2016) Inflection Point • Learning Brief 01: The business case for digitally-enabled smallholder finance • Initiative for Smallholder Finance Briefing Notes • Lending a Hand: How direct-to-farmer finance providers reach smallholders • Value Chain Financing: How agro-enterprises serve as alternate aggregation points for delivering financial services to smallholder farmers • The Rise of the Data Scientist: How big data and data science are changing smallholder finance • IDH Sustainable Trade: Service Delivery Model research • Forthcoming: Opportunity International Value Chain Partnerships in Practice