the drumnet project : lessons learned from a microfinance initiative in kenya’s agricultural...

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


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


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


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


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



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




Agenda


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



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



Pickup scheduled for 27 March 2010


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



9


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




Agenda


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



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



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



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



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the drumnet project : lessons learned from a microfinance initiative in kenya’s agricultural...

Documents

microfinance initiative

microfinance model

pride africa slide

pride africa background

pride network slide

field lessons

design microfinance

clients pride