Innovations in Rural and Agricultural Finance: Bundling Development Services with Agricultural Finance

Although agriculture is a huge economic driver in most African countries, many African farmers remain poor. Poverty persists due to a large number of factors, one of which is smallholders’ lack of access to financial and market information and services. In Kenya, a project called DrumNet is working to change that.

According to an IFPRI 2020 Vision Focus Brief , since 2005, DrumNet has worked to connect small-scale Kenyan farmers with buyers, banks, and agricultural input retailers. The program uses targeted information and communications technologies (ICTs) to create a fully integrated finance, production, delivery, and payment process. With this formal structure, farmers can rest assured that they will get paid for the produce they provide, and buyers can rest assured that producers will follow through on their contract and deliver the agreed-upon goods.

DrumNet has found, however, that financing small-scale farmers is challenging and somewhat risky because many live and work in rural, relatively isolated areas. The program encountered a variety of challenges, including low agricultural yields and non-compliance from farmers, buyers, and banks; these roadblocks led to a significant number of farmer loan defaults.

To address these challenges, DrumNet identified additional products and services that could be “bundled” into its original supply-chain design. These include:

• **Performance ratings.** This system would allow good and bad performers to be identified and would create an incentive for better partner behavior and commitment. Simple credit ratings could help banks assess potential borrowers’ creditworthiness.
• **Crop insurance.** This product would insure farmers’ inputs against drought or other shocks, which would reduce the weather risk inherent in agricultural financing and encourage more farmers to use the program. Insurance could be directly tied to input sales or incorporated into production contracts. Farmers would receive a guaranteed produce purchase price and also guaranteed reimbursement or replacement of inputs.
• **Soil analysis.** This service would provide farmers with tailored recommendations on how to restore soil fertility and improve their land’s productivity. A fertilizer matching component—matching the right fertilizers to a farmer’s particular soil composition—would make the analysis even more effective. The analysis could be offered by input retailers, thereby generating greater trust between farmers, retailers, and DrumNet.
• **Payment systems.** Electronic payment systems like M-PESA, ZAP, and MobiCash can increase the timeliness of transactions between supply-chain partners and make payments to rural farmers easier and more efficient.

As of the writing of the brief, DrumNet was incorporating its products and services into a private company in Kenya. The company hopes to expand upon the program’s existing structure to build an ICT platform that is more stable and accessible to rural partners.