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Posted on December 17, 2015

Up-scaling financial ladders

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“Little money can do a lot.” My mother’s words, a casual phrase meant to encourage us to make the most of what little we had, rang in my ears.

It was a typical sunny day in Kyuluni, Kitui County. We were on a research mission when we met with Mutua and Koki who were busy tilling their 10-acre patchwork farm of crops and empty spaces. 150 grafted mango trees occupied three acres, incrementally established over the last 10 year.  

I listened to their stories with a mixture of sadness and embarrassment at how poverty could deny people growth opportunities. Childhood memories of growing up on a rural farm characterized by low income engulfed me. My mind started asking hard questions. How to bridge the gap of what we had and what we needed? What can little money do? How much money is required to have an impact on a poor family?

On their mango orchard, Mutua and Koki barely grew 10 mangoes per tree each year. Mutua narrated how he made Kshs. 10,000 gross annual total income from sales of his mango crop in 2014 (an average of 3,300 per acre). The mention of his total income quickly jogged a memory in my mind: a previous day’s interview with Joel, whose farm is barely one kilometre away from Mutua’s. Joel’s situation was very different to what we were now discussing. On his farm of six acres, they had 140 grafted mango trees (10 trees shy of Mutua’s orchard) in a little less than three acres. From his 140 trees, he harvested on average 80 mangoes per tree making on average Kshs. 56,000 per year. 

Keen to understand the huge economic discrepancy led me to an analysis. There is a huge rift in how households utilize their economic opportunities. For instance, 49.6% of the farmers are medium scale farmers with an average of 105 mango trees where Mutua belongs. They made on average a gross income of Kshs. 46,400, with 66% profitability, as demonstrated in FSD’s report on the mango value chain. Within this category of farmers, defined by orchard size, there are some who made twice as much gross income (around Kshs. 100,000). Whereas several factors would explain the stark difference in income levels between Mutua and his peers, one reason stood out for me: the level of investment in the business.

I can relate to Mutua and his wife strongly, especially when he said with shyness, “mangoes are a good venture; we don’t incur any cost at all, only weeding”. It could be said that the family makes a near 100% profit with the KShs. 10,000 mango business. However, what Mutua didn’t tell us or even realise is that he could potentially be making over Kshs. 50,000 if he invested Kshs. 8,000 to 10,000 on inputs to control diseases, pests and fertilise his orchard.  

We probed further: what would be the major barriers to accessing quality inputs? It dawned on me that the input cost to a medium-scale farmer (like Mutua) is equivalent to his annual gross income. And, like many mango farming families, income and expenditure spikes are inversely related during the year:

This is why the family could not save money to spend on mango inputs across six months of the year to increase productivity. The family saved the mango income to spend across the months on competing household needs, including health, debts, school fees and food.

I can recall how the family responded when we asked whether they have ever tried to access money to buy inputs from any source. Mutua narrated a story of how once he attempted to borrow from a bank (name withheld) that had opened a branch in Kitui town after his neighbour told him that he could access a loan.

“When I met the bank officer and inquired how to get a loan to buy fertilizer for my mangoes and green grams, I was asked to bring proof of my income which I didn’t have. I farm mangoes, cow peas, green grams and sorghum, but I couldn’t prove my incomes from any of them”.

The list of requirements could be frustrating to most of the farmers (over 90% of whom are in informal value chains) who and are paid cash, leaving minimal financial records trails. 

Frustrated by this problem, we embarked on a human centred design model to understand better the scenarios of our smallholder farmers. It’s now certain that the conventional models of financing are not sufficient to provide financing to the majority of small-scale farmers. This is not a surprise: most financial institutions to date scramble for the few farmers who are in dairy, tea, horticulture (largely export based), and to some extent coffee, which are deemed easier to back.

Pre-financing is rare in agriculture production with most financiers targeting post-production (mainly invoice discounting). The big question, however, that lies ahead is how will the millions of agriculture related households, who make up over 60% of the Kenya population, be engaged in meaningful financial inclusion when over 90% of them are engaged in value chains that are informally organised and hard to tie into financial ecosystems?

Ideas being put forward include the use of alternative data for financial decisions, the use of different market lending models, investment in in-depth consumer understanding, and innovative de-risking models.

Leaving Mutua’s farm, I felt I understood the impact that “little” money can have on a household income if well structured. We have been validating this concept with other sectors like small-scale dairy farmers who have the potential to ‘switch on their cows’ with a minimal pre-investment and reap big (a story for another day).

The journey to unlock this potential is on – the experimentation has begun.

Image Credit:anankkml

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