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Opinion: Market Access

The Tech Bridging the Farmer Finance Gap

Ivan Mbowa Ivan Mbowa

With commercial lending to agriculture representing just one per cent of all lending in Africa, many agribusiness SMEs (small-and-medium sized enterprises) have limited options for financing or even worse, are excluded from financing entirely. One main obstacle, for example, is the onerous requirement for collateral. In Kenya, the time and cost of registering a building as loan collateral in Nairobi for an amount of KES 10 million would take a minimum of 2 months with fees around 6 per cent of the amount.

Compared to other players across the agricultural value chain, smallholder farmers face an even higher obstacle. Even though financial institutions have attempted to provide financial services, farmers’ financing needs are not well understood. This leads to poorly defined financial products based largely on the same restrictions as those put on SMEs. Given that smallholder farmers usually live in difficult-to-reach areas and lack “viable” collateral, they unfortunately must deal with informal lenders at exorbitant rates that inhibit their growth.

Umati Capital strives to revolutionize access to finance for the underbanked and unbanked in Africa through the consistent and innovative use of technology. Our motto, “Access to capital should be guided by transparent access to information”, drives our team to increase financial inclusion for the Kenyan SMEs and agribusinesses in the broad agricultural sector who need more than USD $3.6 billion in financing to grow their businesses.

With our financing, Umati Capital offers simple and transparent pricing without the hefty collateral requirements. With our technology solution, Umati Capital offers a customized web platform and mobile application to collect data, conduct data analytics, and make payments easily to suppliers in remote areas.

Although Umati Capital is relatively new to the market, we have learned that there are several things that financial institutions need to understand to access underserved communities.

First, Umati Capital recognized the need to develop strong and deep relationships with our clients. Although this need is typical of any organization targeting businesses, relationships in markets like Kenya are critical to understanding how to continuously evaluate and meet our client’s needs as well as collaborate to identify issues and define solutions. For example, one of our clients is a food processor who collects agricultural produce including raw milk and fruits from agricultural suppliers consisting mainly of farmer cooperatives and smallholder farmers. The client was facing a challenge: they were not receiving enough produce from the suppliers.

Umati Capital then visited the client’s premises and the collection centers in remote areas to better understand their operations. Upon further inspection, Umati Capital learned that producers were side-selling: selling their produce to informal buyers (brokers) that offer cash immediately but at a much reduced price to address their immediate needs such as paying for school fees. For example, brokers offered a “cash now” price at times less than half of the price offered by a formal buyer. Therefore, the supplier or farmer receives a lower price and consequently a lower income. These same brokers turn around and sell the same produce to the same buyers at a higher price thereby decreasing the buyer’s margins.

With this deep understanding of our client’s challenge, Umati Capital provided our Supply Chain Financing product enabled by our technology solution so that the client could pay their suppliers on time. With money upfront, suppliers received up to twice as much income comparatively while the buyers gained more satisfied and loyal suppliers.

Second, we realized the need to develop and consistently deliver a minimum viable product (MVP). Initially, we were presented with various, seemingly lucrative opportunities from partners and even our clients. However, these opportunities would divert our team beyond our core strengths. For example, our clients in the agricultural sector have various business needs that translate to different financing products from asset financing to working capital financing. At first, we explored various financing products to meet the many business needs of our clients. However, designing a workable, scalable model for each financing product became unwieldy.

With that, we decided to create a niche for ourselves: addressing the working capital financing challenge for our clients. Although we could not meet all the financing needs, we decided to excel in one area and completely satisfy our clients. By focusing on a MVP, we learned the power of saying no and the power of committing to a product that provided clear benefits for our clients.

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