Digital Finance Can Transform Agriculture
By Former Communications Officer
Advances in Technology could be the solution to smallholder farmers’ access to financial services in Uganda. Take Enid Nimusiima, 42 years old, a member of Mushanga Savings and Credit Cooperative Societies (SACCOs) in Sheema District, in Uganda. Nimusiima expanded her poultry business from 60 to 1000 chickens, thanks to MSACCO, a platform developed by Future Link Technologies, that gives members of the SACCO easy access to savings and loans through mobile money. Nimusiima says the platform reduced her transport costs as the money can be repaid digitally with updates sent telephonically. “Using MSACCO is cost effective for me and I don’t have to incur transport costs to the SACCO branch. I pay my loan, receive updates on my phone and I can easily save through the platform,” says Nimusiima.
Access to digital finance is critical if we want to transform Uganda’s largely smallholder agricultural sector. According to the Finscope Uganda 2018 report, 22% of adult Ugandans use informal channels to access financial services while 22% are financially excluded – meaning, 44% of adult Ugandans are not being served by the formal financial services sector. With the advance of technology and mobile money in Uganda however, there is hope that smallholder farmers can now access financial services such as savings, credit and insurance through digital platforms. The Finscope 2018 Uganda report shows that mobile money is driving financial inclusion – of the 58% Ugandans who are using formal financial services, 56% of that is through mobile money.
Agriculture is the mainstay of Uganda’s economy and contributes about half of the country’s total export earnings. The bulk of the sector however, is hinged on smallholder farmers who are subsistence in nature, live in rural areas, farm on small plots of land and use basic methods of farming. However, smallholder farmer productivity has remained low and this is mainly attributed to limited access to finance. For smallholder farmers to be able to access the much-needed inputs such as fertilizer and good quality seed, they need access to savings and credit to finance their farming businesses and increase productivity. Additionally, in case of any eventuality like a drought or crop infestation, good quality insurance products can help farmers to protect themselves against heavy economic shocks.
Researchers have documented a number of factors that hinder smallholder farmers from accessing financial services such as credit and savings. The Uganda Bureau of Statistics’ latest census shows that about one in five (20%) Ugandan households have a functional bank account. Banks and micro finance institutions do not see the business sense in serving smallholder farmers simply because they do not find it cost-effective to set up and maintain bank branches in the rural areas. On the other hand, smallholder farmers lack sufficient collateral to enable them to access credit from banks. They also find it expensive to travel long distances to save their money in banks located mostly in urban and peri-urban areas.
Smallholder farmers like Nimusiima who use services such as mobile money integrated with SACCOs, have found the service cheaper because of reduced costs, easy access to services and being able to transact faster. The potential for mobile payment systems to empower the poor through improved access to finance and lower transaction costs are increasing. Kpodar and Andrianaivo in a study conducted in 2011, on the impact of information and communication technologies (ICT), especially mobile phone rollout on economic growth, revealed that the increasing use of mobile telephony in developing countries has contributed to the emergence of branchless banking services (also called agency banking), thereby improving financial inclusion. Ogwal and Mugabi, in a guide developed in 2015 on digital financial services for agricultural value chains, highlighted that digital financial services such as mobile money can promote increased investment in agro-value chains by providing a cheaper, more efficient, traceable and transparent payment method for high-volume, low-value transactions.
The MSACCO project in Sheema registered an increase in member savings attributed to the ability of members to digitally deposit money on their accounts at any time, which improved loan repayment by three percent because of convenience among members to service their loans.
There are a number of challenges however, that are currently hindering the full realisation of digital financial services by smallholder farmers in Uganda. These challenges include: poor connectivity, inadequate agent network coverage, poor mobile phone penetration and illiteracy levels. Nevertheless, these challenges do not override or deter the benefits that smallholder farmers are realising with the advance of digital financial services.
Technology has long been recommended as a solution to agriculture’s ills but there has been limited effort in increasing digital financial services for smallholder farmers. If we want to support smallholder farmers to increase their incomes, then we must ensure that they too can access a spectrum of financial services that help build their economic resilience and lift them out of poverty.
Alice Nakagwa is the Communications Officer at FSD Uganda. Follow her on Twitter @alyceomega