Leveraging Technology to Increase Access to Rural Agricultural Credit Finance: The Case of Emata

By Douglas Karugonjo, Joseph Sanjula Lutwama and Maren Hald Bjørgum

The State of Rural Agricultural Credit Finance

Agriculture in Uganda especially in the rural areas has always faced the challenge of limited access to credit finance. As of the end of March 2023, the agricultural sector accounted for 11 percent1 of the commercial bank credit to the private sector despite accounting for the highest proportion of Uganda’s labour force at 35.9 percent2. Most of this limited funding is allocated to commercial large-scale agricultural production, processing, and trade with the least going towards small-holder farm production which dominates the rural areas.

Given its predominantly informal nature with heavy reliance on rudimentary agronomical practices, formal financial institutions are hesitant to advance credit to small-holder farm production. First and foremost, these farmers are in far to reach remote areas making it costly to serve this market segment. Additionally, the potential return on investment from this market segment is very low considering the informal nature of their farm production units. Their production levels are highly unpredictable and susceptible to adverse weather patterns and fluctuating market prices. Combined, these factors make this market segment risky and barely profitable.

The Promise of Technology

Despite all the disadvantages associated with small-holder farming, technology presents a unique opportunity that could turn this market segment into a viable and profitable business opportunity for formal financial service providers.

In 2019, the Financial Sector Deepening (FSD) Uganda partnered with Laboremous Uganda Limited to pilot its technology platform Emata in delivering affordable and easily accessible credit to dairy small-holder farmers in Central and Western Uganda. The partnership was focused on digitising farmer records and creating credit scores that could help farmers access credit. FSD Uganda also provided technical assistance towards a human-centred approach to product design for the loan origination and repayment process on the Emata platform. After a successful pilot, Emata was officially registered as a company in March 2020. It received its lending license in December 2020 and started lending in February 2021.

Emata meets the need for agricultural financing by providing affordable digital loans to farmers that are three to six times more affordable than informal loans that smallholder farmers use today. Emata achieves this by digitising the entire process and servicing farmers via partnerships. The Emata model effectively solves the challenges that formal financial institutions face when financing farmers regarding manual processes, last mile distribution, and the need for collateral.

Whereas banks largely rely on manual processes, Emata automated the entire process from data collection, credit processing, to loan disbursement. This high level of digitisation brings many advantages. First and foremost, it reduces the costs of processing a loan. This enables Emata to provide small loans that are suitable for smallholder farmers. The high level of digitisation also makes Emata’s lending decision instant. This means farmers no longer have to wait for months before they know if they will have the funds, they require to make critical and often time-bound investments.

The Emata model effectively addresses the issue of last mile distribution. Emata loans are requested through WhatsApp, by using an automated chatbot. WhatsApp is widely popular in Africa, very data efficient, and eliminates the need to install a separate app. Farmers without WhatsApp can use the smartphone at their dairy cooperative. This allows Emata to reach even the most remote farmers without a smartphone.

Emata reduces the need for collateral by building its credit decisions on data science. Emata uses the patterns of the farmers’ production data, weather data, and satellite data to determine how much a farmer produces, if a farmer is reliable, and ultimately lendable. This data science driven approach allows for better decision-making that reduces the risk and thus the need for collateral. This allows Emata to service all farmers, regardless of whether they are men, women, or youth – and not just the large-scale professional farmers with collateral.

How the Emata platform works

Rather than going to each farmer individually, which would be costly, Emata partners with cooperatives and comparable organisations. The Emata process can be broken down into three steps. First, Emata provides software to partners to digitise their operations via a user-friendly Management Information System (the Emata “MIS”). The Emata MIS unravels administrative clutter, increases transparency, and allows cooperatives to make data-driven decisions.

Second, Emata covers the data collected via the MIS and 3rd party weather and satellite data into credit limits tailored to each farmer. Emata achieves this by using algorithms that forecast production, income, and cash available to repay the Emata loan.

Lastly, Emata provides digital loans that farmers request through a WhatsApp chatbot. Loans are disbursed via mobile money or to input suppliers.

The Impact in numbers 

Between August 2019 and July 2022, a total of 56 dairy cooperatives signed up on the platform with 57 percent active. Over 9,000 farmers were active on the platform with digitised agricultural production records. 80 percent of these were in the dairy sector, with the remainder divided between the oil seeds, maize, and coffee sectors.

During that period, a total of 1,464 loans were advanced to farmers with the dairy sector accounting for the bulk (85 percent) of the credit disbursed. The Emata  platform also provided competitive interest rates that are multiples lower than the market range of 10 percent to 20 percent per month.

The Emata platform also registered good performance about the credit portfolio health of the farmers especially the dairy farmers, with a default rate below 1% and PAR-30 below 5%. This is a clear testament to the value of technology in reducing the risk profile of the small-holder farmer.

From Small-Holder Financing to Unlocking Ecosystem Financing Opportunities

Overall, the Emata platform has transformed the dairy ecosystem beyond increasing access to agricultural finance for the small-holder dairy farmers to opening potential financing opportunities for other dairy ecosystem actors. The dairy cooperatives benefit from the free-of-charge administrative platform of Emata which resolves the burden of manual record keeping and reduces the time spent preparing semi-monthly payments to farmers from four days to a few clicks. Entering records on the Emata platform is cost and timesaving for the cooperatives thereby boosting operational efficiency and profitability. Moreover, membership and milk deliveries are boosted as access to affordable credit becomes a key reason for farmers to join a cooperative.

A Catalyst for Economic Empowerment

Given that the dairy sector is one of the fastest growing export sectors in Uganda yielding 2.08 billion litres of milk, the highest in East Africa, Emata presents an immense economic empowerment opportunity for the small-holder dairy farmers. Given the easy access to credit financing, smallholder farmers can now take advantage of these immense economic opportunities in Uganda’s dairy sector.

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