Module 7: Broadening Smallholders Access Financial Services

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Table of Contents:

• Overview
   
• Topic Note 7.1: The Use of ICT-enabled Financial Services in the Rural Sector
  • Innovative Practice Summary: Linking Conditional Cash Transfers and Rural Finance in Brazil
  • Innovative Practice Summary: RFID Facilitates Insurance and Credit for India’s Livestock Producers
• Topic Note 7.2: Policy Strategies and Regulatory Issues for ICT-enabled Rural Financial Services
  • Innovative Practice Summary: Kenya's DrumNet Links Farmers, Markets, and Financial Service Providers
  • Innovative Practice Summary: A Common Platform Delibers Financial Services to Rural India
• References and Further Reading

Overview

Smallholder farmers are the world’s largest group of working-age poor (figure 7.1). Much of the world’s food supply will continue to depend on their efforts, yet a lack of financial services often stymies their attempts to make productivity-enhancing investments and to smooth their consumption between periods of plenty and scarcity. Capital-constrained farmers minimize risk instead of maximizing returns (for example, by investing in high-quality seed and fertilizer or growing what is most profitable) (Trivelli and Venero 2007). Box 7.1 summarizes the four kinds of financial services that farmers need to achieve their economic goals.

Figure 7.1: Smallholder Farmers Are the Largest Group of Working Age Poor

Source: Mas, 2010b

 

Box 7.1: Farmers Require Four Kinds of Financial Services Credit in the form of loans, personal loans, salary loans, overdraft facilities, or credit lines, is often used as working capital at the beginning of the growing season to purchase inputs and prepare land. They also need capital to invest in equipment such as tractors or drip irrigation and to harvest, process, market, and transport their produce. It is important to distinguish between short-term loans, which microfinance institutions usually provide, and the long-term financial services required for agricultural and livestock enterprises. Savings may be in the form of current accounts, savings accounts, or fixed or time deposits. Famers have a significant need for savings, because their income is seasonally tied to the harvest, and for much of the year they rely on savings to smooth consumption. Transfer and payment facilities allow for local and international money transfers, remittances, government transfers, and check clearing. Insurance may cover crops and livestock as well as human life and health. Source: Author, based on CGAP and IFAD 2006:6 and Nair and Fissha 2010.

 

ICTs have now created the potential to deliver a greater diversity of financial products to greater numbers of rural clients than conventional financial service providers have been able to reach. ICTs can also enhance the government’s capacity to monitor and evaluate financial services provided to rural clients and design effective financial policies and regulations for the rural sector.

A number of agents in rural areas—such as government departments, commercial banks, microfinance institutions, traders, telecommunications companies, community-based organizations, families, and friends—provide financial services, which can include credit, savings, insurance, transfers, and payments. Even so, tailoring and providing financial services for small-scale farmers remains challenging. Rural clients differ from the typical clients of financial service providers. They are located in remote and often sparsely populated areas, and they rarely possess the sorts of physical or financial assets that financial institutions customarily accept as collateral. Typical rural assets, such as livestock, pose challenges of inventory assessment and management, and collateral substitutes based on warehouse receipts or returns from future crops are unavailable in many countries. Farmers also have a special need for financial products with a time horizon extending over multiple crop cycles.

This module explores how innovative mechanisms and technologies are used in specific situations in different countries to help rural dwellers—mainly farmers, whose businesses do not readily receive financial support—obtain the financial services listed above from commercial banks and other providers. Some of these technologies are already used in microfinance institutions in urban and peri-urban areas. Important to note, the ICTs discussed in this module are gender neutral; they are enablers and should be used in contexts where both men and women can participate.

Major prerequisites for using ICTs in financial services for agriculture are robust national financial systems and the infrastructure that allows electronic financial transactions between institutions and individuals. Two types of infrastructure and related services facilitate electronic transactions and are vital for extending financial services to rural areas.

The first is ICT infrastructure, such as high-speed Internet and mobile phones, available at affordable prices. This infrastructure is the backbone of electronic financial transactions. The second is financial infrastructure, which includes national payment systems, credit bureaus, ATM switches, or central platforms for microfinance institutions. Financial infrastructure enables financial service and technology service providers, as well as other providers vital for the integrity and stability of the financial system, to connect and perform transactions in real time.

For example, financial infrastructure makes it possible for customers of one bank to use the ATM of a different bank or conduct a transaction (such as writing checks or wiring money) with customers of a different bank. It also channels financial information (such as the creditworthiness of a new customer) to financial institutions.

These services and infrastructure do not benefit merely one operator or financial service provider; they cater to the entire rural and financial sector. For this reason, their provision is often initially regarded as a task for government, although in reality they can be (and often should be) provided by the private sector alone or in partnership with government.

Current Access to Financial Services in Rural Areas

Across developing countries, in urban and rural areas, access to and use of formal finance remains very low in general.The financial access data in figures 7.2 and 7.3 are not specific to farmers, but they serve as a good proxy, showing that rural reach is a smaller proportion of total reach. Agriculture in particular has been underserved; for example, commercial lending to agriculture is 1 percent of all lending in Africa (Campaigne and Rausch 2010). Often, as a result of poor access to formal sources of finance, farmers are left to borrow at very expensive rates from informal money lenders.

Commercial banks remain the dominant formal institutions providing finance to farmers (figures 7.5 and 7.6). Commercial banks constitute more than 75 percent of all rural branches of financial institutions worldwide; in comparison, microfinance institutions account for less than 3 percent. Microfinance institutions and cooperatives may situate a larger share of their branches in rural areas—41 percent and 43 percent, respectively (figure 7.4)—but their absolute total country reach is limited (figure 7.2).

Figure 7.2  Low Access to Financial Institutions			Figure 7.4 Access is Worse for Farmers
Source: CGAP and World Bank 2010			Source: CGAP and World Bank 2010.
Figure 7.3: Low Utilization of Financial Services			Figure 7.5 Commerical Banks Are Main Players
Source: CGAP and World Bank 2010			Source: CGAP and World Bank 2010

 

The supply of financial products and services in rural areas will remain a challenge until financial institutions can reduce the high operating costs associated with catering to rural clients; however, as this module indicates, ICT applications have demonstrated considerable promise in doing so. The next section briefly describes the factors that have proven critical to using ICTs successfully to expand the range of financial services in rural areas. The topic notes that follow provide greater detail on ICT-enabled interventions in rural finance (Topic Note 7.1) and explore policy and regulatory issues that either positively or negatively influence the expansion of the frontier for rural finance (Topic Note 7.2).

Both topic notes contain summaries of innovative practices that demonstrate how ICT is being used in specific settings to expand financial services while reducing transaction costs and information asymmetries. These approaches are certainly not conclusive (because the ICT is extremely dynamic and constantly changing), yet they provide an indication of alternatives that practitioners can consider when designing projects to improve rural access to financial services in a variety of situations, given the right policy and legal environment.

Key Challenges and Enablers

Expanding access to rural finance is challenging, and needs to be looked at as a process that includes a combination of factors, including a supportive economic policy and regulatory framework; appropriate financial and nonfinancial products; and mechanisms, processes, and technology applications that can deliver products and services, improve transparency and accountability, and reduce costs. Any proposed technology solution should be self-sustaining, with a clear plan for generating revenue and financing, or it will eventually prove impossible to sustain and replicate elsewhere. The technological applications described in the topic notes meet these criteria. This section reviews the lessons from implementing those applications as well as the enablers that different players can take to ensure that using ICT to help farmers access to finance is achievable in the long-term.

Federal Economic Policy

Financial markets resemble other markets in that direct government involvement can crowd out private participation. This problem has been perennial in developing countries’ rural credit markets, where government agricultural banks offering subsidized credit were almost ubiquitous. Their presence created a “chicken-and-egg” problem: Governments were reluctant to withdraw from these markets because there was no private sector presence, but the private sector was reluctant to enter when, in addition to other obstacles to rural lending, government competition was a constant threat. In recognition of this problem, a new generation of government agencies was designed to coexist with—or even “crowd in”—the private sector by filling niches or resolving market failures by operating on a more commercial basis than their predecessors.

Agricultural policies may act to suppress private sector development, including the development of private financial services. Governments often use state-owned enterprises to intervene in agricultural product pricing to reduce price fluctuations and provide a floor price, for example. Such interventions can be very costly, are often ineffective, and preempt development of both insurance and storage markets. Farmers will not hedge their production if there is a floor price. Since producers have little incentive to store crops if they do not expect prices to rise over time, the market for storage facilities (and therefore the emergence of a warehouse receipt system and other mechanisms for managing risk) will be suppressed if these price movements are prevented by government intervention.

In sum, the policy environment that enables markets for financial services to develop is one in which minimal government interventions are carried out on a commercial basis, which allows markets to function freely. This restraint will, in turn, provide an opportunity for financiers to provide cost-effective and appropriate financial services without being encumbered by the government. It will also allow the provision of increased risk management services and ultimately lead to greater availability of financial services.

Legal and Regulatory Environments: Enforcing Contractual Obligations

The largest risk to sustainable financing for agriculture is often attributed to inherent business risks or the inability of financial institutions to design profitable financial products for the rural population. Yet interventionist government policies, such as subsidized interest rates, forgiveness of debt, and failure to enforce appropriate rules and regulations can immensely limit the effectiveness of an ICT-enabled product that could have made finance accessible to a large number of people. Conversely, an enabling environment and legal framework, enforcement of regulations, and supportive rural infrastructure eventually lead to lower but sustainable interest rates by reducing transaction costs and risks and increasing competition. All of these outcomes go a long way toward making a sustainable access to finance a reality.

Infrastructure Costs and Shared Platforms

Technology solutions require an investment that can be costly and difficult to justify when implementation is risky, as is typically the case with technology. Investments in technology can be leveraged by financial intermediaries and others within a community to provide additional services on the same platform, however. Sharing infrastructure such as power, telecommunication, data networks, hosting, application support, or data management drives down the cost of technology, making it affordable to deliver financial products and services to rural areas (see IPS “Passive Infrastructure-sharing in Nigeria” in Module 3).

This idea of leveraging infrastructure can also be considered in the development of warehouses for collateral-based systems, weather stations for the development of index-based rainfall insurance, and physical infrastructure to facilitate improved functioning of the supply chain. Investments in infrastructure that can be leveraged but require a high initial investment require the participation of both the public and the private sector to ensure ownership on both sides.

Technical Assistance and Capacity Building

Building the capacity to use and adapt ICTs to facilitate financial services is important not only for the staff of banks and financial service providers but for borrowers and, in some cases, for governments. Capacity building for staff increases the chances of innovation and success in extending financing. Capacity building is also important for borrowers. In a number of cases reviewed in the topic notes, particularly the cases involving institutions or agencies other than banks, technical assistance was one of the core components of success. Likewise, capacity building that focused on maximizing the impact of credit through improvements in product quality was essential to successful management of supply chain financing in Kenya (see IPS “Kenya’s DrumNet Links Farmers, Markets, and Financial Service Providers” in Topic Note 7.2).

Borrowers will need to be educated about new, ICT-enabled instruments for risk management and insurance. There are many ways that organizations and producers can manage risk, and they should learn to select the correct tool or combination of tools that most efficiently and cost effectively match their risk.

Finally, governments will, in some cases, require assistance in capacity building or creating an appropriate legal or regulatory framework. Such assistance may include, for example, support in drafting appropriate legislation and regulations. Variations in the regulation of ICT infrastructure for making cash transfers and providing other financial services have had a considerable impact on the kinds of services eventually provided in rural areas (see “Topic Note 2.3: Mobile Money Moves to Rural Areas,” in Module 2).

Organizational Culture

A dynamic organizational culture allows staff to innovate—by using new technology, for example—and ensures the sustainability of financial innovation. For example, Bolsa Familia (see IPS “Linking Conditional Cash Transfers and Rural Finance in Brazil”) involves organizations that train staff well, provide innovative tools for the job, and create dynamic environments with appropriate incentives to motivate staff to work closely with clients. Management’s participation is crucial, particularly for the development and implementation of an ICT-for-finance program. Other case studies (such as DrumNet) underscore the benefits of empowerment. People with a stake in a business expend many efforts to make the business work.

Topic Note 7.1: The Use of ICT-enabled Financial Services in the Rural Sector

Trends and Issues

ICT introduces new channels for delivering financial products and services to the rural sector, and it has the potential to reach farmers, intermediaries, entrepreneurs, and rural dwellers more directly than traditional brick-and-mortar bank branches or microfinance offices. These new channels enable financial service providers to offer a larger suite of financial products and services and acquire better financial information, some of which is useful to governments as they oversee, regulate, and develop policy for the agricultural and rural sectors. Figure 7.6 illustrates how ICT expands the traditional relationships and service capacities in the rural finance ecosystem. (As noted, Topic Note 2.3 in Module 2 looks at how ICT infrastructure enables this expansion.)

Interventions using ICT can introduce new players and lead to greater competition in the rural financial sector. Institutions or agencies that are not banks (nonbanks) may start providing rural financial services. Since the early 2000s, a number of nonbank institutions have developed innovative approaches to financing agriculture. They have sometimes adapted microfinance concepts to provide agricultural finance, used good banking practices, and above all, drawn on knowledge of agriculture and ICT to enter and succeed in this market. Many of these new approaches show great promise, but no single approach will work for all situations. Rather, organizations have the most success when they are not dogmatic, apply innovative and comprehensive risk-management strategies and tools, and retain the ability to perform credit analyses of their intended rural clients without political interference.

Figure 7.6: ICT and the Rural Finance System

Source: Author

 

 

Nonbanks and banks can provide these ICT-enabled financial services for the rural sector:

• Mobile financial services. Given the pervasiveness of mobile phones in developing countries, financial service providers can use them to reach clients in rural areas and provide a broad array of financial products and services, including credit, insurance, payments, and deposits. Financial service providers can tailor financial products offered through mobile phones to rural needs.
• Branchless banking. Field agents, equipped with mobile phones or point-of-sale devices, can serve as mobile branches. Agents can provide financial services to smallholders, take deposits, provide financial information, and keep records of clients’ creditworthiness. In this way, branchless banking deepens financial inclusion throughout rural areas.
• ATMs. Though ATMs are often associated with debit cards or smartcards, ATMs can serve as cash-dispensing machines in tandem with branchless banking, mobile financial services, and other ICT-enabled financial products. The availability of ATMs in rural areas can place cash-exchange points within reach.
• Smartcards. Though not entirely in the category of ICT, smartcards (or stored-value cards) are an alternate means of providing services when mobile financial services are not readily available. Pre-paid cards, debit cards, or credit cards provide payment and credit facilities to rural clients. Stored-value cards have historically assumed some level of literacy (in particular, the ability to sign for a transaction), but the advent of smartcards that use biometric devices eliminates the challenges associated with literacy barriers.

As discussed, financial services rely on the availability of underlying financial and ICT infrastructure, such as payment systems, credit bureaus, central ATM switches, central financial platforms, mobile telephony, mobile data services, and Internet in rural areas. Governments have to work with the private sector to ensure that the underlying infrastructure is in place and extended to rural areas; for a discussion of how various governments have done so, see Module 2).

Examples and Lessons Learned

The following examples highlight successful ICT-enabled interventions selected from a wide range of similar interventions implemented in developing countries. They demonstrate that rural and agricultural finance can be profitable without high government subsidies and discuss the lessons learned in the course of implementing the interventions.

Availability and Transparency of Financial Services

ICT can make financial services more readily available in rural areas through mobile phones, Internet, point-of-sale devices, and field agents (box 7.2). Electronic banking makes it possible to provide financial services in places that rural clients visit routinely, such as markets and post offices. Electronic conditional cash transfers also make it easier for rural poverty reduction programs to reach specific beneficiaries (see IPS “Linking Conditional Cash Transfers and Rural Finance in Brazil”). Because transactions are conducted electronically using ICT, they promote transparency, accountability, and financial discipline among all account holders, whether they are in farming, business, or government.

Box 7.2: ICT Increases the Availability of Rural Finance in South Africa Through its A-Card, South Africa’s uBank (previously Teba Bank) (http://www.tebabank.co.za/index.php) offers affordable and accessible financial services to communities, especially in rural areas, that were previously denied access. The card is used with a point-of-sale device that enables customers to access a transactional banking account. The primary banking products and services include standard savings and credit accounts and a facility by which state social grants are deposited directly into a customer’s bank account. The United Kingdom’s Department for International Development, ShopRite, and Checkers partner with uBank in this project. Source: Cracknell 2004.

 

Cost and Operational Efficiency

Financial service providers have reduced transaction costs using electronic payment systems, branchless banking, and other ICT-enabled services. Because these services are available to farmers via handheld devices or loan officers based in the field, they obviate the need to visit a bank branch to conduct basic transactions (box 7.3).

Box 7.3: In Rural Kenya and South Africa, ICT Applications Reduce the Cost of Financial Services Kenya: M-PESA. The leader in mobile payments is Safaricom’s M-PESA, a short messaging service (SMS)-based money transfer system that allows individuals to deposit, send, and withdraw funds using cell phones. M-PESA has grown rapidly to reach approximately 38 percent of Kenya’s adult population. The M-PESA model has been copied with little modification worldwide.a Kenyans use M-PESA to deposit money with a registered agent or phone vendor. The agent then credits the phone account. Users can send between 100 Kenyan shillings (US$ 1.5) and 35,000 K Sh (US$ 530) via text message to a recipient. The recipient obtains the cash from a Safaricom agent by entering a password and showing personal identification. South Africa: Wizzit. In South Africa, First National Bank partnered with a mobile phone provider, Mobile Telephone Networks (MTN), to provide services to clients who had no bank accounts but wanted to send and receive money via cell phone. The service, called Wizzit (http://www.wizzit.co.za/), has enabled 500,000 South Africans to send and receive money from relatives, pay for goods and services, check balances, and settle utility bills. Previously South Africans often paid couriers the equivalent of US$ 30–50 to deliver cash to relatives. Now such transactions cost only US$ 0.50 through mobile bank networks. The greatest impact is in rural areas, where 80 percent of farmers still lack back accounts. Wizzit accounts, unlike regular bank accounts, do not expire if customers do not use them regularly, which is critical for seasonal activities like agriculture.b Source: Author; (a) Jack and Suri 2009:6; (b) Kimani 2008.

 

Aside from reducing operating costs, the use of ICT within financial institutions or government can also improve operational efficiency, create public platforms for smaller organizations to use, and develop management capacity.

The need for ICT-based government services becomes more important as the financial sector expands and the sophistication and complexity of financial products grows (box 7.4). The availability of a common information technology (IT) platform enables government at all levels (municipal, state, federal) to obtain accurate information about the availability and affordability of financial services in rural areas, financial well-being of financial service providers, indebtedness of citizens, and related information. This information enables policy makers and regulators to make appropriate decisions with respect to the rural financial sector. ICT can make information gathering and monitoring and evaluation possible on a real-time basis.

 

Box 7.4: Increased Operational Efficiency in Africa through ICT IBM and CARE: The Africa Financial Grid. IBM and CARE are designing the Africa Financial Grid, a shared financial service and infrastructure model that will, for example, help microfinance providers reduce their operating costs, streamline lending processes, scale up, and integrate their services with other resources such as credit bureaus, financial institutions, and international payment networks. The Africa Financial Grid will eventually link with telecommunications providers to enable customers to repay loans or carry out money transfers via mobile phones or other devices. Ghana: E-Zwich payment system. The Bank of Ghana has rolled out a national payment and settlement system in the form of an electronic clearinghouse for all banking and financial institutions called e-Zwich (http://www.ghipss.net/e-zwich). The Bank of Ghana also issued a biometric smartcard, which is a very secure way of paying for goods and services. Source: IBM 2007; B&FT 2010.

 

Governments require information systems for their own management and operations with respect to making policy and regulating the rural financial sector. Such information systems can be linked with financial infrastructure (such as payment systems) and applications that can reach most rural clients.

Improved Risk Management

Through ICT, financial institutions and intermediaries can better manage the risk involved in increased lending, especially in lending to lower-income and rural clients (box 7.5). Credit bureaus and collateral registries can equip financial service providers with better financial information about the market and clients and improve their ability to expand lending. See IPS “RFID Facilitates Insurance and Credit for India’s Livestock Producers” for more detail on the importance of ICT in managing lending risks.

Box 7.5: Financial Service Providers in the United States and Mozambique Use ICT to Improve Risk Management United States. In the United States, Sevak Solutions and Financial Ideas are piloting technology that allows credit decisions for microfinance clients to be made electronically, increasing transparency between lenders and lendees. Initial tests will be carried out with United States military personnel and their families, some of whom experience financial distress caused by limited financial literacy and predatory “pay-day” lenders (http://www.sevaksolutions.org/prototypes/finideas.html). A similar idea could be useful in developing countries, particularly as farmers and rural citizens gain further access to loans and credit. Mozambique. The Banco Oportunidade (a microfinance bank) introduced its Client Relationship Management (CRM) system, a web- and cloud-based system that assists with processing and monitoring loans and is accessible to loan officers, managers, and country and regional teams. The CRM uses data from land mapping and farmer and crop profiling conducted with agricultural clients to process loan applications electronically, taking into account the standard data and farmer, crop, and national limits. After a loan is approved, the CRM sends the data to the bank’s accounting system and assists in loan disbursement, monitoring, and recovery, providing real-time information. The CRM has a personal dashboard, specific to each bank team member, which allows inputting and monitoring related to the team member’s specific line management and process control responsibilities. Source: Sevak Solutions 2008; Management Reports for Banco Oportunidade in Mozambique.

Authentication

Using a variety of technologies, ICT can help financial service providers and government authenticate individuals, inventories, and assets in rural areas (box 7.6). For example, biometric technology captures and stores information that is unique to every person, such as fingerprints, retina scans, or facial images. Its increasing availability and decreasing cost has made it useful in developing countries, where it limits identity theft and facilitates the development of credit markets. The ability to track individuals in a credible way over time provides incentives to individuals to repay loans and reduces the risks faced by lenders. Financial service providers can use biometric tools to provide services to individuals who may not have a national identity card or never learned to sign their names. (See IPS “Using Biometrics to Provide Rural Services” in Module 13.) Similarly, radio frequency identification (RFID) can count and track livestock, harvests, and inputs, among other things. Global positioning system (GPS), satellite data, and weather-based electronic sensors can collect data necessary to create and price crop insurance policies, particularly index insurance programs.

 

Box 7.6: Using ICT to Identify Financial Service Clients in Africa and South Asia Malawi: Biometric technology in rural credit markets. In 2009, 3,200 smallholder paprika farmers in Malawi who had applied for loans to purchase agricultural inputs were randomly assigned to a control and treatment group. The treatment group was electronically fingerprinted and told that their fingerprints would be stored and used to validate their eligibility for future loans. Repayment rates rose by 40 percent in the treatment group. The increased rate of repayment and the resulting savings from avoiding default could justify the costs of deploying an IT system to collect fingerprints for all loan applicants. Kenya: Kilimo Salama. The Kilimo Salama index insurance scheme uses weather indicators as a proxy for loss of inputs. The insurer collects premiums and distributes payouts via mobile phone, which reduces assessment and administrative costs. Kilimo Salama also employs a “pay-as-you-plant” sales model, in which insurance policies are sold for each input purchased. India: Biometric ATMs. ICICI and the Government of India launched an initiative in 2004 to offer banking services to people who earned less than US$ 40 per month (http://www.icicibank.com/). The service relied on biometric ATMs (based on fingerprint scans) and biometric smartcards that do not require personal identification numbers, which can be forgotten or stolen. The ATMs cost 5 percent of what these wage-earners have been accustomed to pay at kiosks offering similar services. Source: Giné 2010 for Malawi; Ogodo 2010 for Kenya; ICICI Bank 2001 for India.

 

Disseminating Information

ICTs are perhaps best known for their capacity to disseminate information. Online videos, television, and community radio can improve farmers’ financial literacy by informing them about the benefits and risks of credit and various banking transactions. At basic rural Internet kiosks, farmers can acquire accurate financial information, such as market prices, to improve productivity and sales.

Conclusion

These brief examples provide some idea of innovative, on-the-ground initiatives that have brought financial services to rural areas. All of these initiatives hold promise but face challenges which, in the end, may not enable them to be scaled up or replicated. Even so, they demonstrate that it is possible to provide financing for agriculture on a sustainable basis and at a reasonable cost. Many of these initiatives are based on the premise that the policy environment will allow such innovations to flourish.

The next sections of this topic note explore two innovative practices in greater detail. The first one, Brazil’s Bolsa Familia, uses an IT platform to extend financial services to people who have been excluded from using them. The second one, a livestock insurance and credit scheme in India, uses RFID technology to reduce the risk inherent in providing these services to poor producers.

INNOVATIVE PRACTICE SUMMARY
Linking Conditional Cash Transfers and Rural Finance in Brazil

 
A 2009 study found that governments worldwide transfer cash to more than 170 million poor people through social protection programs providing cash allowances, health benefits, and pensions (Pickens, Porteous, and Rotman 2009). The number would be much higher if government wage payments were included. In comparison, an estimated 99 million people access microfinance loans, but few of these payments advance the goal of rural financial inclusion. Three-quarters of government-to-person (G2P) payments are delivered in ways that do not allow people to store the payments until they need the money, transfer the money to others, or access them easily (from the perspective of cost and distance).

ICT creates a significant opportunity to exploit the synergy between G2P payments and financial inclusion. The reasoning is that if the government were to facilitate development of the required infrastructure, institutional capacity, and literacy to deliver government payments into basic savings accounts that poor recipients could access easily, those accounts might also be used to channel a wider array of financial services to the same segment—a segment that currently has little or no access to such services.

While three-quarters of G2P payments have not yet exploited this opportunity, some governments are using ICTs to reduce the transaction and administrative costs of implementing government transfer program that also serve as vehicles for financial inclusion. Examples include Brazil’s Bolsa Familia (“family allowance”) program, implemented through Caixa Economica; Colombia’s ACCION Social; Kenya’s Hunger Safety Net Program, through Bankable Frontier Associates; Mexico’s Oportunidades program, implemented through McKinsey and BANEFSI; Peru’s Juntos (“together”) program; and South Africa’s Department of Social Development (Rotman 2010b). The Government of India has used the Financial Inclusion Network and Operations platform to deliver social transfers as well (see IPS “RFID Facilitates Insurance and Credit for India’s Livestock Producers”).

Bolsa Familia: The Applications and Their Impact

Of the programs just mentioned, Brazil’s Bolsa Familia program is exceptional in its scale and impact. Created in 2004, the program consists of monthly cash transfers to poor households with children or pregnant women as well as unconditional transfers to extremely poor households (Anna Fruttero, World Bank, personal communication). In 2007, the program reached 12.4 million households—one-quarter of the country’s population.

Of the 13 million Bolsa Familia family recipients, 3.84 percent withdraw benefits using their electronic benefit card at one of 13,000 lottery kiosks, correspondents, or point-of-sale terminals belonging to merchants acting as agents of Caixa Economica, the bank that holds the grant delivery contract (figure 7.7). In 2004, when cards were first issued to Bolsa Familia recipients, only 24 percent of customers said that using the card was “easy” or “very easy,” but one year later, the number has risen to 96 percent (Pickens, Porteous and Rotman 2009; Anna Fruttero, World Bank, personal communication).

The electronic benefit cards did not quite constitute financial inclusion because the value of the cards had to be used within three months or it would expire. Nor was the value on the card easily transferable. In response, Caixa Economica decided to migrate the Bolsa Familia recipients from the electronic benefit card to a Conta Caixa Facile (“easy account”), a financially inclusive account that includes a Visa-branded debit card. As of October 2009, the bank had converted 2 million recipients to the Conta Caixa Facile. Caixa also has experimented with offering insurance to Conta Caixa Facile holders, is considering microloans, and has developed a financial literacy program for new account holders.

Figure 7.7: Channels for Financial Inclusion for Bolsa Families Beneficiaries

Source: Pickens, Porteous, Rotman 2009.  Note: POS = point of sale.

 

 

Two Key Enablers, One Key Lesson

Though G2P recipients often have limited schooling and little exposure to banking, these limitations have not prevented them from using electronic infrastructure as long as the services match their needs. In Brazil, two key enablers fostered success with electronic transfers through Bolsa Familia. First, the value of the Conta Caixa Facile is significantly enhanced by a wide national network of over 20,000 contact points formed by Brazil’s preexisting financial infrastructure of ATMs, bank branches, and point-of-sale-equipped merchants who handle deposits and withdrawals. Second, government policy favoring cash transfer programs such as Bolsa Familia drives the growth of the Conta Caixa Facile. The key lesson is that a government transfer program can indeed be a vehicle or instrument for financial inclusion.

INNOVATIVE PRACTICE SUMMARY
RFID Facilitates Insurance and Credit for India’s Livestock Producers

 
Worldwide, 60 percent of rural households are estimated to own livestock (including cattle, goats, pigs, sheep, poultry, honeybees, and even silkworms) and to earn 10 percent of their income from products such as meat, milk, cheese, eggs, honey, raw silk, wool, hides, and skins (FAO 2009:34). Livestock perform numerous vital functions. They are a savings mechanism, a form of insurance, collateral for loans, a source of food security, an aid to farm operations, a means of recycling waste products, and form of controlling insects and weeds, and a powerful source of opportunities for women to earn income (which promotes gender equality) (FAO 2009:33).

For this reason, livestock constitute some of the most important assets of rural households. Their loss through theft, disease, or drought can push households into poverty or deepen the distress of already impoverished households. Insurance products piloted in Mongolia, Kenya, and India seek to mitigate the risk of such losses.

Monitoring the whereabouts and health of livestock poses a significant challenge for both farmers and financial institutions. Insurance companies must be able to validate reports of livestock losses to avoid the moral hazard problems (the false claims) that plague insurance delivery and drive up the cost of insurance for all farmers. Most livestock move around to graze and are therefore susceptible to injury, theft, starvation (when drought reduces foliage and pastures), and drowning in floods. Monitoring animal health is even more important when animals are concentrated in intensive production facilities where the risk of disease is high.

Traditional livestock monitoring is cumbersome and expensive. Farmers must hire or use family labor to herd, pasture, or otherwise keep track of animals to keep them safe. Banks and insurance companies need to spend time and money to find and identify individual animals to verify reported losses or take possession if owners have defaulted on loans.

The use of RFID technology has reduced the cost of monitoring livestock.RFID uses electromagnetic waves to exchange data between a terminal and an electronic tag attached to an object that enables identification and tracking (image 7.1). At a minimum, most RFID tags have an antenna for receiving and transmitting the signal and an integrated circuit for performing specialized functions such as monitoring animals’ location, heart rates, or temperatures and storing and processing information on animal weights, feeding histories, and immunizations. The tags can be read by terminals or readers from several meters away and beyond the line of sight of the reader. The readers can be used to access the stored information or place additional information on the chip.

Image 7.1: RFID Can Be Used to Track Cattle and Manage Herds

Source:  Curt Carnemark, World Bank.

 

The technology allows farmers to better manage their herds and enables farmers, banks, or insurers to locate animals. RFID tags have become 99.9 percent reliable and have dropped in price. Prices vary by location, but a basic RFID chip costs approximately US$ 0.15, whereas readers can range from one hundred to several thousand dollars, depending on their sophistication (RFID Journal 2010).

A Business Model for Delivering Cattle Insurance in India

India is the world’s largest milk producer, but only 7 percent of India’s cattle are estimated to be insured (Economic Times2009). Insurance would not only protect producers from losses but improve their ability to obtain loans to increase their herds, because commercial banks are more willing to lend toward the purchase of insured cattle.

In September 2009, several institutions in India teamed up to offer cattle insurance to farmers in two districts of the southern state of Tamil Nadu. The Institute for Financial Management and Research (IFMR) Trust, a private trust that has pioneered financial inclusion efforts, joined HDFC Ergo, a commercial bank that provides insurance, and Dairy Network Enterprise (DNE), a supply chain and logistics organization, to design and deliver the new insurance product, which has several unique features.

First, the insurance is cheaper than other insurance offerings, with a premium of 2.9 percent of the insured value—typically 10,000–20,000 Rupees (Rs) or US$ 200–400, compared to the typical premium of about 4.5 percent. Second, the time needed to issue a policy or indemnity payment is only 72 hours, compared to the norm of 15 days or more. Third, the insurance policy provides access to preventative veterinary services and medicine through DNE to maintain the health of insured animals. Finally, insured animals are tracked using RFID chips in ear tags. The tags cost Rs 60 (US$ 1.20) (standard metal tags cost US$ 0.30).

Policies are sold through the Pudhuaaru Kshetriya Gramin Financial Services (PKGFS), which has 25 branches serving 135 villages in the two remote districts where the new product is being piloted. Each branch has three agents who serve approximately 2,000 households. Policies can be issued rapidly because the PKGFS customer management system is connected in real time and integrated with HDFC Ergo’s policy issuance system. PKGFS and DNE, which manages the RFID technology and health services, must verify that the producer does indeed own the animals he or she wishes to insure and that the animals are healthy. Once this information is verified, PKGFS collects the premium (PKGFS can issue a loan for the premium if necessary) and the producer’s information and transmits it to HDFC Ergo, which activates the policy, usually in less than three days (IFMR Trust 2008).

Once a policy is issued, DNE registers the insured animals at the farm, tags them, and records their vital information in a computer database. Then DNE begins regular checkups to ensure that insured animals remain in good health. Veterinarians update the computer database every time they perform a checkup. In entering this information, they must scan the RFID tag of each animal to collect the unique ID number which must be entered into the database along with the latest health update. This procedure prevents veterinarians from avoiding farm visits and entering false data into the system.¹ If an animal should die, DNE agents verify the death and notify PKGFS, which connects to HDFC Ergo to ensure payout.

Key Enablers

One key enabler was leadership in coordinating important stakeholders. The partnership between the bank/insurer (HDFC Ergo), a logistics organization (DNE), a rural financial institution (PKGFS), and a coordinating group (IFMR Trust) was critical for ICT-enabled insurance to promote financial inclusion.² The leadership demonstrated by IFMR Trust in assuming a coordinating role cannot be overstated. Elsewhere, such a role might also be performed by government or a public financial institution.

A second key enabler was the Internet and communications infrastructure. The PKGFS customer management system connected to HDFC Ergo requires Internet and communications infrastructure. Such infrastructure is increasingly accessible in India. According to the World Bank’s World Development Indicators, teledensity—a measure of telephone access—is 60 percent (though 100 percent in urban areas and 20 percent in rural areas), and 670 million people in the country subscribe to a mobile phone service. India has 4.5 Internet users per 100 people, double the number for the average least-developed country (though less than one-third of the average for low-and middle-income countries).

Growth and Lessons

Since its launch in 2009 in Tamil Nadu, the program has expanded to the states of Uttrakhand and Orissa. The mortality rate of cows has improved with the provision of preventive care, especially deworming drugs and vaccinations.

Despite this initial success, two issues remain to be resolved: moral hazard issues and low adoption. With regard to moral hazard, it appears that RFID tags can be removed far too easily from animals’ ears, and without a national or even regional animal tracking system, it is possible to have duplicate tags. Australia’s National Livestock Identification System tracks all animals, each of which has two RFID chips (one in the ear, one in the digestive system). The point is that RFID technology alone may not resolve moral hazard problems. Using two tags may help, but the key lesson is that an institutional framework in the form of a national or regional identification system is probably necessary for commercial banks to become sufficiently confident to extend financial services to the poor to buy livestock.

Several factors appear to limit adoption. Given insurance companies’ propensity to renege on contracts, producers lack confidence that indemnities will actually be paid. Producers also seem to be confused by the livestock insurance product compared to a cheaper personal accident insurance product offered by PKGFS. Where efforts have been made to explain the difference, a higher rate of adoption has been observed (Gupta 2010). The key lesson is that technology cannot substitute for human capacity. In determining whether insurance products—even efficient, ICT-enabled products—will succeed in a given area, practitioners must consider the prevailing basic literacy and financial literacy rates.

Topic Note 7.2:     Policy Strategies and Regulatory Issues for ICT-enabled Rural Financial Services

Trends and Issues

As noted, a diverse group of stakeholders is involved in providing financial services to rural dwellers. To design supportive policies, provide the necessary infrastructure, and provide appropriate, affordable financial products based on assessments of local needs, governments must explore partnerships with the private sector and rural communities. In turn, governments can devise and implement policies that give rural communities and private enterprises incentives to participate in the rural financial sector.

For example, the Government of India promoted rural digital services by partnering with the private sector to set up village kiosks with IT infrastructure. The kiosks offered a single window for providing government services electronically at the village level (for example, issuing land records to farmers). The kiosks improved citizens’ experience in dealing with government, because they reduced the time needed for officials to respond to citizens’ requests. They also created a village database that could be used to reach more citizens. Financial service providers could potentially use this infrastructure to follow up on clients from the village.

Another example of effective public-private partnerships between government and ICT providers and community organizations is in Sri Lanka, which has 600 distance learning centers and e-libraries that penetrate deeply into rural and remote areas, cover 22 of 24 districts in all nine provinces, and link more than 70,000 underserved users to markets and information essential to their livelihoods.³ At the telecenter in Bakalacia, users include farmers checking market prices, entrepreneurs marketing their businesses, community leaders searching for information on how to improve community livelihoods, mothers seeking first aid and connecting to hospitals and doctors in the capital city, children and students interested in learning, and citizens communicating online, requesting government services, or doing word-processing, printing, and copying. Surveys indicate a user satisfaction rate of 96 percent. An estimated 48 percent of users are women; 82 percent are youths up to 25 years of age. These telecenters can also be used for financial services, like point-of-sale terminals.

Lessons Learned

Financing smallholder agriculture is a complex undertaking, easily thwarted by regulatory impediments to the development of new products or service delivery channels. For example, some potential financial service delivery channels, such as agency arrangements that operate outside physical branch offices, are not yet allowed in most countries in Africa and in most of Asia. Regulatory support for such arrangements may be needed to alleviate the perception of risk associated with financing agriculture and livestock production. Agents can be based closer to rural communities at a fraction of the cost of brick-and-mortar banks. From this vantage point, they can assess the risk associated with lending to farmers better than banks or microfinance institutions. Agents can address the scale issues associated with providing financial services in rural areas, such as the small size of most transactions.

The lack of an appropriate regulatory framework also hampers the development of warehouse receipts as an electronic financial instrument.⁴ Many countries do not recognize warehouse receipts as a transferrable financing instrument, even though this product can facilitate smallholders’ access to finance and, at the same time, improve the quality of produce, which is often dictated by warehouse managers. Policies and enabling legislation would provide for the establishment of a central registry for warehouse receipts as a title document used by banks to grant loans. Warehouse receipts held by banks would be included as liquid assets under the definition of the national banking act. A fund would be established to collect acess from warehouses to indemnify receipt holders in the event of a loss. Coherent industry standards and certification regulations would be introduced.

Many ICT-enabled applications described in this module (and sourcebook) require an enabling legal and regulatory environment. In many countries, point-of-sale devices, m-banking, and other innovative applications have yet to be introduced because the corresponding regulations have not been introduced, despite evidence that they can extend cost-effective financial services throughout the economy, including underserved rural areas.

The two innovative practice summaries that follow demonstrate the importance of public policy and regulatory frameworks in stimulating the use of ICTs to improve rural financial systems and services. The first summary describes how ICT minimizes information asymmetries and links farmers directly to markets and to finance. It demonstrates how risk can be managed at the three operational levels of the financial service provider, market operator, and farmer. The second summary offers another example of the benefits that accrue from a common ICT platform to support rural banking in India.

INNOVATIVE PRACTICE SUMMARY
Kenya's DrumNet Links Farmers, Markets, and Financial Service Providers

 
Small-scale farmers struggle to obtain agricultural loans even where they have good access to commercial banks. Commercial banks are reluctant to lend to them, recognizing the severe barriers and risks these farmers face in successfully producing a crop, marketing it, and repaying loans. Smallholders face risks in transporting produce to markets, finding buyers there, and earning the value they expected at planting. This risk not only introduces uncertainty in their income stream but, as noted, inhibits their ability to obtain the credit to make the productivity and quality improvements that will break the cycle of poverty.

Much of the risk in accessing markets can be mitigated, and farmers’ access to credit can be improved, if farmers can forge better links with agribusiness buyers such as domestic supermarkets, agroprocessors, or (further along the supply chain) exporters. When such links are weak, buyers also face problems in sourcing sufficient produce of the quality demanded by supermarkets or food processors. Farmers often do not know that the market is willing to pay a high price for certain products that meet certain quality standards; even if they do know, they lack the financing to switch to a new and more profitable crop or the knowledge to achieve the desired level of quality.

Better links between farmers and buyers would help to overcome these obstacles, but they are difficult to form. Mistrust between farmers and buyers runs deep. Buyers fail to honor purchasing agreements or do not pay the agreed price at harvest. Farmers abandon purchasing agreements and sell their produce to another buyer or on the spot market if they can get a more favorable price. Aside from these problems, the practical aspects of working with large numbers of small-scale farmers—organizing them, negotiating prices, sharing information, and managing their agronomic activities—are daunting for agribusinesses. Even if they were easy to resolve, agribusinesses still lack the core capabilities and often the resources to extend financing to all of those farmers.

The less risk exposure a client presents, however, the more banks are willing to lend. If farmers can demonstrate that an agribusiness is willing to purchase what they will produce, a bank will be much more amenable to financing the purchase of inputs and labor for production. The challenge for the bank is then limited to the transaction costs of disbursing funds, ensuring the loans are used for their stated purpose, collecting payments, and bearing the exposure to weather risks (unless there is crop insurance).

DrumNet is a project of PRIDE AFRICA, a nonprofit that has promoted the spread of microfinance across the continent since 1988. Created in Kenya in 2002, DrumNet was designed to provide market, information, and financial services to smallholders, and it has evolved a sophisticated technology platform to deliver these services. The project illustrates that it is possible for a third party to coordinate and link farmers, buyers, financial intermediaries, and operations managers to deliver financing to small farmers, and that ICTs have a vital role in doing so. ICTs such as mobile phones, smartcards, and management information systems facilitate communication between the parties and help to manage the administrative challenges of tracking large numbers of smallholders, delivering loans cost-effectively, ensuring that funds are properly used, and collecting payments.

Links with Key Players

DrumNet recognized that it could not improve financing for farmers without linkages with financial intermediaries and buyers (DrumNet 2007). In 2008, DrumNet began a pilot program in the sunflower subsector to facilitate partnerships that would give smallholders access to finance and improve efficiency throughout the supply chain. The agribusiness buyer, Bidco, was the largest manufacturer of vegetable oils, fats, margarines, and protein concentrates in East Africa and needed a steady supply of sunflower seed. The financial institution was Equity Bank (also involved with to M-PESA, discussed earlier). Farmers were recruited to grow sunflower instead of their typical crop. Two additional players proved important to the partnership. Input suppliers had to agree to sell products to farmers on credit and receive payment from Equity Bank instead of cash directly from farmers. AgriTrade recruited farmers and managed sunflower production, harvest, and collection. The benefits foreseen from their collaboration are depicted in figure 7.8.

Figure 7.8: Benefits to Stakeholders in DrumNet's Sunflower Supply Chain Partnership

Source: Adapted from PRIDE AFRICA n.d.

Figure 7.9: Flow of Goods, Information and Money in DrumNet's Sunflower Supply Chain Partnerships

Source:  Adapted from PRIDE AFRICA, n.d.

 

 

Services and Revenues

DrumNet negotiated the contracts that brought these parties together and managed the flow of information and financial transactions among them (figure 7.9). Through this arrangement, farmers received credit for inputs from Equity Bank upon signing a fixed-price contract with Bidco. To ensure that the loans would be used for their stated purpose, farmers received no cash from Equity Bank. Instead, through another agreement facilitated by DrumNet, Equity pays input retailers directly for materials purchased by farmers on credit. When the produce is delivered to Bidco, Bidco pays farmers through DrumNet, which first deducts the cost of the loan and transfers it to Equity Bank. The remainder is sent to the farmer’s account with Equity Bank (Campaigne and Rausch 2010). DrumNet earns revenue for this service.

Farmer groups (typically consisting of 20–100 farmers in the same area) open an account with Equity Bank through which all payments are made. Individual farmers can be paid in cash, but cash is withdrawn from the bank at the group level to reduce transaction costs. Each member is required to contribute to a Transaction Insurance Fund, which is 25 percent of the value of the input loans and acts as security for them (DrumNet 2009).

ICT Applications

DrumNet provides the ICT platform through which all financial transactions and communications take place. The platform includes mobile phones, SMS, and email to enable the parties to do business. All payments from buyers pass through DrumNet accounts at the bank.

Information is transmitted up and down the supply chain during the crop cycle primarily via SMS. Bidco is informed about the area planted to estimate production and plans accordingly. The processor monitors crop progress and passes on important crop management information to farmers. Input retailers are updated on which products to stock at what time, and producers learn about collection dates and locations long before harvest.

The input retailers, trained in basic record keeping for DrumNet, submit virtual receipts to DrumNet via mobile phone and receive payments into their bank accounts in two-week cycles through the DrumNet system. Equity Bank is shielded from these many small transactions, as it simply opens a single line of credit in DrumNet’s Master Account, receiving regular principal and interest payments from DrumNet from this revolving account. DrumNet’s management information system provides the internal controls to track and report on compliance throughout the process. It also retains data to establish user and credit ratings.

Key Enablers

A key enabler is the partnerships between Equity Bank, Bidco, input suppliers, and farmers that enabled the system to work. ICT plays a significant role in sustaining the trust and confidence that make these relationships work. It provides the visibility, communication, and speedy transactions that bind partners together for their common benefit. The DrumNet system allows the various partners to be in touch constantly, reducing the potential for misunderstanding and unilateral decision making. Each partner can view the actions of the other partners. If there is no rainfall, Bidco knows to downgrade production plans, Equity Bank knows and can begin to work with farmers to make refinancing arrangements, and so on. Collaboration replaces confrontation. The speed of payment permitted through DrumNet is also central to maintaining sound relationships. Farmers note that they get paid in days rather than months, as was customary. The same can be said for the retailer and bank or the buyer and bank.

As the previous paragraph implies, a second key enabler was infrastructure. DrumNet’s ICT platform relies on mobile phones and Internet. Based on the World Bank’s World Development Indicators, it appears that Kenya’s infrastructure for both technologies is above average compared to that of other developing countries in sub-Saharan Africa. Kenya has wireless coverage across 77 percent of its territory (the average for developing countries in sub-Saharan Africa is 75 percent) and 42.1 mobile subscriptions per 100 people (compared to 33.3 in developing countries in sub-Saharan Africa). Similarly, Kenya has 8.7 Internet users per 100 people compared to 6.5 for sub-Saharan Africa.

Outcomes and Lessons

More than 2,000 smallholders participate in the sunflower pilot. Several lessons have become apparent since the first harvest was completed. The complex arrangement between farmers, buyers, banks, and retailers certainly allows farmers to obtain credit, reduces defaults, and increases trust. Yet the relationship remains extremely fragile. It is still susceptible to mistrust. Side-selling by farmers, scams from input retailers, buyers reneging on agreements, and hidden fees from the bank all erode trust and undermine the relationships. Such problems occur more often at the beginning of the process. As the partners come to understand each other’s operations and develop trust, the problems should lessen. As noted, efficiency in service delivery is one way to mitigate some of these risks.

The partnership is also susceptible to problems arising from typical production risks such as drought or floods. After the first year, when one region of sunflower growers was affected by drought (McCormack 2009), the issue of loan repayment became contentious. Would Equity Bank allow an additional year to repay? Should DrumNet require a higher security deposit from farmers? Failure to reach agreement on such flashpoints before a partnership is implemented can unravel hard-won cooperation.

INNOVATIVE PRACTICE SUMMARY
A Common Platform Delibers Financial Services to Rural India

 
In India, the Financial Inclusion Network and Operations (FINO), an Indian technology company, and ICICI Bank have used ICT to facilitate remote bank transactions and dramatically reduce the costs of serving rural areas. Using smartcards and point-of-sale devices connected to a centralized ICT platform, FINO has overcome the traditional problems of low volumes and values of transactions in rural areas.

ICT Application and Business Model

In partnership with IBM and i-Flex (now Oracle), FINO developed a remote transaction system that uses a small biometric point-of-sale device, in combination with a biometric smartcard, to authenticate users and conduct transactions (image 7.2 and figure 7.10). Transaction data are sent over the Internet to a core banking system that houses the data and allows for analysis. Besides the obvious benefit of allowing remote transactions, the service provides the ability to uniquely identify customers and record their transactions over time. The transaction history for each customer can be used to provide credit bureau services to mainstream banks and allow them to lend to qualified borrowers in whom they have confidence (Business Line2006).

 

Figure 7.10: Other ICTs Used by the Financial Inclusion Network and Operations

Source: FINO and IBM

 

 

An Extended Agent Network

FINO employs over 10,000 agents, 95 percent of whom are based in rural areas. The agents, called bandhus(“friend” in Hindi), form a network of human ATMs. Each agent is trained and equipped with the handheld biometric transaction device which allows clients with smartcards to access banking services. Balance transfers, deposits, and withdrawals can all be done through the smartcard system, even where the Internet is not accessible, since the smartcard retains the user’s account information (India Knowledge@Wharton 2010). New transactions are stored on the transaction device until Internet is available, at which point the data are synchronized with the core banking system.

Products and Services

Through its human and electronic network, FINO delivers microfinance transactions for various banks as well as its own banking services. Originally meant as a conduit for other financial institutions, FINO decided to offer its own financial services—savings, credit, insurance, and remittances—primarily because banks and businesses remained reluctant to pursue the rural market (India Knowledge@Wharton 2010).

FINO is also testing new initiatives. For instance, the company opened bank accounts for dairy farmers that supply milk to the National Dairy Development Board in Gujarat. Along with a savings bank account, farmers can receive bank loans and cattle insurance combined in a single product (India Knowledge@Wharton 2010).

Profit Margin and Cost Structure

FINO earns approximately US$ 0.10 for each transaction. A similar transaction costs US$ 1.00 at a bank and about US$ 0.40 cents at an ATM (Rotman 2010a). The company had turnover of US$ 22.5 million in 2009–10 (India Knowledge@Wharton 2010). FINO aims to keep interest rates below 20 percent. The company has a similar cost structure as other microfinance institutions (figure 7.11), but it claims to have operational costs of 4–6 percent, nearly on par with traditional banks, because its rural agents cost less than urban agents, technology reduces administrative paperwork, and FINO shares the cost of maintaining the agent network with other banks that use FINO to conduct transactions (India Knowledge@Wharton 2010).

Scale and Sustainability

FINO has grown spectacularly since it was launched in July 2006. The company reached 2 million customers by 2008 (FINO 2008) and 5.5 million by 2009 (findBiometrics 2009), within an estimated market of 500 million rural people. By September of 2010, “there were 21 million customers, 22 banks, 10 MFIs, 4 insurance companies and 12 government entities covering 22 states, 266 districts and 5,884 gram panchayats [village councils].” The ambitious goal is to reach 100 million customers by July 2011 and have revenue turnover of US$ 52 million (India Knowledge@Wharton 2010).

Figure 7.11: Cost Structure and Microfinance Institutions (MFIs in India)

Source: CGAP and IBM

 

The financial viability of the agent network is questionable, however. At about US$ 23, the average monthly profit for a FINO agent is less than 20 percent of the profit made by an M-PESA agent in Kenya or an agent in Brazil, both of whom make around US$ 130. FINO agents surely need additional income to supplement that from FINO, but being an agent for FINO takes up an enormous amount of time, leaving little for another job unless there are synergies between the travel required for FINO and the other job (Rotman 2010a).

Key Enablers

An operation on such a large scale requires strong support from major institutions, policy initiatives, and infrastructure. FINO has benefited from all of these key enablers. A major advantage was that ICICI Bank, India’s largest private financial institution with assets of US$ 81 billion, incubated FINO. It transferred critical technical and administrative capacity to the company in addition to financial support.

Early on, ICICI Bank recognized the challenge of reaching rural customers. The bank, founded in 1955 by the Government of India, industry, and the World Bank, has consistently innovated in service delivery. In 2004, the bank launched the Kisan (“farmer”) Credit Card in Andhra Pradesh to facilitate delivery of cash loans and credit to tobacco farmers (ICICI Bank 2001). In the same year, ICICI unveiled biometric ATMs in peri-urban areas. The ATMs cost 5 percent of typical ATMs.

These steps led ICICI to envision a technology platform that could allow banking transactions in rural areas, and ICICI began incubating FINO to achieve this goal. The effort was guided by leaders of other companies that ICICI had incubated: Crisil, a ratings agency, and Ncdex, a commodities exchange (Business Standard2006). FINO spun off in 2006, with ICICI retaining a 19 percent stake. Intel Capital and the International Finance Corporation (IFC) each have a 15 percent stake, the Life Insurance Corporation of India has 8 percent, and various other public banks have the remaining 22 percent (figure 7.12) (India Knowledge@Wharton 2010).

Figure 7.12: Financiers of the Financial Inclusion Network and Operations

Source: fino.co.in

Government policies and regulatory incentives have also been instrumental in helping FINO to grow and maintain its momentum. First, FINO earns most of its revenue from delivering government transfer payments for the Social Security Pension system, the Health Insurance initiative, and the National Rural Employment Guarantee Act (India Knowledge@Wharton 2010). Second, FINO facilitatestransactions that commercial and state banks are legally obligated to perform. Since the 1960s, the Reserve Bank of India has required commercial banks to direct some portion (more than 40 percent) of their lending to priority sectors, which include rural industries and agriculture. Finally, a centralized ICT platform such as FINO’s relies heavily on telecommunications infrastructure, which is already quite good in India.

Lessons

As indicated in the discussion of FINO’s operations, significant financial, management, and political support from ICICI Bank and the International Finance Corporation were critical to the development and implementation of a rural transactions system as ambitious as FINO. Another important lesson is that government can be an important customer. It can drive the transaction volumes necessary to make rural financial transactions viable.

References and Further Reading

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• 1 If services other than routine preventive care are required, the producer must pay for them on top of the insurance cost.
• 2 This arrangement resembles the arrangements in another successful program, DrumNet in Kenya.
• 3 This section draws on unpublished information from World Bank Implementation support missions.
• 4 Warehouse receipts are not covered in depth by this module because of the limited ICT used. Nonetheless, the basics for establishing warehouse receipts as a financing mechanism are not normally addressed, and as a result, some interventions do not succeed. In addition to proper legal frameworks that protect all parties, there must also be a critical mass of farmers’ organizations that can bring produce to the warehouse. The commercial banks and other service providers must be brought into the design from the very beginning, and there must be interest from the private sector to participate in the operations of the scheme. Warehouse receipt mechanisms also often lack the long-term objective of linking the scheme to the overall commodity exchange system, which would then encourage smallscale farmers to participate. Warehouse receipts can be useful with the proper frameworks and implementation, however. The Uganda Commodity Exchange warehouse receipt mechanisms, for example, is working well for smallholders.

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