Let’s Get Digital: Un-Blocking Finance for Farmers in Senegal
In Senegal, as in many other countries, a productive, thriving food system is dependent upon several factors, including quality productive inputs, appropriate tools and technologies, connections to a strong market system and access to finance. For years, the government supported access to credit for both producers and processors in northern Senegal with disappointing results. Loan defaults by farmers and millers alike eroded trust and perpetuated a vicious cycle whereby farmer organizations accessed limited or poorly targeted financing, leading to the purchase of less-than-ideal inputs and resulting in lower yields and incomes. The cycle repeated itself as farmers had even fewer resources to purchase better inputs the next season. Lending in the Senegal River Valley stagnated around the US$5 million mark, well below what is required to provide productive inputs to the area’s 30,000+ smallholder rice farmers.
Diagnosing the Problem
The Feed the Future Senegal Naatal Mbay (“flourishing agriculture”) project, managed by USAID/Senegal, specializes in assessing, diagnosing and remediating points throughout a value chain that may create inefficiencies or gridlock. Analysis of the Senegal River Valley rice value chain revealed that financial institutions were hesitant to lend to rice farmers due to a perceived high risk and a lack of available collateral. These findings presented a familiar conundrum in agriculture: the only bankable collateral that smallholder farmers possessed was their crop, which they had to sell within a discrete timeframe. In order to finance their operating expenses before sale, therefore, they had to forward-fund their investments. If their crop failed to sell at a break-even market price, they were already “in the red” for the next cropping season.
Facilitating a Solution
As a market systems facilitation project, Naatal Mbay does not take on the direct role of any value chain actor in order to avoid market distortions. In this case, the project worked with farmers, producers and financial institutions to broker an alternative contracting arrangement to address the challenges faced by banks. Under this new system, banks become trade facilitators by accepting aggregated paddy rice from farmer organizations as loan collateral. The banks then extend lines of credit to rice mills, which buy the aggregated paddy rice, mill it and sell it to wholesalers who supply the local markets. In this alternative system, rice producers and processors obtain financing when they really need it. Stable contract prices and economies of scale generated by the aggregation of quality rice have made local rice a profitable activity for both farmers and millers, and loan defaults have dropped from over 20 percent to less than five percent.
There was one remaining challenge to this new and innovative system of financing: Banks still felt uneasy scaling the system and providing loans based on pre-harvest rice, because they were not able to track the harvests and ensure that they were aggregated on time at warehouse points. The banks had no way of knowing whether the rice was misplaced, lost or damaged in the post-harvest process.
Working through its existing partnership with Senegal’s Agricultural Credit Bank (CNCAS), Naatal Mbay recruited Kamex Audit & Counsel, a local accounting business based in Saint-Louis (northern Senegal), to establish an experimental system to “audit” or monitor rice paddy stocks produced by Feed the Future-supported farmer networks for the 2016 hot dry season. The team brought computer engineering firm SIS'Tech — also local to Saint-Louis — into the fold to digitize the tracking system and make it easier for banks to follow the path of their collateral.
With the data available and verified by a third party (Kamex), CNCAS considers farmer organizations’ loans repaid when the paddy is received at approved aggregation points or warehouses. With their input loans counted as paid by the bank once the paddy is in the warehouse, borrowers can access additional credit without delay to plant a second rice crop for the year or process more paddy rice. The system differs from a traditional Warehouse Receipts System (WRS) because the warehouse stock is not held, waiting for future sales at a higher market price. Instead, the paddy rice is part of the processors' stock which they use to fulfill orders for clean, white rice packaged in their unique, branded sacks.
On- and Off-Farm Benefits
The results of this innovative new financing system have been life-changing for the producers, the processors and the businesses involved in the partnership. On the production side, the new, transparent, traceable rice tracking system put CNCAS at ease and led to increased loans to the farmer networks, which have helped them grow their businesses with confidence. At the same time, thanks to their new relationship with CNCAS and the farmers, both Kamex and SIS’Tech have seen their local off-farm businesses grow. The services of these two providers have now paid for themselves several times over as they enable the scaling up of the loan portfolio while driving down default rates. Writ large, this system has enabled CNCAS to boost annual input credits to farmers from US$6.9 million to US$20 million, accompanied by a drastic reduction in defaults. The system is now in a transition phase from pilot to scale. CNCAS has adopted the process as part of its standard lending procedure and will contract directly with SIS’Tech to provide a fee-based service to adapt and monitor the platform as well as oversee data collection, systems training and tech support — all without any Naatal Mbay support. CNCAS will continue to outsource auditing services to Kamex to maintain segregation of duties and avoid conflict of interest.
This new and unexpected niche in agricultural finance has created jobs and business expansion that go well beyond the farm and will help support long-term economic growth in Senegal long after the Naatal Mbay’s work is completed.
By Christophe Poublanc, Chief of Party, Feed the Future Senegal Naatal Mbay Project