Women meet as part of a community savings group in Colombia.

Value Chain Finance with a Digital Twist

Heather Joffe Reyes

June 12, 2018 | 4 Minute Read

Agriculture and Food Security | Finance and Investment | Financial Services and Access to Finance | Economic Growth and Trade

Digital Development

Banks and microfinance institutions have long struggled to reach rural clients with traditional methods. Heather Joffe Reyes explores an approach that blends agricultural value chain financing with digital services to ensure rural communities in Colombia can access the financial services that they need.

Back in 2015 while designing our approach for USAID’s Colombia Rural Finance Initiative (RFI), a Colombian colleague and I visited a sugar smallholder who had settled in the Meta department, fleeing the civil war. On his adobe walls hung a photograph of the farmer smiling proudly next to Colombia’s President Santos, who had visited their cooperative to inaugurate a sugar mill — which more than a year later stood idle and without electricity. His village lacked running water while his cooperative lacked capital. The farmer told us the only time he banks is when he takes an expensive, three-hour bus ride to the state capital, to pay cooperative taxes — even though they’re not turning a profit. We came away humbled and wondering, “How are we going to link farmers with financial services when they’re not even connected with electricity or markets?” We knew the answer lay with reducing transaction cost and risk for bank and farmer — but how?

Three years into implementation, RFI has worked with more than a dozen banks and microfinance institutions to link 250,623 rural Colombians, half of them women, to more than $227 million in financial services (largely rural and agricultural credit, savings, and insurance). However, the question remains, “How can we scale up financial services further, to reach millions more rural Colombians like our Meta sugar farmer?” This is a question that practitioners ask worldwide, and one that’s particularly pressing in Colombia with the 2016 peace accords’ promises of rural economic inclusion after decades of violence and neglect.

The Challenge to Reach Rural Clients

It’s no secret that research points towards digital services as a major financial inclusion driver, since digital services reduce transaction cost by reducing use of cash — as cited by the Consultative Group to Assist the Poor (CGAP) and the World Bank’s Better than Cash Alliance (BCA). Digital channels are especially attractive where security is an issue; for example, in parts of Meta, cash must be helicoptered in at high cost for bank and customer. However, while Colombia boasts an increasingly sophisticated financial system, it has historically failed to reach rural clients — and digital services are no exception.

For example, RFI partner bank and Colombian multinational Davivienda boast the fast-growing “Daviplata” mobile app with some 4 million users, 5,600 businesses paying salaries, and $235 million in transactions — mostly in urban areas. Daviplata allows customers to manage savings and checking accounts and to make and receive payments, like a banking app combined with Venmo. Given promising urban uptake, RFI and Davivienda asked, “How can we reach rural customers?” Rural customers are traditionally more expensive and risky to reach, given geographic dispersion, informality, and ag cycle vulnerabilities. While small microfinance institutions may visit individual smallholders for loan origination, it’s prohibitively expensive for Davivienda’s business model.

Rural customers are traditionally more expensive and risky to reach, given geographic dispersion, informality, and agriculture cycle vulnerabilities.

Digital Services Meet Value Chain Financing Innovation

In response to this challenge, RFI Chief of Party Asdrubal Negrete and his team spent last year working with Davivienda and other financial institutions to develop a value chain financing model that tailors services (credit, savings, and insurance) for buyers (frequently cooperatives) and their smallholder suppliers. This approach allows the bank to assess and award loans to anchor organizations based on its business operations and relationships, rather than conducting risk assessment for individual smallholders, reducing transaction cost and risk. Following this value chain model often helps the cooperative and smallholder suppliers establish credit history for repeat transactions.

The next step was marrying the value chain model with digital services. In the pilot stage, RFI and Davivienda are in the process of learning from two examples in coffee and pineapple value chains, before scaling the model.

“Other banks have mobile wallets and platforms, so the innovation isn’t Daviplata alone,” explained RFI Value Chain Finance Specialist Eliana Duarte. “The innovation is the method of linking value chain actors to reduce cost and risk, so that the anchor organization provides the bank with data for credit decisions,” which becomes a gateway to the bank’s whole ecosystem of services.

What does this look like in practice? In Colombia’s coffee-producing Huila department, RFI helped Davivienda conduct risk analysis and award a US$35,000 working capital agricultural loan to the Coagrobrisas coffee cooperative, reducing loan origination cost and risk by analyzing the cooperative rather than its 160 members. The cooperative will have access to Davivienda’s online business platform to make payments to their 160 smallholder member-suppliers, who in the future will be able to make payments to their workers. RFI is helping Davivienda develop a database to track these payments, which become the credit history for future loans Davivienda hopes to award directly to these smallholders.

Meanwhile, the smallholders will receive payments from the cooperative via Daviplata SmartPhone app or SMS text Davivienda’s business experience leads them to believe this will be a bridge to link the cooperative and its smallholders with the bank’s existing ecosystem of channels and services that interact with each other. For example, smallholders receiving digital payments from buyers can make cashless payments to local merchants, reducing cash use in dangerous areas. With this in mind, through RFI’s challenge grants, we’re helping Davivienda develop microsavings and loan products and apps to reach the new market niche of smallholders.

Davivienda’s executives see past the hurdles to the potential market in Colombia’s 4 million farmers, and they have committed to expanding this new agricultural value chain financing model, supported through digital services. For our part, we’re excited to learn from the Huila coffee experience and help Davivienda replicate it throughout rural Colombia — perhaps sparking competition from other banks.

About Heather Joffe Reyes

Currently the director of the Small Business Liaison Office, Heather is an international development practitioner with more than 20 years of experience in agricultural value chains, financial services, small business development, and rural development. In addition, Heather has worked on contracts and grants management with an emphasis on designing grant programs to avoid market distortions.…