Highlights of the webinar on “climate-resilient agriculture, virtual breakfast club”: Where climate-action ideas brew

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The following are timestamps of the meeting conducted on the 2nd of December, 2022, on “Climate resilient agriculture- virtual breakfast club.”

We organized a discussion session with a panel representing the funding side of the ecosystem. The panel discussed the following topics:

  1. What solutions can investors provide to address the challenges faced by Agtechs?
  2. How can we ensure that ecosystem support infrastructure is meeting the needs of Agtech startups?
  3. Are new platforms for information exchange between AgTech startups and investors needed?
  4. A few examples where investors have met the capital requirements of AgTechs.

Click on the timestamps from the webinar stream to hear specific segments.

00:18 – 00:40 – Welcome note by Partha Ghosh, Senior Manager at MSC’s climate change & sustainability practice.

00:41 – 06:48 – Introduction by the speakers Ashish Khetan, President, Indigram Labs Foundation Shreejit Borthakur, Senior Innovation Manager- Technology, IDH

08:33 – 08:47 – The speakers answered the first question: What solutions can investors provide to address the challenges faced by AgTechs?

09:04 – 09:52 – Shreejit Borthakur of IDH responds: “Trajectory of funding has changed. Till 2014, most of funding was going to mitigation but now as the exposure to climate change hazards has increased, there is a growing momentum towards adaptation and resilience.”

15:15 – 16:30 – Ashish Khetan from Indigram Labs Foundation responds: “Climate resilient agriculture could be put in buckets such as soil resilience, water management and food waste management.”

17:52 – 18:15 – The speakers answered the second question: Can you give a few examples of the types of investments you have made in AgTechs?

18:56 – 19:38 – Ashish Khetan from Indigram Labs Foundation responds: “Usually, Investors like to invest in startups that are at a revenue stage and not all businesses are venture capital friendly. But no business is a bad business.”

22:00 – 22:25  – The speakers answered the third question: How can we ensure that ecosystem support infrastructure is meeting the needs of startup AgTechs?

23:28 – 24:21 – Shreejit Borthakur of IDH responds: “As the focus on climate adaptation and resilience will increase, the investment vehicles dedicated to that will start being set up.”

24:35 – 25:05 – Shreejit Borthakur of IDH also responds: “Development stakeholders are pumping in patient capital to SMEs.”

22:27 – 23:04 – The speakers answered the fourth question: Are new platforms for information exchange between AgTech startups and investors needed?

26:22 – 27:15 – Shreejit Borthakur of IDH responds: “Ecosystem level interventions are required and India’s Agristack could be a gamechanger.”

28:05 – 28:28 – The speakers answered the fifth question: Is there a difference between investors interested in pure-play AgTech and investors focusing on climate resilient agriculture?

29:25 – 30:23 – Ashish Khetan from Indigram Labs Foundation responds: “From investor’s perspective, money alone cannot solve the problem. The ecosystem plays an important role.”

39:36 – 39:58 – The speakers answered the sixth question: Is there a difference between investors interested in pure-play AgTech and investors focusing on climate resilient agriculture?

41:01 – 41:20 – Ashish Khetan from Indigram Labs Foundation responds: “It is crucial that we go to a sector specific incubator if the founder is looking for some value addition rather than being all over the place.”

41:40 – 42:20 – Shreejit Borthakur of IDH responds: “Most of the funding going towards startups focused on adaptation rather than mitigation are from investors that have longer return horizon.”

58:08 – 59:54 – Closing note by Graham A.N. Wright, Founder and Group Managing Director of MSC

59:56 – 01:01:46 – Conclusion and note of thanks by Partha Ghosh, Senior Manager at MSC’s climate change & sustainability practice

Adopting a segmentation approach to serve enterprises in Kenya: Insights from the FinAccess Household Survey 2021

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“I do not have a bank account or an M-PESA till number,” sighs Ronah, who runs an unregistered fresh produce shop in Busia on Kenya’s southwestern border. Far away in the southeast in Mombasa, William operates a registered grocery store with three workers and wants to know how to upgrade and digitize his business. Meanwhile, in Nairobi, electronics shop owner Doreen employs 20 employees and seeks to expand her business and access hassle-free credit. All of them aspire to grow their businesses.

Ronah, William, and Doreen are among the millions of spirited people who comprise Kenya’s micro, small, and medium enterprises (MSMEs) sector, which contributes to approximately 25% of the country’s GDP. They make up more than 90% of private enterprises and employ around 93% of the Kenyan labor force (FSDK,2021).

Most government policies treat MSMEs as a monolithic, homogenous group and do not recognize the complex range of sub-segments within—each with specific characteristics, behaviors, and needs. A one-size-fits-all approach will not create customized solutions to enable small businesses to grow. In response, MSC analyzed the different MSME segments to assess how businesses vary according to their sophistication.

Segmenting enterprises in Kenya

We used the FinAccess Household Survey 2021 to create a composite score-based index for the sophistication of enterprises. The variables used for the segmentation were: the number of paid workers, availability of written books of account, till number, bank account, registration number, and business permit.

Using this methodology, we found that 70% of the enterprises in Kenya fell in the category of “low-sophistication.”

The categorization is based on how enterprises function. Yet it also highlights how well these enterprises perform business operations and access financial services. Enterprises with low sophistication are run predominantly by women with low levels of education and are concentrated in rural areas. On average, these enterprises pay lower wages to their employees than their more sophisticated counterparts. Entrepreneurs managing high-sophistication enterprises have better internet access and use mobile money more frequently.

Source of savings and credit

Business sophistication also directs how these enterprises manage and access their finances. A more sophisticated enterprise is more likely to access its Credit Bureau Report (Table 1) and save with formal channels or avenues, such as banks, and mobile money.

Enterprises with higher sophistication were more likely to use formal sources of credit than less sophisticated enterprises. Lack of collateral and financial records are among the reasons for the exclusion of these enterprises. The lack of credit from formal sources stifles the growth of all categories

Financial resilience of enterprises

Findings from the FinAccess Household Survey also suggested low financial resilience of the enterprises, irrespective of their sophistication. Major unforeseen events, such as the pandemic itself, highlight the need for enterprises to have access to financial services to help manage risks and short-term adversity. Our June 2020 report on the “Impact of the COVID-19 pandemic on MSMEs” discusses how the pandemic significantly hurt the income of these businesses and disrupted supply chains and cash flows. About 6% of enterprises used formal borrowing and saving channels to cope with the shocks, while 22% relied on assistance from friends and families. However, the various segments displayed minor differences. More sophisticated businesses were better placed than the others to use formal savings and credit to manage shocks.

Access to banking products

Most entrepreneurs were keen on insurance and pension facilities but cited affordability as a significant hurdle. Less sophisticated businesses were least likely to afford the insurance coverage they wanted. A report by UNCTAD discusses how insurance coverage for enterprises still largely remains a distant aspiration. The affordability of pension schemes is similarly challenging for all business owners. Barriers associated with product design, distribution channels, and a lack of insurance culture require collective participation from the public and private sectors to overcome.

The segmentation analysis makes the challenges faced by enterprises more distinct. More details about the operations of the different categories of enterprises will provide an even clearer picture on the challenges faced, and needs and aspirations of the enterprises. For example, many challenges are seasonal, while others have more predictable and consistent course. Nevertheless, the segmentation analysis helps us understand the enterprises better and makes strategizing for immediate response to ensure short-term survival and build their resilience for the long term easier.

Mobile money agents: Sustainability in the digital era—findings from Mozambique

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This report assesses pressing challenges that affect Mozambican mobile money agents: poor liquidity management, low working capital, and network issues. These challenges threaten the agents’ business and thus reverse the already realized gains in financial inclusion in the country.

The insights from this report will inform agent network ecosystem players in Mozambique to create sustainable strategies to maintain and expand agent networks.

Read this report for more details.

 

Embracing the idea of financial well-being: Insights from India using the Global Findex database, 2021

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Sunita, a domestic worker from Delhi, receives her monthly income through India’s United Payments Interface (UPI). She has a smartphone and a functional bank account and is well-versed in how financial technology works. However, Sunita is worried about not having enough savings for a medical emergency or old age.

Since UPI’s launch in 2017, India has improved financial inclusion at a CAGR of more than 5%. Further, the country has witnessed growth in the value and volume of UPI transactions since 2018. The value of UPI transactions increased from about USD 85 billion to USD 742 billion in 2022, while the volume increased from USD 3.8 billion to USD 32 billion, as per the Reserve Bank of India’s extensive Digital Payments Index and Financial Inclusion Index.

India has experienced the deepening of financial inclusion through an increase in access and usage. However, a study of financial well-being to understand true inclusion is important. The US Consumer Financial Protection Bureau has defined financial well-being as the freedom to meet current financial obligations and adequate savings to manage short-term emergency needs and long-term future needs. The Global Findex 2021 describes well-being as a person’s financial resilience to deal with unexpected financial events, stress generated by common financial issues, and confidence in using financial resources.

Trends in financial well-being

India has shown improvements in bank account ownership and usage of formal financial instruments from 2014 to 2021, as shown in Figure 1. Bank account ownership has jumped by around 50% from 2014 to 2021.

However, the data on financial well-being from India reflects high financial vulnerability. We used the Global Findex database 2021 data that included variables on individuals’ financial well-being in 2021 to gather insights in India.

Insight 1: People struggle to arrange emergency funds

In a survey, nearly 60% of the respondents in the higher-income group failed to meet their monthly expenses due to higher unexpected medical expenses during the COVID-19 pandemic and loan repayments. In the lower income group, 33% fell into a debt trap due to inadequate financial safety net, highlighting the importance of people being able to access and build an emergency fund.

Figure 2: Source: Global Findex Database 2021

The data shown in Figure 2 captures a similar reality: most people lack a sufficient cushion for unforeseen expenses and find it “not possible” or “possible and very difficult.” Only less than 10% of the respondents across rural and urban areas were in a comfortable position to arrange emergency funds.

The situation was more acute when asked to manage funds within a week. See Figure 3. More than 80% of respondents found managing funds “not possible” or “possible and very difficult” to manage.

Figure 3: Source: Global Findex Database 2021

This data also highlights a deepened financial insecurity within social networks as most individuals rely on their family, friends, or employer to finance their emergency needs. Only 11% responded that they would access savings to meet emergency needs, as shown in Figure 4.

Figure 4: Source: Global Findex Database 2021

Insight 2: Medical illness remains the major cause of worry among Indians

Most Indians are one medical bill away from poverty. According to a study by the Public Health Foundation of India, about 55 million Indians were pushed into poverty in a year due to patient-care costs.

Figure 5: Source: Global Findex Database 2021

The Findex 2021 data shows that the most worrying financial issue for individuals is the inability to meet medical expenses. About 71% of respondents in rural and 60% in urban areas were “very worried” about lacking sufficient money to pay for medical expenses, see Figure 5. Moreover, even though health insurance coverage has increased over the years, it remains far from satisfactory. As per the National Family Health Survey (NFHS)-5, about 41% of households in India have at least one member insured. The fear of the inability to pay for medical illness varies with age and education level. About 72% of the people with primary or less education reported being “very worried” about the medical costs compared to just 53% who were educated at least up to the secondary level. About 70% of older people were also more worried about medical costs compared to 57% of the younger population, as per the Findex 2021 data.

Insight 3: An increasing number of people are worried about not having enough for old age

The Findex database also measured another dimension of financial well-being—the perceived financial security for old age. Nearly 70% were “very worried” about insufficient savings to meet old-age needs, see Figure 6. The fears are corroborated by a UN report, which states that 52% of respondents think the current social security net for the elderly is insufficient in India. An August, 2017, report of RBI’s committee on household finance paints a similar picture that only 23% of Indians were saving or planning to save for retirement.

Figure 6: Source: Global Findex Database 2021

Insight 4: People are worried about not having enough for education or monthly expenses

The Findex data estimates that the majority of the people in rural (68%) and urban (54%) are “very worried” about not having enough funds for monthly expenses.

Further, about 59% of the people in rural areas and 44% in urban areas reported being worried about not having enough to pay for education (Findex, 2021).

Figure 7: Source: Global Findex Database 2021

Shifting focus toward financial well-being

Poor financial well-being has far-reaching consequences that affect the wallet and an individual’s physical and mental health. Further research is needed on individuals’ financial behavior and personality traits to measure financial inclusion through financial well-being and build effective strategies that do not solely focus on access or usage. This will build a story where Sunita and the many like her belonging to the LMI segment have the ability to absorb shocks, and are investing enough to meet emergencies and their financial goals.

Were countries adopting digital payments financially resilient during COVID-19? The data suggests so

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The COVID-19 pandemic has spurred financial inclusion by increasing digital payments and expanding formal financial services. The Global Findex Database 2021 provides data on the growth in access to digital financial services and their use during the pandemic. The average rate of account ownership in developing economies increased from 63% to 71%. In the low- and middle-income (LMI) economies, excluding China, more than 40% of adults made in-store or online merchant payments using a card, phone, or the internet for the first time since the pandemic.

The increase in scope and intent of digital payments among LMI groups and MSMEs is also evident from MSC’s studies, where we examined the impact of COVID-19. Building on this work, we sought to understand correlations between the adoption of digital payments by an economy and its financial resilience to cope with the pandemic. We used The global Findex Database 2021 and the World Bank 2020 data to investigate.

The Global Findex Database 2021 data has indicators on first-time users of digital payments, including in-store or online merchant payments and utility payments during the pandemic. We used indicators related to income, coping capacity, and awareness of government policy from the World Bank dataset. After an exploratory data analysis of both datasets, we finalized four indicators corresponding to financial resilience and the adoption of digital payments from each dataset for this purpose.

Here is the list of indicators we used in our analysis:

Data were missing for many indicators in most countries. We selected only those countries for which the complete data was available, or only one indicator value was missing. We created a Digital Adoption Index using Findex data and a Financial Resilience Index using the World Bank data for 14 countries across different regions.

The Index is inspired by the method Mandira Sarma used in ICRIER’s working paper on the Index of Financial Inclusion. We used the simple weighted average method to create indices.

The graph given below shows the relation between the two indices:

The scatter plot shows a strong positive correlation of 0.73 between the indices, implying that countries with high digital adoption at the start of the pandemic also showed higher financial resilience.

Increased financial resilience could have emerged from governments using digital channels to transfer benefits directly to beneficiaries’ accounts. Beneficiaries could use this amount digitally whenever and wherever they needed it. For example, people in cities could send money to their relatives in the villages. Digital payments sped up the transfer of money in the challenging times of the pandemic.

A World Bank tally of policy responses to the pandemic in 2021 found that at least 58 governments in developing countries used digital payments to deliver COVID-19 relief. Of these, 36 countries made payments into fully functional accounts, and only 33 governments used manual modes to deliver COVID-19 relief.

Payment methods used in COVID-response social assistance programs across a subset of 58 low- and middle-income countries (Source: The impact of COVID-19 on financial inclusion, a report by the World Bank and Global Partnership for Financial Inclusion (GPFI))

According to data from the World Bank, 84 countries reported changes to their social protection systems in response to the pandemic. Of these, 58 countries scaled up cash transfer programs. In many developing countries, the scale of these payments was unparalleled. For instance, new programs covered one-third of the population in Argentina, Pakistan, and Peru, and more than 70% of households received emergency transfers in the Philippines.

At the same time, the private sector also shifted to digital payments. Despite the contraction in economic activity, GSMA, in its “State of the Industry Report on Mobile Money,” reported that mobile money grew twice as fast as had been forecasted for 2020, at 12.7%, reaching 1.2 billion accounts. Global credit card giant Visa reported that more than 13 million users made their first-ever online transaction in early 2020.

However, we noted a few exceptions to this general pattern observed across countries— particularly Bolivia and Indonesia—where the Financial Resilience Index lags in growth compared to the Digital Adoption Index.

In Indonesia, the adoption of digital payments grew during the COVID-19 pandemic. Of all the people who made digital in-store merchant payments, 47% did so for the first time after the pandemic. Similarly, 54% of all people who made digital merchant payments used digital payments for the first time after the pandemic started.

However, this did not reflect high financial resilience in Indonesia. Almost 50% of people in Indonesia reported reduced consumption of goods to cope with the pandemic. At least 10% had to sell their assets to pay for daily living expenses. A possible explanation for that could be limited use-cases in the country, as indicated in our latest study on QRIS implementation in Indonesia.

While COVID-19 prompted increased use of digital finance, all communities or consumers were not in a position to pivot rapidly toward digital financial products and services. People need connectivity, including ownership of a mobile phone, access to the internet, and digital skills to use digital financial services, which are not distributed evenly among the population. Besides, vulnerable segments tend to have limited access to these technologies.

Despite these challenges, most countries in our study showed a high correlation between resilience to the pandemic and the adoption of digital payments. Findex 2021 data suggests countries that adopted digital payments were financially resilient during the COVID-19 pandemic. However, our analysis was based on a restricted dataset due to the lack of data availability, and the results might change if we explore a richer dataset. The data shows how driving financial inclusion and digital payments can help build the resilience of nations in times of global disasters, such as the COVID-19 pandemic.

How can customized and bundled digital financial services improve the lives of women micro and small entrepreneurs operating from open-air and cross-border markets? A case from Kenya

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In our last blog, we featured the plight of Faith—a woman open-air and cross-border trader from Kenya. We highlighted the challenges she faces in accessing credit. We also discussed how existing solutions do not quite serve her needs.

But life was not always so hard for Faith. Before the COVID-19 pandemic, Faith was among the 45% of Kenyans living a comfortable middle-class lifestyle. She was a well-respected member of her community and the envy of her local women’s group. Her children went to good schools.

Faith owned a thriving retail business in her town that employed three full-time staff. She could comfortably service a USD 1,000 facility she had taken from Milly Finance (name changed), her local financial service provider. She would prepay her loans during good times to save on interest expenses. She was a model borrower for Milly Finance. She envisioned expanding her business and requested Milly Finance to extend her a credit line.

After the pandemic struck, the COVID-19-related restrictions dealt a fatal blow to Faith’s business. Her business was among 20% of businesses that closed permanently. Auctioneers picked off whatever they could to recover the outstanding loans. As she tried to manage the situation, she ended up depleting her savings reserves to pay her employees and keep her family afloat.

Things got so bad at the height of the pandemic that Faith had to downgrade her lifestyle. She moved to a different town. Unable to find meaningful work, Faith tried trading from an open-air market to supplement her income. She tried to borrow to make ends meet. However, risk-averse financial institutions meant little formal credit was available.

Further, formal credit providers did not lend to informal businesses like hers. Faith resorted to borrowing from an informal women’s group. As she was new to the area, she had not cultivated sufficient trust or savings to meet her needs. As a result, informal lenders became her primary source of capital despite their punitive rates.

No matter how hard she tries, Faith is yet to recover fully. Worse still, she no longer has confidence in formal financial institutions.

Like Faith, Milly Finance also struggled through the pandemic. More than 40% of Milly Finance’s portfolio deteriorated like many other financial institutions in Kenya, as many borrowers faced significant economic and financial impacts and thus could not service their loans. This situation forced Milly Finance to write off such loans.

Milly Finance also closed its local branches and now only operates from the capital city. However, it can barely survive and no longer afford to offer credit lines to micro-entrepreneurs. Instead, Milly Finance has anchored its turnaround strategy on lending to salaried up-market customers. Its dreams of digital transformation are shattered.

Even in the best times after COVID-19, Milly Finance and other financial institutions would struggle to meet the needs of micro-entrepreneurs like Faith.

According to our research, financial institutions find it difficult to cost-effectively tailor financial products for micro-entrepreneurs. Tailoring financial products for micro-entrepreneurs is difficult due to costs driven partly by the lack of scale to justify the business case.

Digitization can enhance scale, lower operational costs, build resilience, and offer convenience to customers. Digitization can also serve as a tool that financial institutions can use to support micro-entrepreneurs in recovering from the effects of the pandemic.

Digital transformation for financial institutions is critical for them to remain relevant and competitive in an increasingly digital landscape. Beyond costs to implement, digitization also requires effective change management procedures and commitment from the board and senior management. If these essential components are lacking, efforts to transform the financial institution are often met with resistance and are short-lived.

Click here to watch our webinar on digital transformation for more insights.

A transition to risk-based lending and using alternate data to appraise customers would also be a game-changer. Unfortunately, these investments require upfront capital, which is not easy for Milly Finance and other financial institutions to come by in a post-pandemic and high-inflation environment.

Moreover, Kenya’s macroeconomic outlook makes it difficult for financial institutions, such as Milly Finance, to obtain wholesale credit cheaply. With a weakened shilling and reduced foreign currency reserves, lenders face high currency risk when servicing dollar-denominated debt. Locally, the situation is worse. With the 91-day T-bill rate at 9%, the government continues to borrow heavily from the domestic market to meet its development agenda due to an inability to access funds at cheaper rates internationally. This dependence on the domestic market raises lending costs and makes it harder for Milly Finance and others to extend affordable credit to micro-entrepreneurs like Faith.

Fortunately, the government is aware of the challenges that micro-entrepreneurs currently face. In partnership with the private sector, the government has rolled out new measures to lower short-term credit costs and whitelist excluded borrowers. In addition, the government has increased access to affordable, accessible, and convenient credit through the Hustler Fund to fulfill its mandate. The USD 500 million annual Hustler Fund will enable micro-entrepreneurs to access loans ranging from USD 5 to USD 500 at an interest rate of 8% per annum.

Undoubtedly, the promise of a single-digit, unsecured credit delivered digitally is attractive to Faith and others like her. Sadly, none of the government’s solutions would solve the problem for Milly Finance or similar financial institutions that face liquidity challenges.

Based on our work with financial institutions in Kenya’s financial sector, we observe that most institutions urgently need solutions that address the three pillars of credit: accessibility, affordability, and convenience.

Affordable, convenient, and accessible credit can become the norm for borrowers and lenders in Kenya by deploying targeted interventions on the demand and supply side. This paradigm shift has the potential to usher in a new future where informal micro-enterprises can flourish, expand, formalize, and contribute meaningfully to the country’s economy. This shift would be significant as more than 80% of Kenyans are engaged in the informal sector, which forms 98% of all business activity in the country.

Struggling financial institutions can follow a similar roadmap to regain their footing and cement their legacy in delivering credit that can unlock productive sectors of the economy.