E-Agriculture

Question 5 (opens 28 May) What are the regulatory challenges faced in ICT and rural financial services?

Saripalli  suryanarayana
Saripalli suryanarayanaProfessional Engineer-Administrator-40 years experience-water,irrigation and infrastructure Projects conceptulationIndia

Digitalization and encrypting the codes,and storage in multiple servers,as well having an unique Identity Card with all details of property,banking and other detailed in multiple formats are necessary,even if the loan dispersal takes 2 to 3 days shall generally o.k.

For loans,for insurence reimbursement etc.For payments for seeds,for pesticides,for personal loans ,as required number of days to process the data from the mobile,and the making a pass,and payment option could be as per general systems.

Michael Riggs
Michael RiggsUN-APCICT/ESCAPRepublic of Korea

Thank you for these inputs. Interesting points in every case. As I understand you point to the need for standards and specifications for individual digital identities, as well as standards for the processes around rural financial services.
 
In addition to these needs, have any existing regulations been identified that prevent rural financial services from reaching their full potential?
 
 

 

Richard Tinsley
Richard TinsleyColorado State UniversityUnited States of America

While I recognize this forum is mostly concerned with the application of ICT to rural finances, would it be completely inappropriate to think about the overall mechanism for providing financial services to rural communities to promote poverty alleviation of smallholder farmers and their communities? Are we providing the most effective services for the money being invested? Is there a better opportunity to make some suggestions to the micro-finance community on how the micro-finance programs could possibly be more effective in serving the smallholder farmers and assisting them get out of poverty?
  As I understand it, most of the micro finance for smallholders is production credit for purchase of inputs such as certified seed, fertilizer and plant protection chemicals. Also, this is usually administered through some form of farmer organization often utilizing credit clubs in which club members are expected to assure each other of loan repayment, and in the event of non-repayment of individual the other members of the club will have part of their crop confiscated to cover the loss. Something that can be highly antagonistic to those whose crop is confiscated. I believe this has been the bases for most of rural development projects for the past couple decades. I also believe that these programs require continual external facilitation and while available can claim some success, but the project ultimately collapse once the external facilitation effort ends.  I also feel there is considerable spin reporting promoting these programs even when there is only limited participation by the intended beneficiaries who, perhaps wisely, take most of their business elsewhere, even when members of the program. Much of this could be concern for having their crop confiscated to cover a defaulting loan.
Very little credit is provided to the service providers to allow them to more effectively serve the smallholder producers by enhancing the operating environment in which the smallholders operate that will allow them to enhance their yields, the yield recovery and quality of marketed crop. Most of the time the relationship between smallholder producer and service provider has been considered as an exploitive praetor/prey when it might better be considered as symbiotic with each dependent upon the other, in an overall suppressed economic environment that already curtails profit margins.
The service providers would not only include the agro-dealers who provide the inputs and through whom they market their crops, but also those providing mechanical assistance such as tractor owner/operators who can provide contract tillage. This would greatly enhance crop establishment time substantially increasing the yield potential. It is often overlooked as operational limitation are rarely considered with the assumption there may be a surplus of labor available to smallholder, and being nearly oblivious to the dietary calories available that might limit the work day to as little as 4 hours and total crop establishment extended to over 8 weeks. With the dietary energy available it is virtually impossible for smallholders to manually dig themselves out of poverty.
Other opportunities for service providers to enhance the returns of smallholder would be through mechanical threshing of various crops. Typically this will provide a 10 to 15% increase recovery over more common whacking or trampling and provide a cleaner final product that would require less winnowing, if any. This additional recovery could more than pay for the service even if the charge was a 5% in-kind payment. Also, some mechanical winnowing would easier allow a cleaner final sale that could come close to meeting the > 1% foreign material and command up to 10% higher price, or perhaps avoid have the value discounted as the trader would eventually have to pay to have the crop cleaned before being sold to the consumer or processor.

Out of space to be continued as following comment

Richard Tinsley
Richard TinsleyColorado State UniversityUnited States of America

In order to include service providers it might be necessary to consider some major restructuring of how micro financing is provided. This would be particularly true when considering downstream benefits, and the need to cover some capital costs. For example in the case of contract tillage their might be a need for 2 levels of loans. The first to cover the capital cost of acquiring a reconditioned used tractor with such things as set of triple disc plows and trailer.  This would represent a capital purchase of some US$12,000 but for which the tractor and equipment could serve as collateral and become a secured loan. However, since contract tillage is needed at the beginning of the season there might also be a need for an unsecured loan to allow the owner/operator to provide his services on credit against an in-kind payment after harvest. This would follow the normal rules of informal credit as is currently done for tillage loans.
This also implies a need to revisit the informal credit system. While the stated interest is usually a usury seasonal rate of 100%, the real question is how much of this rate is based on availability of capital and how much is the administrative overhead incurred by the lenders to cover some possible excessive games being played by the borrowers. Also, what kind of in-kind discounts are offered to those who repay their loan with a nice clean bag of grain shortly after harvest? Unfortunately the lender has to quote the interest in anticipation of all the possible games that can be played and then discount when farmers make for prompt repayments.
This would also apply to agro-dealers providing the inputs. Could they be provided with loans that will allow them to provide inputs on credit to the smallholder farmers? Won’t they be the default service providers if the farmer organizations collapse when external funding ends? Thus might it not be better to work with them from the beginning. They also can deal with the farmers as individuals, respecting them as the individual entrepreneurs they are, and as members of the same community have a better grasp on their credit worthiness. Wouldn’t working with agro-dealers and other service providers allow for larger loans, and thus lower the overhead costs at least as a percent of the loan, and thus wouldn’t this have a better chance of providing a more durable input that could outlast the external facilitation.
I hope this provides some ideas to think about.
Please visit my website and specific pages for more details on the ideas expressed above.
http://www.smallholderagriculture.com/ .
http://lamar.colostate.edu/~rtinsley/FinancialSuppressed.htm  .
http://lamar.colostate.edu/~rtinsley/CalorieEnergyBalance.htm .
http://lamar.colostate.edu/~rtinsley/DeceptiveReporting.html .
http://lamar.colostate.edu/~rtinsley/Symbiotic.htm .
http://lamar.colostate.edu/~rtinsley/InformalCredit.htm .

Michael Riggs
Michael RiggsUN-APCICT/ESCAPRepublic of Korea

Dear Dick, thank you for all this, which is indeed a lot to consider.

As ICT is the particular focus of this community as well as the forum, as you've noted, do you think any of the challenges you have detailed could be resolved (at least in part) by some use of ICT?

Dick,

I liked what you had to say regarding the general focus of discussions on delivering financial servicesto smallholders . Most seem concerned with improving the efficiency of credit delivery and recovery. Virtually no attention is being given to the topics of rural savings deposit mobilization nor regarding the absolutely important topic of rural finance intermediation, i.e. the importance of building a balance between smallholder savings deposit mobilization and  credit delivery and recovery.  The "credit need creed" spin in these discussions remains in spite of overwhelming empirical evidence that it does not lead to a sustainable  smallholder agriculture nor does it strengthen smallholder financial self-reliance, nor does it strengthen the self-sufficiency of most rurral finance.

The question I would like to see raised is how can ICT help redress and strengthen the balance betwee the credit and savings sides of the rural fianc intermediation?

Michael Tarazi
Michael TaraziUnited States of America

When we are talking about reaching rural populations with mobile banking, agent regulation is key. Banks simply cannot serve rural populaitons effectively through branches which are expensive to build and maintain. By using agents, often retailers - sometimes very informal ones, to serve as cash-in and cash-out points, the cost of reaching rural populations can be greatly reduced, making business models viable. But to use agents effectively, regulation must permit a wide range of actors to act as agents. If agent regulation is too restrictive, agent networks will be too difficult to develop- ultimately impacting customer take up. Many regulators have gradually become more liberal in permitting the use of banking agents - taking comfort in the fact that the service provider (the bank or MNO) is ultimately liable for agent actions undertaken in the course of their agency. CGAP has written a number of publications on agent regulation including "Regulating Banking Agents" located at http://www.cgap.org/publications/regulating-banking-agents

Michael Tarazi
Michael TaraziUnited States of America

Another key area for regulation is whether nonbanks such as Mobile Network Operators can issue electronic money directly - or whether they have to rely on a bank partner. MNOs are experienced in managing networks of retailers specialized in low-value, high-volume transactions (airtime resellers) so are uniquely positioned to use agents and process the type of low-value payments poor people might make. Although M-PESA is a successful example of these nonbank models, most regulators are still uncomfortable allowing nonbanks to take the lead, arguing that electronic money is effectively banking and requires a bank license. This can sometimes result in forcing MNO-bank partnerships which often don't work (often as a result of being unable to agree on how to divide revenue and who owns the customer). But allowing nonbanks to enter this space could increase competition and result in more successful outreach. CGAP has also published a Focus Note on Nonbank E-Money Issuers and how they can be regulated: http://www.cgap.org/publications/nonbank-e-money-issuers 

Michael Riggs
Michael RiggsUN-APCICT/ESCAPRepublic of Korea

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</o:shapelayout></xml><![endif]--></head><body lang=EN-US link=blue vlink=purple><div class=WordSection1><p class=MsoNormal><span style='font-size:11.0pt;font-family:"Calibri","sans-serif";color:#1F497D'>Thanks for sharing these insights Michael.<o:p></o:p></span></p><p class=MsoNormal><span style='font-size:11.0pt;font-family:"Calibri","sans-serif";color:#1F497D'><o:p>&nbsp;</o:p></span></p><p class=MsoNormal><span style='font-size:11.0pt;font-family:"Calibri","sans-serif";color:#1F497D'>Are there examples where regulators have successfully removed regulatory barriers to allow nonbanks (such as MNOs) to become active in mobile money services? <o:p></o:p></span></p><p class=MsoNormal><span style='font-size:11.0pt;font-family:"Calibri","sans-serif";color:#1F497D'><o:p>&nbsp;</o:p></span></p><p class=MsoNormal><span style='font-size:11.0pt;font-family:"Calibri","sans-serif";color:#1F497D'><o:p>&nbsp;</o:p></span></p><p class=MsoNormal><span style='font-size:11.0pt;font-family:"Calibri","sans-serif";color:#1F497D'><o:p>&nbsp;</o:p></span></p><div style='border:none;border-top:solid #B5C4DF 1.0pt;padding:3.0pt 0cm 0cm 0cm'><p class=MsoNormal><b><span style='font-size:10.0pt;font-family:"Tahoma","sans-serif"'>

Saripalli  suryanarayana
Saripalli suryanarayanaProfessional Engineer-Administrator-40 years experience-water,irrigation and infrastructure Projects conceptulationIndia

Banking is controlled under Bessal accords internationally.The experience form microfinance institutions in Asian countries,is that they need to be regulated.

The greediness for any one is endless,even under regulation,the credit cards charge at 2% to 3%  permonth in these parts.

It cannot be different if an uncontrolled microfinance charges differently.