Why financial institutions need behavioural economics: Lessons from eMKambo Perishable Finance Models

In an effort to lure reluctant financial institutions into the agriculture sector, over the last two years we brokered business relationships between a sample of financial institutions and agriculture commodity traders. Dubbed eMKambo Perishable Finance, the initiative is still ongoing across five urban food markets in Zimbabwe where high frequent trading is a key feature. An instructive set of experiences and lessons has emerged from this business model.
While the conventional, brick and mortar banking model has traditionally thrived on command and control, the informal agriculture market has shown the wisdom of replacing this mindset with influence and respect. The most important thing when working with traders and other value chain actors in informal agriculture markets is building relationships and trust. Farmers and traders can only give you accurate information if they trust you.


Financial institutions have to understand typical behavior in informal agriculture markets like Mbare, Harare

Financial institutions that want to survive and thrive in the current network era should remove all structural barriers to learning fast. Banks should realize learning has become an essential part of doing agribusiness not expecting people to just repay loans without banks making an effort to understand commodity cycles fully. The expansion of mobile technology imply financial institutions have to grapple with innovative disruption coming from all corners. Coincidentally, economic value is getting redistributed to creative workers and then diffused through networks.

Farmers and traders may not have solutions to the world’s challenges like recession or the collapse of banking as an industry. However, their knowledge of their own cultural and socioeconomic realities is paramount in the creation of sustainable agriculture finance models. Without integrating the expertise of farmers, traders and other value chain actors, financial interventions in the agriculture sector are doomed to fall short of their full potential. Unfortunately, it seems prioritizing insights from farmers and traders often runs into financial institutions’ institutional, systemic and power barriers.

Looking back over the past two years of eMKambo Perishable Finance modelling, Zimbabwean financial institutions continue to be unaware of business models and structures in the agriculture sector. They continue deluding themselves into thinking that the agriculture sector is predictable. Confusing beautiful models with messy reality is the main reason why the majority of banks have become victims of non-performing loans.

As the cases below illustrate, leveraging behavioral and evolutionary economics will empower financial institutions with much clearer insights into the reality of agriculture markets. They will also probably gain a better understanding of how to add value through cognitive issues such as crafting appropriate agribusiness finance models. Very few financial institutions have grasped the complexity of agriculture production and marketing systems and how value migrates between farmers, traders and other market players. A new set of skills are needed if financial institutions have to fully participate in fostering agricultural ecosystems that collaborate and compete based on agriculture commodities.

Case Study 1: Still waiting for a bank loan disbursement approved 5 months ago.
Why need a loan?
For the past 10 years the business has been into trading of fruits and only 5 months ago it moved into specializing in onion trading. The former fruit business focus was more lucrative because not much capital for restocking was required and trading in a variety of commodities provided a fallback position in the event one of them does not perform well on the market. Like any other business factors surrounding trading space/premises, rentals included contribute to its success. A hike in trading space rentals resulted in the owner changing the premises sensing increased burden to the business. The new trading space however is not suitable for trading more perishable commodities like fruits as it is exposed to sunlight during the greater part of the day.

The new business is now into onion trading. Not much value addition is done to the onion between farmer and trader hence profit margins are maximized through bulk buying and selling. Therefore this new trading venture required more capital and the owner had to apply for a bank loan 5 months ago and up now she has not received the approved loan due to cash shortage experienced by banks. The business had applied for a loan of $250 at a monthly interest rate of 10% and to be repaid over 3 months in 6 installments. Using own capital, the business restocks 2 x 90kg bags at $40 per bag of onion bought from the farmers’ market. The stocks last within 2 days during good business days and not more than 4 days when the business is low. At maximum, 30% profit margin is realized after every stock run down and most of which goes towards payment of weekly rentals of $18.

Micro Financiers riding on Traders’ Desperation

Left with no option due to delay in loan disbursement, the business owner had to try her luck with Micro Financier and accessed a loan of $100 with conditions to repay $5 per day for 24 days. Despite quick disbursement and relaxed preconditions that only required one’s national identity number, passport size photo and proof of residence, this loan package proved to be a burden to the business and owner. The package does not give room for the business to reinvest the loan due to very short repayment period and daily reduction of working capital going towards loan repayment. Pressure is also put on business as on a daily basis pressure mounts to make sure the daily repayment due is made. Stress and embarrassment is then passed to the owner as he/she runs around to further borrow to repay daily rate in the event the business fails to make any sales on the day in question. The same pressure comes from Market Committees on a daily basis as Financiers report the defaulters and in most cases the committees threaten the owner that he/she will lose trading space as he/she is putting the market’s name in disrepute.

Case study 2: Financing Farmers through the Market – Loan Multiplier Effect

This trader has been in agro produce trading for the past 25 years. Some call them ‘Makoronyera’, a derogatory term referring to traders at Mbare Musika as tricksters. But if these traders are what they are called, why then do farmers and other value chain actors continue to work with them? What of banks, how do they view this crop of business people?

In November 2014, eMKambo facilitated a bank loan for the trader in question. This case study tried to track, to what extent a market loan goes on to support farmers in their agribusinesses. The trading business first received a loan of $250 to be repaid over 3 months in 6 installments. On a daily basis the business would purchase commodities worth at least $250 per day for the first 2 weeks according to the owner’s records. For the second forty night the loan amount was now buying commodities worth $250 less principal ($41) loan repayment amount , leaving $208. For the third forty night the business was now buying commodities worth $208 less $41 and so on. The table below shows summary tabulation of loan multiplier effect for the first cycle.


Upon repayment of the first loan the trader qualified for the second then third and finally fourth rounds. The table below shows how much in total the loan amount exchanged hands between her business and farmers in 12 months.


The above multiplier effect shows that 490 farmers received US$250 from one trader in 12 months. Loans advanced through eMKambo Perishable Finance account for less than 10% of the market demand which banks are failing to meet.

Case Study 3: Bank and Loan Purpose Defined from the Market

The trader and his/her own business plays a pivotal role in supporting other up and down stream growth of agriculture value chain businesses. Having started his trading business 5 years ago, as a young man, the business owner chose commodities to trade that are unique and serve a niche market. Such crops are broccoli, green beans, peas, green/yellow pepper and carrots among others. The business supplies food chain stores, high income families and hotels in Kariba and Victoria Falls through his networks with other traders in those towns. At any given time the business trades in at least 5 and not more than 10 vegetable varieties. According to the young entrepreneur trading in such a business is like a white collar job in the formal economy. The business requires one to be ‘smart’ in areas of planning, relationship building, negotiations, business ethics and product knowledge and presentation. The fact that not everyone goes for these products, the business needs to develop a very strong relationship with suppliers as well as the buyers. With suppliers they share best cropping calendars, volumes needed by the market specifically his business and supplier capacity to meet orders, market trends up to point of sale and during trading period. Production in this line of business is market oriented.

When do banking services become necessary?

According to the owner, for his line of business banking services become necessary when one intends to save for assets that require large sums of money. Plans that then follow after deciding to bank are that the business should not do unnecessary withdrawals from this account. The working capital in business is just to build up profits that are then saved in asset account. The business owner just opened a bank account when he had plans to buy a residential stand. Once the amount he was looking at to build was enough he withdrew all of it and bought a stand and to date whatever business surplus generated however small goes towards purchase of building materials without passing through the bank.

Why not use banking services for working capital and business transactions?

High value crops needs the business to have ready cash at any given time especially during supply shortages. Any hint or information of the availability of produce needs one to act promptly by either paying the producer via mobile phone or rush to the sources in person to make payments. Secondly the perishable nature of the commodities require that fresh produce is ordered on a daily basis and hence cash needs to be readily available to fulfill this purpose. The current capital/stock requirement for the business is between $800 to $1000 between one and two days.

Why applying for a loan?

The purpose of the loan is not just for the sake of business growth but to see something tangible come out of the business loan injection. According to the owner now that he had started a housing construction project the business needed to be boosted so that more income is realized towards purchase of building materials. The bank loan approved 5 months ago is yet to be disbursed.


Concluding insights

Financial services should match the velocity (speed at which money changes hands) among value chain actors, for instance, between farmers, traders and transporters. Otherwise the money misses the target and fails to meet needs. If you put $100 in the market, how many hands does the money change hands within the market?

The type of products that traders specialize in selling are determined by location, space of the stand from which they operate. This also depends on the capital used in the business in terms of the amount needed for purchase of stock as well as the revenue that comes from consistent selling of the product.

More information:
Charles@knowledgetransafrica.com / charles@emkambo.co.zw
Clever@knowledgetransafrica.com / clever@emkambo.co.zw
tafadzwa@knowledgetransafrica.com / tafadzwa@emkambo.co.zw
tenjiwe@knowledgetransafrica.com / tenjiwe@emkambo.co.zw
farai@knowledgetransafrica.com / farai@emkambo.co.zw
tariromk@knowledgetransafrica.com / tariro@emkambo.co.zw
Laizah@knowledgetransafrica.com / laizah@emkambo.co.zw
Website: www.emkambo.co.zw / www.knowledgetransafrica.com

eMkambo Call Centre:
0771 859000-5
0716 331140-5

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