Understanding the digital financial interventions in dairy and tea value chains

If you ever get a chance to interact with a farmer in Nepal, do not forget to ask this question, “How do you pay your workers and how do you receive the money from your distributors?” The most common answer will be “In cash”.

In a country where agriculture contributes two-thirds of the GDP and employs more than half of the population, digital finance and mobile money are still considered very foreign and sophisticated concepts. A recent study on agriculture’s digital linkage shows that digital finance can play a crucial role in solving financial problems that farmers face on a day-to-day basis. There is a real need for digital financial solutions such as receiving online payments for farmers, as well as viable business potential for digital financial services providers.

As a case in point, let us look at two such agricultural produces - dairy and tea. In many tea plantation areas in Nepal such as Illam, the tea farmers are often dairy farmers as well. And in fact, both the tea and dairy value chains look very much alike. With similar supply and payment models. Let us show you why.

Supply Chain

Dairy: Every morning from 6:00 am to 8:30 am dairy farmers walk to the nearest cooling centers (which include cooperatives) with their milk. Then dairy trucks collect the milk from these chilling units between 10:00 am to 1:00 pm. Dairy processing companies receive the milk within two to three hours. From here milk is further processed and then finally transported to small shops and supermarkets.

Tea: All day tea workers pick and store the leaves from the plantation at the nearest collection center. Cooperatives hire loaders to pick up the produce from collection centers and sends them to tea factories. After doing a final quality check, the tea factories package and transport the product to small shops, export companies and supermarkets all over Nepal. Finally, payments are released to the cooperatives from tea factories.

Payment Flows

Dairy: Dairy companies pay cooperatives every two weeks on their bank accounts. The cooperative officials withdraw money from the bank and bring the cash on motorbikes to the cooperatives. From here, farmers are paid in cash. But the farmers seldom deposit their earnings in a bank account simply because the bank branches are located at a distant location.

Tea: Tea factories pay their workers every two to three months, as they receive payments for each consignment exported or sold locally. Tea factories transfer the payment to the cooperative bank account. The cooperative sends the payment to collection centers in cash due to lack of options such as bank transfers available to its payees.

Considering the similarities in the value chains of dairy and tea, introducing digital modes of payments can help eliminate problems such as risky cash movements, taking loans from local villagers, friends who charge high-interest rates etc., UNCDF-MM4P has come up with an optimum way to leverage digital finance in the agriculture value chain of Nepal:

1. Digitize limited products in value chain

Payments from the dairy companies are carried on motorbikes to the cooperatives. Officials from the cooperatives then pay the farmers in cash. If a digital financial service providers comes into the picture, they can enroll the dairy cooperative as an agent and offer bulk payment solutions to the farmers who are the members of the cooperatives. The digital finance provider can also offer mobile wallet services to farmers where they can receive the payments in an interest-bearing account.

2. Customize products

Both tea and dairy factories can partner with cooperatives to promote digital finance. Like the dairy cooperatives, tea cooperatives will also be enrolled as super agents and offer bulk payments to other cooperatives. Digital finance service providers can partner with financial cooperatives or banks to use transactional histories to develop credit scoring tools. These can help offer small credit to farmers for immediate needs and insurance to safeguard livelihoods.

3. Integrate access to information and digital marketplace

Once the digital payments are in place, it will open a gateway for other financial services and smart solutions for farmers. Partnering with other organizations developing IT solutions for ag-businesses will help design and disseminate services such as mobile applications for farmers. These innovative tools will address new agricultural practices, market prices and financial literacy. Similarly, digital finance providers can also partner with virtual marketplace providers that can offer access to seeds, fertilizers, equipment etc.

There are several pain points for farmers in both dairy and tea value chains when it comes to receiving payments and accessing financial services. A simple digital finance intervention can help eliminate the financial problems they have faced since starting work. With 95% mobile phone penetration^[1] rates in Nepal, cooperatives and farmers are already safe-guarded with their parachutes. Now it is only a matter of making the jump.

^[1] FINSCOPE Survey highlights Nepal 2015