Why injecting money in agriculture markets is the best way of financing rural areas

In many African countries such as Zimbabwe, banks, micro finance institutions and insurance companies are concentrated in urban areas. With 70% of the population living in rural areas, it follows the majority have no access to financial services. Many banks no longer have functional branches in rural areas. Since the bulk of commodities flowing into urban food markets like Mbare (Harare), Sakubva (Mutare), Garikayi (Gweru), eMalaleni (Bulawayo), Chikonohono (Chinhoyi) come from rural areas, injecting money into these markets is the only way of financing rural areas.

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While banks still think financing agriculture should target the farmer as the main recipient of the loan, in Zimbabwe there is enough evidence showing that when traders have money, such money end up with farmers in Mutoko, Chipinge, Murewa, Gokwe, Mhondoro, Mwenezi, Muzarabani and many other rural areas which supply commodities to the people’s market. The table below shows amounts of revenue that migrated from Mbare Agriculture market to diverse rural areas in Zimbabwe from January to March 2015:

Expected Revenue (E R)
DISTRICT JANUARY FEBRUARY MARCH TOTAL PERCENTAGE
MHONDORO $ 146,649.00 $ 208,704.62 $ 239,892.20 $ 595,245.82 14%
MUTASA $ 165,442.50 $ 213,380.30 $ 195,112.60 $ 573,935.40 13.43%
MUREHWA $ 171,134.00 $159,165.28 $ 226,284.17 $ 556,583.44 13.03%
MUTOKO $ 120,120.50 $ 117,674.62 $  262,207.32 $ 500,002.44 11.70%
MAKONI $ 195,809.00 $ 145,415.43 $ 94,543.88 $ 435,768.31 10.20%
HARARE $ 155,941.00 $ 165,076.10 $ 112,571.19 $ 433,588.29 10.15%
GOROMONZI $ 106,773.00 $ 94,851.08 $ 87,401.60 $ 289,025.68 6.76%
WEDZA $ 49,203.00 $ 56,567.17 $ 51,870.09 $ 157,640.26 3.69%
SHAMVA $ 32,143.00 $ 43,531.23 $ 42,642.94 $ 118,317.17 2.77%
MARONDERA $ 50,061.00 $ 35,486.92 $ 24,544.79 $ 110,092.71 2.58%
CHIMANIMANI $ 22,160.00 $  30,221.60 $  54,737.00 $ 107,118.60 2.51%
MAZOWE $ 37,577.00 $ 25,955.85 $ 33,528.07 $  97,060.92 2.27%
NYANGA $ 17,592.00 $ 11,394.33 $ 28,874.44 $ 57,860.77 1.35%
BUHERA $  1,056.00 $  7,217.25 $ 35,558.00 $  43,831.25 1.03%
U M P $ 11,634.00 $ 15,060.98 $ 12,741.99 $ 39,436.97 0.92%
SEKE $  9,940.00 $  7,899.40 $  940.70 $ 18,780.10 0.44%
BINDURA $  8,625.00 $  5,746.33 $4,323.65 $ 18,694.98 0.44%
MASVINGO $ 3,756.00 $ 7,320.63 $  6,231.00 $17,307.63 0.41%
CHIKOMBA $  9,159.00 $ 1,166.40 $ 3,676.40 $ 14,001.80 0.33%
CHIRIMUHANZU $  168.00 $     – $  13,063.32 $ 13,231.32 0.31%
GOKWE SOUTH $  840.00 $   434.50 $ 11,700.00 $ 12,974.50 0.30%
ZVIMBA $ 5,351.00 $ 1,238.79 $  2,886.88 $ 9,476.67 0.22%
CHIPINGE $  672.00 $  5,020.54 $ 3,598.00 $   9,290.54 0.22%
BEIT-BRIDGE $   – $    – $  8,856.00 $ 8,856.00 0.21%
CHEGUTU $  5,225.00 $ 631.75 $ 2,928.60 $  8,785.35 0.21%
GURUVE $  838.00 $ 871.18 $  4,989.80 $ 6,698.98 0.16%
CHIREDZI $ 1,396.00 $ 1,089.90 $   3,690.00 $  6,175.90 0.14%
GWERU $  1,200.00 $ 1,613.20 $   – $  2,813.20 0.07%
MUTARE $   – $   200.00 $  2,191.52 $ 2,391.52 0.06%
MT DARWIN $  195.00 $   761.28 $ 720.00 $  1,676.28 0.04%
RUSHINGA $  – $  – $ 1,584.00 $  1,584.00 0.04%
MUDZI $   84.00 $   – $  1,440.00 $ 1,524.00 0.04%
GUTU $    – $   581.28 $   614.00 $ 1,195.28 0.03%
KADOMA $   816.00 $   – $    – $  816.00 0.02%
ZAMBIA $   – $   – $ 780.00 $  780.00 0.02%
ZAKA $   225.00 $     – $   – $   225.00 0.01%
KWEKWE $  – $  164.00 $   – $ 164.00 0.00%
MAKONDE $   – $    – $  120.00 $  120.00 0.00%

TOTAL

$ 1,331,785.00 $ 1,364,441.93 $ 1,576,844.15 $ 4,273,071.08 100%

At US$ 595,245.82, Mhondoro district took away the largest share from Mbare market between January and March 2015. Mutasa, Murewa and Mutoko completed the list of districts that cloaked more than half a million dollars ($573,935.40, $556,583.44 and $ 500,002.44 respectively). All this income went back to stimulate the rural economy. Very few banks and micro finance institutions will be willing to extend such amounts of money to rural farmers.

Interestingly, Mbare agriculture market was also able to extend funds to what are normally considered low potential districts like Chimanimani ($107,118.60), Buhera ($43,831.25), Masvingo ($17,307.63), Gokwe South ($ 12,974.50), Chipinge ($ 9,290.54), Beitbridge ($ 8,856.00), Guruve ($ 6,698.98) and Chiredzi ($6,175.90). Also visible on the market were Mt Darwin, Rushinga, Mudzi and Gutu district where ttere are no banking services for farmers and rural artisans.

Availability of a ready market as a finance model in its own right

Zimbabwe has reached a stage where the market is a key determinant of success or failure. Availability of a market has become a finance model in its own right. If a market enables a farmer to meet the cost of production and remain with a profit from a particular market, such a market is as good as a finance model. If financial institutions and development partners are keen to finance agriculture they should do it via the market. By doing so, they will be financing production plus profit as illustrated in this scenario:

If a farmer takes 60kg of butternuts to the market at a production cost of $50 and sells the commodity at $65,s/ he gets $15 profit (30% plus profit). If you multiply that by 10 (months) = $150 which the farmer can re-invest in the land to increase production. Let us compare this farmer with another farmer who obtains a loan to produce butternuts. The farmer produces 60kg butternuts at a production cost of $50 and if s/he gets $15 profit, $10 goes to loan repayment and s/he is left with $5 x 10 (months) = $50. This farmer is trapped in poverty since s/he will continue borrowing.

If you want farmers to grow, encourage them to grow products that meet market standards and expectations. Extending loans to traders specializing in potato means the money will end up with farmers who specialize in potato production. These traders go and buy from farmers at prices that cover costs, leaving farmers with enough to increase production. Strong relationships are also created between farmers and traders because farmers will be assured of income while traders are assured of good quality products.

If a financial institution extends $10 000 to traders in Mbare, farmers end up with the $10 000 while traders will start selling commodities worth $10 000 which can end up growing to $13 000. On the other hand, the farmer has bought inputs worth $10 000 from the input supplier toward continued production. The trader has enough money to go back and buy from the farmer while the farmer continues to produce. Through a multiplier effect, the initial $10 000 injected in the market will generate business worth more than $30 000. Where a financial institution gives $10 000 directly to a farmer and the farmer buys inputs, chances are that the market won’t be able to buy the farmer’s produce because traders have no money. The farmer is unable to go back for more inputs because produce has not been bought. The whole chain collapses at once.

Financing rural areas through the market increases the multiplier effect of money more than would happen if funding is given to farmers without a clear sense of market dynamics. The market can easily direct financiers who to give loans. Those who bring commodities to the market and participate in the market clearly receive loans while those not participating cannot do so ahead of market actors. This is an example of a viable rural finance model.

Another variation of this model is target financing informed by the market calendar. In most cases traders order as per demand using market trends. They allow the market to be an assessor for the farmer. This is about financing the crop not the farmer. Often it is difficult for a commodity to introduce itself to the market and immediately start competing against commodities that will have established themselves in the market and have chosen their companions.

Financing via market as a national imperative

Injecting money in the market should be a national strategic imperative. If banks inject $5 million today, by year end it will be $150 million due to short cycle crop calendars and the diversity of commodities which will drive the multiplier effect of the injected money. Small pockets of money from micro finance institutions are important for short term problem solving but a strategic intervention at national level should see banks thinking big and using the market as a powerful business institution. Seventy percent (70%) of money injected in Mbare market can end up with farmers in Mutoko, Murewa, and Manicaland and Mashonaland West provinces. Sixty percent (60%) of money injected in Bindura market will end up with farmers surrounding Bindura market. The same for money injected in Masvingo, Mutare, Gweru and other areas, which ends up in the pockets of farmers in those areas. If bakeries can agree to sell a loaf of bread for a dollar for many years, why can’t banks agree to introduce one financial package for agriculture market towards reviving Zimbabwean agriculture? Unfortunately, each bank tries to create its own product and group of people to finance without looking at the bigger picture. Financial institutions urgently need to upgrade their skills so that they can be able to see both the fish and the water.

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

wilson@knowledgetransafrica.com / wilson@emkambo.co.zw

tembie@knowledgetransafrica.com / thembi@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

 

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4 thoughts on “Why injecting money in agriculture markets is the best way of financing rural areas

  1. Dear Charles,
    Thanks for that in-depth analysis of the agricultural market and how revenues generated there is helping to influence development of the farmer in the different parts of the country. I agree with you that a market development strategy is the best to try and turn around our economy and financial institutions need to read into this and design affordable products for traders to use. The market development approach should be the that lense that we support because of its ability to distribute resources in all facets of the economic system i.e. input suppliers, farmers, financial institutions, just to mention a few.

    However, whilst it is impossible to eliminate the transport costs from the farmer’s books, i feel that we need to explore a model that we would facilitate more of farm-gate purchases from farmers to cut on costs and relieve the burden of transport from the farmer and this will undoubtedly put more $ in the farmer’s pocket. I totally, agree with you that fortifying the agricultural markets will contribute immensely to the turn around of struggling economy like ours in a smaller way and other sectors could then take up to complete the puzzle.

    Like

    • Collen,

      Thanks for the feedback. Transport remains an enormous headache indeed. Many people are investing in kombis and small vehicles for transporting people rather than ideal transport for agriculture commodities. We certainly need a revolution in that direction.

      Best,

      Charles

      Like

  2. Dear Charles,

    Thank you for sharing the Zim experience, it is not different from Bots where over 70% of farmers are in rural areas and banks concentrated in urban areas. What is of much interest is the lack of industry experience that these banks have, they finance agriculture the same way they would finance other non- agricultural subsectors. It is very important to understand the industry and the nature of the required financing. Your financing model of market is very interesting, this is because it is ability to actually sell the product which is of utmost importance to farmers than just production, therefore enabling the buying of agricultural commodities is vital and can ensure positive impact of agricultural financing. Banks have to understand this in order to take it up otherwise their intervention will not have the desired impact in agriculture and in the development of our rural communities.

    Regards

    Milly

    Liked by 1 person

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