The third in this series of notes, Insights note-Edition 3, covers aspects related to the status of access to finance among India’s informal enterprises (IEs). Despite several initiatives by the Government of India, access to finance remains a critical issue among IEs due to several challenges that this note delves into.
The note discusses examples from MSC’s Financial Diaries research on IEs to validate the findings. It also provides recommendations for policymakers and financial service providers to address the credit gap for IEs.
In May 2022, as market trends indicated rising prices for maize, Aranyak Agri-Women Farmer’s Producer Company Limited (AAPCL) used the National Commodities and Derivatives Exchange (NCDEX) futures market to make an additional $1,875 (INR 150,000) profit on their sale of maize.
Policymakers in India view the trading of commodity derivatives sceptically, and as a result, have enacted occasional bans and suspensions. Unfortunately, this apprehension is often misplaced and appears to be driven by concerns around speculative trading and market price manipulation. However, there is a growing trend among farmer-producer companies to utilize commodity derivatives trading to establish market linkage, achieve better price realization, and/or hedge commodity price fluctuations. In fact, over the last five financial years (FY 2016 to present), NCDEX has successfully onboarded 470 FPCs, with 160 of them trading a total of 115,175 metric tons (MT) in 18 different commodities.
The NCDEX and Multi-commodity Exchange (MCX) are the two major derivative exchanges in India, including futures and options contracts. Futures contracts allow buyers to purchase a commodity at a pre-determined price at a specific point in the future, while options contracts give the owner the right to sell (put option) or buy (call option) the underlying commodity/asset at a pre-decided price. One major difference between futures and options contracts is that the buyer or seller is obligated to buy or sell the good at the predetermined price upon contract expiration, whereas options holders have the right, but not the obligation, to buy or sell. In India, FPCs are allowed to deal in both futures and options. MSC through our work with FPCs, has facilitated 2,100 MT of maize futures trades and 1,200 MT of options trades in maize, chickpea, and mustard seeds. In this blog, we highlight our experience in supporting FPCs, trade in the derivatives markets, as well as the opportunities and challenges they have encountered as a result. For the purpose of this blog, we are only concerned with delivery-based trades, which is derivatives trading accompanied by the physical transfer of commodities upon contract expiration, and not speculative trades.
How FPCs can benefit from derivatives trading?
Derivatives markets as a way of institutional market linkages for FPCs
FPCs can benefit from futures contracts in several ways, one of which is by leveraging arbitrage opportunities between the spot market price which is the current market prices, and future prices reflected on commodity exchanges. Commodity exchanges have the potential to attract a larger set of buyers than traditional spot markets, due to the sheer size and volume of what is being traded, providing opportunities for FPCs to obtain some arbitrage opportunities than they would get in the open markets.
For an example, let us return to the case of Aranyak Agri-Women Farmer’s Producer Company Limited (AAPCL), which operates in Purnea, Bihar, and works with maize farmers. During the maize season from May to June, the FPC had the opportunity to trade maize August futures on the NCDEX exchange at USD 306.25 /MT (INR 24,500/MT), while the prevailing spot market rate was only USD 302.5 /MT (INR 24,200/MT). In essence, market forces indicated that the price for maize was going to rise, resulting in a price in the futures that was higher than the current metric ton price. By trading on NCDEX, the FPC was able to obtain a gross margin of 3.09% on the transaction, compared to the 1.04% margin it would have received if it sold in the spot market. There are additional expenses incurred by the FPC to deliver on the platform such as transportation costs till the NCDEX delivery centre and assaying costs at the NCDEX accredited warehouse. However, AAPCL benefitted from the subsidies offered by the regulator Securities and Exchange Board of India (SEBI) and NCDEX to FPCs to encourage their participation in derivatives trading.
Figure 1: Delivery based trade of AAPCL using futures contract
Price risk management using futures contracts
FPCs can effectively manage the price risk of stored commodities by using futures contracts without participating in deliveries on the commodities exchange platform. This approach can be particularly useful as explained in the following scenarios:
When the exchange’s delivery center for a particular commodity is unavailable in the FPC’s intervention area. For example, NCDEX has a delivery centre for only maize in the entire state of Bihar. So, for other commodities FPCs may have to send the produce to other states.
When the cost of delivery-based trades on the exchange is higher than selling in the nearest physical market.
When storing commodities at the exchange’s warehouse is not logistically feasible or too expensive.
To illustrate the hedging mechanism, using a hypothetical company, ABC, consider the following example. On December 1, 2022, FPC ABC purchases maize from its shareholders at USD 275/MT (INR 22,000/MT). To hedge against potential losses, the FPC enters into a futures contract to sell maize on the NCDEX at USD 281.75/MT (INR 22,500/MT). On 15-Dec-22, the spot market price for maize became USD 287.75 /MT (23,000 /MT) and the “buy” rates in the futures market also moved up to USD 293.75 /MT (INR 23,500 /MT). The FPC sells the procured maize at USD 281.75/MT (INR 23,000/MT) in the nearest physical market, resulting in a profit of USD 12.5/MT (INR 1,000/MT). Simultaneously, the FPC closes out its sell position by buying a futures contract at USD 293.75/MT (INR 23,500), incurring a loss of USD 12.5/MT (INR 1,000/MT). In this example, the FPC does not realize a net gain or loss on these transactions but effectively protects the initial purchase price of USD 275/MT (INR 22,000/MT) from potential market price losses.
Figure 2: Price risk management using futures contracts
Price hedging through Put Options contracts
As previously mentioned, a put option, giving the holder the right to sell a good at a specified price by/on a specified date also serves as a valuable tool for hedging against price risks. For example, FPC ABC dealt in mustard seeds during the production season and purchased Put options on the 1st of December for 50 MT at a strike price of USD 62.5 /MT (INR 5,000/MT) via the NCDEX platform. This strike price represents the price at which FPC ABC can sell its mustard seeds if it chooses to exercise its put option. This put option was set to expire on January 25th. At the end of the season, the price of mustard seeds had risen to USD 67.5 /MT (INR 5,400/MT), allowing the FPC to sell the commodity in the spot market and earn a profit, while also squaring off the outstanding Put option at no additional cost. Alternatively, if the price of mustard seeds had fallen below USD 62.5/ MT (INR 5,000/MT), the FPC could have executed the trade on the NCDEX platform and made a profit. By following this process, the FPC was able to lock in a price for the commodity prior to the harvest season. The cost to purchase the Put option, also known as the premium, was around 6% of the total trade value, the FPC was able to take advantage of a 100% subsidy on the premium amount provided by SEBI to encourage Options trading by FPCs.
Figure 3: Price risk management using Options contracts
Other benefits of trading through exchanges
Exchanges are organised and supervised market places and trading through them offer a number of benefits to FPCs such as:
Reduced counterparty risk: Derivatives trading is supervised by the commodities exchange, which ensures that all parties involved in the trade meet their obligations. FPCs do not have to worry about receiving payment and buyers do not have to worry about the quality of materials supplied. These issues are common in spot market trades.
Price discovery and transparency: Derivatives markets are a good source of price discovery of agricultural commodities. FPCs can get a trend of the prices that the market is headed towards and can plan accordingly. Prices in the derivatives markets are clearly laid out, and FPCs do not face the ambiguity that they often encounter when dealing with traders and some institutional buyers.
Our next blog in the series considers the five key challenges that prevent greater adoption of derivatives trading by FPCs.
The Government of India’s 10,000 FPO scheme, renewed focus on the aggregation of small, marginal and landless farmers to facilitate market linkages to enhance incomes and livelihoods. As a result, the number of registered Farmer Producer Companies (FPCs) has increased from 8,341 to 15,948 between 2019 and 2022, presenting a significant opportunity to transform agriculture marketing for smallholder farmers. A diverse group of actors, including government agencies, corporate social responsibility arms of private corporations, foundations, NGOs, and agri-business conglomerates have joined forces in the form of cluster-based business organizations (CBBOs) to catalyse FPC formation. The Bihar Rural Livelihoods Promotion Society (BRLPS), also known as JEEViKA, recognizes the transformative impact of FPCs on the lives of smallholder farmers and, supports the development of FPCs across Bihar. In partnership with MSC, JEEViKA works to enhance 26 FPCs’ capacities, including innovative and sustainable value chains, effective governance structures, and the empowerment of women farmers.
Hiring technically knowledgeable staff: Agribusiness requires specialized skills and expertise to generate profitable transactions. Most FPCs start off as simple aggregators of commodities where margins tend to be low. For example, aggregator margins are in the range of 2-3% for non-perishable commodities such as grains and cereals. To ensure sustained profitability, FPC management need to manage and measure quality, understand the specific market for each quality grade, negotiate optimal rates for logistics and storage, manage working capital, and facilitate strong market connections for access to timely information. These skills are developed through years of experience.
However, CBBOs typically deploy their own staff, who come from a social development background, to manage newly established FPCs. These staff are competent in community mobilization but lack the necessary agri-business skills to run a profitable FPC. Under the 10,000 FPO scheme, the salary support provided by the government to CBBOs is up to INR 25,000 (USD 312.5) per month for 3 years, yet MSC has found that recruiting experienced candidates for this salary is not possible. Recognizing that knowledgeable and qualified candidates require a higher salary, JEEViKA has made the strategic decision to hire individuals with agri-business backgrounds to act as CEOs of its FPCs and offers them market compensation. While policymakers need to rethink the support provided to FPCs, CBBOs also have to be resourceful to meet the gap.
Multiple business lines and multiple commodities: Many FPCs are formed as single commodity companies, influenced by the success of dairy FPCs promoted by the National Dairy Development Board (NDDB). As a single commodity company, the FPC is tied to the production and sale of one commodity. However, our experience shows that single agri-commodity FPCs struggle to thrive if they just aggregate and trade. While single-commodity FPCs do succeed, particularly those that undertake secondary processing and achieve substantial volumes, they require significant capital investment and specialized skills, such as food technology and processing for which many FPCs lack the resources.
The majority of small-scale farmers are involved in two or three cropping cycles annually, known as kharif (sowing post-monsoon), rabi (sowing in winter), and zaid (sowing in summer) and as a result, would be better served by FPCs that cater to the many commodities grown in the region, while providing the necessary inputs for each cropping season. Diversifying into multiple commodities offers several benefits including better staff utilization and productivity, effective use and rotation of working capital, increased resilience against commodity price fluctuations, and more active involvement of its members.
The transition to multiple business lines by the FPCs supported by Jeevika has proven successful. A prime example is Samarpan JEEViKA Mahila Kisan Producer Company Limited (SJMKPCL), which operates in three distinct business areas: agri-outputs, agri-inputs, and other businesses. The agri-outputs line includes commodities like paddy, wheat, litchi, and potato. The agri-inputs line covers a range of products like seeds, fertilizers, growth promoters, and farm equipment. The other business line includes seed production and bulk purchase of food and groceries for women members. With this diverse range of business lines, SJMKPCL has achieved profitability for the past two years. The figure below illustrates Samarpan FPC’s different business lines throughout the financial year.
Social capital in the local communities: The success of FPCs, in part, lies in the active involvement of its members. Developing the necessary social capital among the community can be a time-consuming process, but CBBOs with a history of impactful social and economic development initiatives have a head start over those starting their operations anew. For example, JEEViKA, with over 15 years of experience in livelihood promotion, financial linkages, and women’s economic empowerment, is well-positioned to mobilize members, establish strong leadership, and educate communities about the benefits of FPCs. Building this social capital among its members helps FPCs overcome the influence of middlemen and other intermediaries who have built their own social capital over time.
Financial support from inception to maturity: One of the critical roadblocks for FPO growth is working capital. Both trading in agri-commodities and agri-inputs require working capital to maximize business opportunities. Commercial banks and mainstream non-bank finance companies (NBFCs) depend on robust balance sheets and track records as part of the underwriting process, while the majority of FPCs are nascent or early stage and may not have the required net worth to obtain the requisite credit.
Most FPCs are also poorly capitalized despite special credit guarantee schemes and the equity grant scheme of SFAC. Only 11.2% of FPCs registered at the end of FY 21 across India have paid in capital equal to or more than INR 1 million (USD 12,500). Between FY 2015 to FY 2022, only 839 FPCs had access to equity grant from SFAC, while only 282 FPCs were sanctioned credit guarantees. JEEViKA provides working capital grants to newly formed FPCs in the early years to meet their liquidity needs, thereby enabling them to grow their businesses without the need for commercial capital. JEEViKA’s ability to raise funds is not easy to replicate for most CBBOs and there is a genuine need for philanthropic capital to provide critical seed money for FPCs to meet the financing gap in the initial 2-3 years. The government/policymakers could also help by expanding coverage of the equity grant and credit guarantee schemes, increasing upper limits for good-performing FPCs, and encouraging commercial banks to enter the FPC lending market.
Simplifying the business environment for FPCs: Despite efforts to promote FPCs in India, many face difficulties obtaining basic business licenses, particularly to sell agriculture inputs such as fertilizers, because local government officials have discretion to issue these licenses. FPCs often lack the knowledge and networks to secure them. The state governments can ease the licensing process by creating a common agri-inputs license (seeds, fertilizers, and pesticides) for FPCs.
Additionally, there are numerous regulatory compliance requirements to which FPCs must adhere, such as filing Goods and Services Taxes (GST) and Income Tax (IT) returns, conducting annual audits, and holding Annual General Meetings (AGMs). Non-compliance could result in fines and legal consequences. To mitigate these challenges, JEEViKA provides professional support to manage the compliance of its FPCs and concurrently trains their managers on the necessary requirements, ensuring they stay up-to-date and avoid missing regulatory deadlines.
This is another area where philanthropic organizations could support the growth of FPCs through investments in the training of auditors and building the capacity of FPC managers in areas of regulatory compliance, business licenses, etc. This approach mirrors the large-scale efforts put into training of microfinance institutions from two decades ago.
Responding to the constraints above has fueled a robust growth trajectory for JEEViKA FPCs. Over the last three years, total business revenue of the FPCs experienced growth of more than 353% as they continue to progress towards financial profitability.
FPCs are powerful tools to allow smallholder farmers to have more control over the markets in which they trade. FPCs can channel high-quality services like access to inputs, credible buyers, advisory, etc. to transform agriculture productivity and increase the incomes of small-scale producers. However, CBBOs should recognize the inherent challenges that FPCs face and learn from the likes of JEEViKA, which has addressed the pitfalls associated with managing FPCs, helped them deploy the right business models, acquire the right talent and arrange for necessary and adequate financing to ensure the FPCs’ potential is realized.
Small and marginal farmers (SMFs) in Bihar face challenges related to scale, crop diversification, cultivation costs, and price realization. The collectivization of smallholders through farmer producer companies (FPCs) has gained substantial momentum in recent years. FPCs bring together cooperative values with a corporate governance structure and have become the preferred legal form for farmer collectives. A study conducted by MicroSave Consulting in 2022 examined 35 FPCs across 10 districts in Bihar to better understand their functioning and challenges. This blog shares key findings from the study, which you can find here on the MSC website.
Key insights from the study
1. Farmer Mobilization
The collectivization of smallholders through FPCs has gained momentum in India, as it helps reduce input and marketing costs by achieving economies of scale and improving bargaining power. Members play a crucial role in attracting capital and patronage, and pooling financial resources and market access through FPCs improve the income of SMFs. FPCs require a minimum of 10 shareholders, but the median FPC membership base in Bihar is 275, with 55% of FPCs having a membership of less than 300. FPCs with fewer members upon formation usually have limited capital mobilized, resulting in many remaining dormant after incorporation. Only 47% of FPCs commenced business activities within three years of formation. Operational FPCs had a larger membership base averaging 485 members. Member mobilization at the time of registration is crucial for FPCs to start and sustain their business operations.
2. Inclusion of women and landless farmers
Women constitute a significant proportion of the agricultural workforce in India, but their participation in FPCs is limited. Women make up only 40% of the total membership base of the FPCs studied, and their participation in leadership and governance roles is also limited. Fifty percent of FPCs had a single woman representative on the Board of Directors (BoDs) – primarily driven by a mandatory requirement, but 20% had no female representation at all. This highlights the need for concerted efforts to promote women’s participation in FPCs, and state and central governments in India should develop policies to incentivize the inclusion of women in FPCs.
3. The importance of a business planning
Business planning is crucial for FPCs as it provides a roadmap for their vision and strategies to maximize profits and minimize risks. However, only 40% of the FPCs in the study had a business plan. FPCs with a business plan had higher revenue and were able to diversify their activities. The majority of FPCs lack awareness on the importance of business planning, and only 22% reported receiving training on the topic. Business plan capacity building efforts of FPC promoting agencies are constrained due to a lack of expertise and involvement of member farmers and BoDs, leading to a lack of direction and financial sustainability for FPCs.
4. The state of FPC business activities
The average turnover of mature FPCs in FY 2020-21 was USD 22,100 while those between 3-5 years of age was USD 17,620 and FPCs formed during the last 3 years had an average turnover of USD 7,120. Output aggregation and input sales are the most common business activities for FPCs. 48% of FPCs diversified their business activities with at least two business lines, but profitability is not necessarily correlated with the number of business lines. FPCs should prioritize proper business planning and a balanced mix of business activities. The average per-member business volume in mature FPCs was USD 55 while the average per-member business volume in FPCs between 3-5 years and less than 3 years was USD 20 and USD 4, respectively.
5. Insufficient access to capital
FPCs require capital for building institutions, operations, and infrastructure investments, but access to credit remains a challenge. Most FPCs rely on paid-in capital and short-term borrowing from informal sources, with 47% reporting using short-term borrowing from members or other informal sources. Accessing equity grant and credit guarantee schemes is also difficult due to lack of awareness and cumbersome processes. Only 11% of FPCs applied for institutional credit from banks or NBFCs, and only 9% received approval. Many FPCs lack the necessary expertise or resources to meet the requirements for formal credit, and financial institutions often require personal guarantees or collateral from BoDs, which is discouraging for SMFs who lack assets to pledge.
6. Gaps in Training and Capacity Building for FPCs
FPCs and their PAs require a distinct skillset to manage business functions, membership mobilization, and statutory regulations. Capacity building efforts offered by institutions are limited and neglect important areas such as business planning, credit assessment, value chain-specific training, market linkages, statutory compliance, and convergence. Moreover, finding qualified trainers with an understanding of rural dynamics, FPC management, and agriculture value chains is challenging. FPC promoting agencies also focus on conducting one-time training programs without ongoing support or follow-up, hindering long-term success. To address these issues, systematic capacity-building efforts with periodic refresher and follow-up training are necessary to help FPC members adapt to changing circumstances and succeed in competitive markets.
FPCs have the potential to be a powerful tool to improve the livelihoods of SMFs. However, it is important to note that the promotion of FPCs alone is not enough to ensure their long-term success and sustainability. They must be nurtured and supported with strong structures and mechanisms to help them grow and mature over time.
This study has identified several critical levers that could help unlock the potential of FPCs in Bihar. These include targeted and sustained efforts to increase the membership base through awareness building, policy interventions that promote the inclusion of women and landless farmers in FPCs, a systematic approach to capacity building that includes periodic refresher and follow-up trainings on key topics that affect FPC sustainability, and improved access to adequate financial resources to commence and sustain businesses operations and develop the business acumen of FPCs.
Salon owner Stella was visibly excited after hearing the Kenyan President’s inauguration address. Soon after, she picked up her phone, dialed *254#, followed the message prompts, and waited. After 48 hours, she received a notification that she had qualified for a KES 8,000 (USD 62) loan from the Financial Inclusion Fund, known commonly as the Hustler Fund. Moreover, if she pays back the loan in seven days, she would have to pay no interest.
The Hustler Fund promises to improve the financial health of Kenyan MSMEs
The Hustler Fund receives support from KCB and Family Bank and is a first for the country. It targets individuals and micro and small enterprises that struggle to access formal financial services due to the documentation requirements and steep loan prices. The fund provides these individuals and enterprises greater access to convenient and affordable credit. Besides enabling access to loans at single-digit interest rates for people like Stella, the fund allows borrowers to save for short- and long-term goals.
Before the fund’s launch, Stella would take digital credit from formal financial service providers. She accessed loans of up to KES 5,000 (USD 39) to purchase stock for her salon business. As her business prospered, her credit line increased, as did her confidence. She borrowed to meet her family’s needs, hoping she would make enough from the business to repay the loan. Most times, she did.
Then in December 2018, her mother fell ill and had to be hospitalized. As the eldest in the family, Stella had no option but to exhaust her savings and borrow from family and friends to settle the hospital bill. In the same month, her business struggled. As Stella dedicated her time to caregiving, she left the business to her employees, who stole from her. A few even opened salons of their own and snapped up her customers.
After six months of struggle, Stella finally recovered her business, even though she could not repay all her loans on time. Unfortunately, her financial health plummeted by this time as her digital financial service provider had negatively listed her due to her unpaid loans. She could no longer access credit from formal sources. Once again, Stella was forced to seek out informal financial service providers to survive.
Due to her mother’s illness, Stella had already exhausted her immediate sources, including friends, family, and her savings group. Left with no choice, she turned to a moneylender who offered her a KES 100,000 loan (USD 770) at an usurious 30% interest rate to be repaid within two weeks. Unsurprisingly, Stella could not repay her loan, and her assets went up for auction.
Stella’s story is not unique. Sadly, more than 6 million Kenyans, or 19% of the country’s adult population, have been negatively listed since September 2022. This figure represents 32% of the 19 million listed on the credit reference bureaus countrywide.
The core elements of financial health include how well a household manages daily obligations, copes with risks, recovers from economic shocks, and grows by building or maintaining reserves. Yet more than half the borrowers defaulted on mobile loans in 2021. This was likely because borrowers often de-prioritize payment of mobile loans as these are unsecured and do not involve a risk of losing collateral. As a result of these and other factors, financial health in Kenya is declining, as per a household survey conducted by the Central Bank of Kenya, Financial Sector Deepening Kenya, and the Kenya National Bureau of Statistics.
Beyond the Hustler Fund, additional changes in the delivery of credit are shaping the country’s financial landscape.
In this situation, the Kenyan government has gone beyond the Hustler Fund to increase access to credit. It abolished negative listing and introduced a graduated system in which defaulters get a low score but remain eligible for credit from formal financial institutions. Lenders who decline credit due to an adverse CRB listing risk incurring a KES 2 million (USD 15,385) fine.
The new system allows lenders to price loans based on the borrower’s risk profiles. Bad borrowers can improve their scores through timely loan repayment, while good borrowers are rewarded with higher scores and better loan terms. The regulator has approved six banks to offer risk-based loans and is rolling this out in a phased manner.
The Central Bank of Kenya received applications for risk-based lending from more than half of Kenya’s Banks. A few have started to implement risk-based lending, albeit gradually. This has led to the removal of the interest rate cap, which earlier constrained providers’ ability to offer credit to higher-risk clients. Providers now charge as much as 16% per annum for business loans.
The developments in Kenya’s credit system are welcome. Hopefully, lenders and borrowers can collaborate to manage credit effectively. This collaboration is important given the challenging economic environment that has seen loan defaults exceed KES 514 trillion (USD 4 billion) for the first time in the country’s history. Otherwise, the government and regulator may be forced to step in and manage credit effectively —and indeed, they are willing to step in.
In 2019, MSC recommended against the negative listing of borrowers with small outstanding loan amounts. In 2020 the Central Bank of Kenya ordered digital lenders to stop listing defaulters who owed less than KES 1,000 (USD 8), who were the majority at the time. The same year, the Central Bank of Kenya acted to suspend the listing of borrowers in arrears of less than KES 5 million (USD 38,000) onto credit reference bureaus to allow these borrowers access to credit during the COVID-19 pandemic. While suspending the listing of borrowers could reduce the appetite for providers to extend credit, it had positive short-term effects of increasing liquidity for individuals and MSMEs during the pandemic.
Credit repair is a welcome development to increasing access to finance for MSMEs
In November 2022, the Central Bank of Kenya announced measures to remove blacklisted borrowers from the credit reference buraus list, that would cost KES 30 billion (USD 231 million). While this is less than 1% of the total banking sector loan portfolio, the action affected about 20% of the 6 million negatively listed borrowers. These measures only covered a discount of at least 50% of the non-performing mobile phone digital loans outstanding as of the end of October 2022, leaving more than 2 million borrowers still negatively listed on the credit reference bureau.
Despite the government and regulators’ efforts to repair credit, risk-adjusted interest rates offered by banks remain unaffordable for microentrepreneurs. As a result, they rely on cheaper sources of credit, such as savings groups, savings and credit cooperative societies, and the Hustler Fund.
Formal financial service providers have started to respond to this gap by providing digital tools to integrate savings groups. This is because the opportunity to mobilize funds cheaply attracts the providers to cultivate a pipeline of future borrowers. A few have also indicated an interest in extending more extensive credit lines to borrowers who repay their facilities with the Hustler Fund.
A closer look at the Hustler Fund reveals several appealing features for Stella and microentrepreneurs like her:
Beyond credit, the fund automates savings, simplifying borrowers’ decision-making process, and serves multiple purposes. Firstly, the short-term saving component serves as collateral in case of default. Secondly, the long-term saving component contributes toward a pension. This is critical for mobilizing funds for economic development. Kenya’s savings as a percentage of the GDP is a paltry 16%, which is lower than emerging economies like Zambia at 43% or advanced economies like Qatar at 51%.
MSC has followed the fund’s rollout and identified three high-priority areas that need to be addressed by the ecosystem players to support the government’s ambitions of increasing access to credit for underserved persons:
Linkages to financial sector actors need strengthening to avoid market distortions while increasing loan limits and minimizing over indebtedness. For example, data sharing will enable state and non-state actors to avoid saddling borrowers with excessive debt.
Behavioral principles and data analytics should be used to encourage loan repayments through personalized messages and target at-risk customers based on predictive analytics, as with M-KOPA. Providers could also consider waiving a proportion of the risk-premium interest for borrowers if they repay their loans on time to encourage loan repayments.
Monitoring and evaluating the fund from the perspective of state and non-state actors should be done to create a comprehensive feedback loop to optimize fund use and effectiveness. For example, data analytics can help the government and financial institutions improve fund performance and increase customer centricity.
Salon owner Stella was visibly excited after hearing the Kenyan President’s inauguration address. Soon after, she picked up her phone, dialed *254#, followed the message prompts, and waited. After 48 hours, she received a notification that she had qualified for a KES 8,000 (USD 62) loan from the Financial Inclusion Fund, known commonly as the Hustler Fund. Moreover, if she pays back the loan in seven days, she would have to pay no interest.
The Hustler Fund promises to improve the financial health of Kenyan MSMEs
The Hustler Fund receives support from KCB and Family Bank and is a first for the country. It targets individuals and micro and small enterprises that struggle to access formal financial services due to the documentation requirements and steep loan prices. The fund provides these individuals and enterprises greater access to convenient and affordable credit. Besides enabling access to loans at single-digit interest rates for people like Stella, the fund allows borrowers to save for short- and long-term goals.
Before the fund’s launch, Stella would take digital credit from formal financial service providers. She accessed loans of up to KES 5,000 (USD 39) to purchase stock for her salon business. As her business prospered, her credit line increased, as did her confidence. She borrowed to meet her family’s needs, hoping she would make enough from the business to repay the loan. Most times, she did.
Then in December 2018, her mother fell ill and had to be hospitalized. As the eldest in the family, Stella had no option but to exhaust her savings and borrow from family and friends to settle the hospital bill. In the same month, her business struggled. As Stella dedicated her time to caregiving, she left the business to her employees, who stole from her. A few even opened salons of their own and snapped up her customers.
After six months of struggle, Stella finally recovered her business, even though she could not repay all her loans on time. Unfortunately, her financial health plummeted by this time as her digital financial service provider had negatively listed her due to her unpaid loans. She could no longer access credit from formal sources. Once again, Stella was forced to seek out informal financial service providers to survive.
Due to her mother’s illness, Stella had already exhausted her immediate sources, including friends, family, and her savings group. Left with no choice, she turned to a moneylender who offered her a KES 100,000 loan (USD 770) at an usurious 30% interest rate to be repaid within two weeks. Unsurprisingly, Stella could not repay her loan, and her assets went up for auction.
Stella’s story is not unique. Sadly, more than 6 million Kenyans, or 19% of the country’s adult population, have been negatively listed since September 2022. This figure represents 32% of the 19 million listed on the credit reference bureaus countrywide.
The core elements of financial health include how well a household manages daily obligations, copes with risks, recovers from economic shocks, and grows by building or maintaining reserves. Yet more than half the borrowers defaulted onmobile loans in 2021. This was likely because borrowers often de-prioritize payment of mobile loans as these are unsecured and do not involve a risk of losing collateral. As a result of these and other factors, financial health in Kenya is declining, as per a household survey conducted by the Central Bank of Kenya, Financial Sector Deepening Kenya, and the Kenya National Bureau of Statistics.
Beyond the Hustler Fund, additional changes in the delivery of credit are shaping the country’s financial landscape.
In this situation, the Kenyan government has gone beyond the Hustler Fund to increase access to credit. It abolished negative listing and introduced a graduated system in which defaulters get a low score but remain eligible for credit from formal financial institutions. Lenders who decline credit due to an adverse CRB listing risk incurring a KES 2 million (USD 15,385) fine.
The new system allows lenders to price loans based on the borrower’s risk profiles. Bad borrowers can improve their scores through timely loan repayment, while good borrowers are rewarded with higher scores and better loan terms. The regulator has approved six banks to offer risk-based loans and is rolling this out in a phased manner.
The Central Bank of Kenya received applications for risk-based lending from more than half of Kenya’s Banks. A few have started to implement risk-based lending, albeit gradually. This has led to the removal of the interest rate cap, which earlier constrained providers’ ability to offer credit to higher-risk clients. Providers now charge as much as 16% per annum for business loans.
The developments in Kenya’s credit system are welcome. Hopefully, lenders and borrowers can collaborate to manage credit effectively. This collaboration is important given the challenging economic environment that has seen loan defaults exceed KES 514 trillion (USD 4 billion) for the first time in the country’s history. Otherwise, the government and regulator may be forced to step in and manage credit effectively —and indeed, they are willing to step in.
In 2019, MSC recommended against the negative listing of borrowers with small outstanding loan amounts. In 2020 the Central Bank of Kenya ordered digital lenders to stop listing defaulters who owed less than KES 1,000 (USD 8), who were the majority at the time. The same year, the Central Bank of Kenya acted to suspend the listing of borrowers in arrears of less than KES 5 million (USD 38,000) onto credit reference bureaus to allow these borrowers access to credit during the COVID-19 pandemic. While suspending the listing of borrowers could reduce the appetite for providers to extend credit, it had positive short-term effects of increasing liquidity for individuals and MSMEs during the pandemic.
Credit repair is a welcome development to increasing access to finance for MSMEs
In November 2022, the Central Bank of Kenya announced measures to remove blacklisted borrowers from the credit reference buraus list, that would cost KES 30 billion (USD 231 million). While this is less than 1% of the total banking sector loan portfolio, the action affected about 20% of the 6 million negatively listed borrowers. These measures only covered a discount of at least 50% of the non-performing mobile phone digital loans outstanding as of the end of October 2022, leaving more than 2 million borrowers still negatively listed on the credit reference bureau.
Despite the government and regulators’ efforts to repair credit, risk-adjusted interest rates offered by banks remain unaffordable for microentrepreneurs. As a result, they rely on cheaper sources of credit, such as savings groups, savings and credit cooperative societies, and the Hustler Fund.
Formal financial service providers have started to respond to this gap by providing digital tools to integrate savings groups. This is because the opportunity to mobilize funds cheaply attracts the providers to cultivate a pipeline of future borrowers. A few have also indicated an interest in extending more extensive credit lines to borrowers who repay their facilities with the Hustler Fund.
A closer look at the Hustler Fund reveals several appealing features for Stella and microentrepreneurs like her:
Beyond credit, the fund automates savings, simplifying borrowers’ decision-making process, and serves multiple purposes. Firstly, the short-term saving component serves as collateral in case of default. Secondly, the long-term saving component contributes toward a pension. This is critical for mobilizing funds for economic development. Kenya’s savings as a percentage of the GDP is a paltry 16%, which is lower than emerging economies like Zambia at 43% or advanced economies like Qatar at 51%.
MSC has followed the fund’s rollout and identified three high-priority areas that need to be addressed by the ecosystem players to support the government’s ambitions of increasing access to credit for underserved persons:
Linkages to financial sector actors need strengthening to avoid market distortions while increasing loan limits and minimizing over indebtedness. For example, data sharing will enable state and non-state actors to avoid saddling borrowers with excessive debt.
Behavioral principles and data analytics should be used to encourage loan repayments through personalized messages and target at-risk customers based on predictive analytics, as with M-KOPA. Providers could also consider waiving a proportion of the risk-premium interest for borrowers if they repay their loans on time to encourage loan repayments.
Monitoring and evaluating the fund from the perspective of state and non-state actors should be done to create a comprehensive feedback loop to optimize fund use and effectiveness. For example, data analytics can help the government and financial institutions improve fund performance and increase customer centricity.
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Small and marginal farmers (SMFs) in Bihar face challenges related to scale, crop diversification, cultivation costs, and price realization. The collectivization of smallholders through farmer producer companies (FPCs) has gained substantial momentum in recent years. FPCs bring together cooperative values with a corporate governance structure and have become the preferred legal form for farmer collectives. A study conducted by 
2. Inclusion of women and landless farmers
Business planning is crucial for FPCs as it provides a roadmap for their vision and strategies to maximize profits and minimize risks. However, only 40% of the FPCs in the study had a business plan. FPCs with a business plan had higher revenue and were able to diversify their activities. The majority of FPCs lack awareness on the importance of business planning, and only 22% reported receiving training on the topic. Business plan capacity building efforts of FPC promoting agencies are constrained due to a lack of expertise and involvement of member farmers and BoDs, leading to a lack of direction and financial sustainability for FPCs.
The average turnover of mature FPCs in FY 2020-21 was USD 22,100 while those between 3-5 years of age was USD 17,620 and FPCs formed during the last 3 years had an average turnover of USD 7,120. Output aggregation and input sales are the most common business activities for FPCs. 48% of FPCs diversified their business activities with at least two business lines, but profitability is not necessarily correlated with the number of business lines. FPCs should prioritize proper business planning and a balanced mix of business activities. The average per-member business volume in mature FPCs was USD 55 while the average per-member business volume in FPCs between 3-5 years and less than 3 years was USD 20 and USD 4, respectively.
FPCs and their PAs require a distinct skillset to manage business functions, membership mobilization, and statutory regulations. Capacity building efforts offered by institutions are limited and neglect important areas such as business planning, credit assessment, value chain-specific training, market linkages, statutory compliance, and convergence. Moreover, finding qualified trainers with an understanding of rural dynamics, FPC management, and agriculture value chains is challenging. FPC promoting agencies also focus on conducting one-time training programs without ongoing support or follow-up, hindering long-term success. To address these issues, systematic capacity-building efforts with periodic refresher and follow-up training are necessary to help FPC members adapt to changing circumstances and succeed in competitive markets.
