Why ‘Financial Inclusion’ May Not Be The Correct Terminology

Over the past few years, financial authorities and development organizations in Africa have become fond of ‘financial inclusion’ as a process of involving many people in banking services. Unfortunately, such a notion reduces everything to money when focus should be on understanding socio-economic dynamics. Progress is less about money but more about grasping socio-economic ecosystems. By elevating finance, the notion of financial inclusion assumes money is all that is needed for development or progress.

In African agriculture, financial institutions certainly need new selling points if they are to forge relationships with new actors like SMEs, farmers and traders. At the moment, financial inclusion is presented as if it is a favor to these economic actors. Banks continue to develop financial packages in offices with the assumption that these actors are desperate for money. Most traders and SMEs have been in business for more than 10 years without formal financial support. They probably need support in exploring export markets and improving the quality of their products, not how to start and run a business. They could be more interested in work space and serious recognition from policy makers not just paper recognition.

Who should include who?

When financial institutions start working with SMEs and informal markets that is not financial inclusion. It should be a completely new socio-economic relationship, carefully defined and understood in terms of its requirements, partnership models and sustainability frameworks. In Zimbabwe, cash that used to move from farmers and commercial markets to banks has migrated to SMEs and informal markets where business has also found its way. The key question is how can banks be included in this pool of money and business activities? How can government also be included in this new phenomenon and practice? It is not how SMEs and markets can be included in the little market seating in banks or stock markets.

SMEs and informal markets are also suspiciously wondering why they should include banks in their business when they have been operating on their own for years. There is still resentment against banks who have traditionally been interested in pay slips. Many SMEs and informal traders have not forgotten how they were compelled to look for someone with a pay slip to guarantee them for a loan even if that person knew nothing about the business for which the loan was being sought. Now that the pay slip economy is no longer viable, why are banks finding people they had previously shunned attractive?

If the above questions are not adequately answered, traders and SMEs will continue keeping their knowledge to themselves. You cannot forcibly extract that knowledge by excessive regulation or other negative means. Value chains are now monopolized by smallholder farmers, SMEs and informal markets. They are the ones with practical models. Logistical issues are also handled by individual transporters based on trust and relationships. Most small transporters have embedded themselves into this new ecosystem by providing packaging services in addition to transport services. The level of integration and relationship building is such that traders would rather store commodities in houses close to the market when there are ideal warehouse facilities near-by.

Learning from the past

Traditionally, African communities had their own diverse ways of valuing their socio-economic activities without over-rating the financial component ahead of other sources or expressions of value. Banking was also alien to most local communities who relied on their own forms of recognizing and storing value, mostly livestock. Modern day financial mechanisms were introduced as part of the colonial experience. After independence, there were very few financial institutions offering financial services. As part of ‘modernizing’ African communities through agriculture, initial financial models were in the form of loans extended in kind (fertilizer, seeds, farming implements, heifers and others).

In Zimbabwe, for instance, the evolution of most farmer organizations was tied to this process which could only succeed through mobilizing farmers to access and demand commercial inputs. There were different types of collateral mainly tied to the farming business. Contractual arrangements where formal markets were used to guarantee supply and stimulate demand for agricultural commodities became fundamental. Upon harvest, input providers were paid first while farmers kept surplus commodities for households and communities. There was limited cash in circulation, with commodities supporting each other – maize working together with groundnuts; maize with livestock, etc.,. The role of marketing boards was well-defined, for instance, ensuring payment through stop order mechanisms.

Slowly, the banking sector started coming in to play a facilitation role. Saving became automatic when farmers realized that after selling their commodities there was no immediate use of excess cash. A few banks such as the Post Office Savings Bank started cultivating niches around farming areas where farmers started saving money. More importantly, saving was very attractive because it had high returns in the form of interest. A farmer could earn up to 30% from his/her annual savings in a bank. To a large extent, saving became an important form of asset creation for farmers.

What then happened?

The collapse of formal markets, contracts and farmer unions led to the demise of financial models that had been built pre – and post- independence. Without a reliable market for agricultural commodities and lack of farmer organization, there was depletion of savings for the few banks. Everything moved back to subsistence production and some bit of semi-commercial agriculture. Before this withdrawal phase, every commodity had a reliable market. Groundnuts, sunflower and small grains were part of important cash crops that enabled farmers to send their children to school.

With the depletion of savings from agriculture, the financial sector decided to support a few cash crops around which formal contractual arrangements could be designed and sustained. Examples of such crops were cotton, tobacco and sugar cane, with the rest no longer considered viable cash crops. Unfortunately, that movement spawned a serious monoculture in crops that were not consumed locally. Pressure began to mount on the few cash crops to meet food requirements as well as other important needs like school fees, inputs and tax. After meeting all these demands, farmers producing the few cash crops were left with little savings that could be banked. In addition, inflation and an increase in the cost of inputs also ate into the little savings.

Birth of a new paradigm

The paradigm shift explained above pushed out smallholder farmers from the original pool of clients that had existed for banks. The collapse of formal markets meant farmers had to look for options. For years, banks had also excluded informal markets from their clientele base, preferring to deal with contract companies. While the new paradigm has fuelled the growth of the informal agriculture market and SMEs, the financial sector has not moved with this shift. They have not been able to adjust their models to suit the prevailing environment characterized by informal markets, traders and new farmers.

For instance, all banks are failing to develop suitable financing models for livestock farmers. As a result, farmers end up selling livestock to buy inputs when a bank should simply extend loans to farmers using livestock or agricultural activities as collateral. When a farmer uses livestock to finance agricultural activities, the first thing s/he does after selling commodities is to replace the cattle s/he sold for inputs. The farmer does not see any need to save money in a bank when the bank did not see it fit to provide agricultural finance using livestock as collateral. More-over, the returns from livestock within six months to two years are much more than could be achieved from the bank. Not to mention other benefits from livestock like milk, manure and draught power which cannot be earned by saving money in a bank.

Surfacing dormant models

Before talking about financial inclusion, let us understand business models that are driving SMEs and informal markets. Banks should seek to be included in these models not the other way round. It is important to consult deeply why informal markets and SMEs are not participating in the formal money economy, making it difficult to record and make sense of what is happening. Financial institutions should be fully aware of the performance of particular agricultural commodities. Unfortunately, no financial institution is following trends in agricultural markets in order to minimize failed models. Banks should be part of understanding trends in agricultural markets just as they are interested in the stock exchange.

In most cases the market is blamed when it was not consulted during production. It does not help to continue developing financial models from production while ignoring the market. Production is not the final destination for loans. When you have converted money into an agricultural commodity, it is important to track it all the way to the market. This will avoid cases where banks blame farmers as if farmers are the commodity or the market when the problem is business modelling. Informal markets and SMEs are neutral in sharing information and knowledge. Documenting such knowledge will create a competitive edge for the financial sector. This is unlike bringing banks together to share knowledge when they are cut-throat competitors. When banks meet, 90% of best practices won’t be shared. Where a model failed, banks would rather hide those experiences so that a competing bank can also lose money.