The Future of Financial Technology in Promoting Sustainable Agriculture
Agriculture plays a critical role in feeding the global population that is growing exponentially. According to the World Bank records, the global population is estimated to hit the 15 billion mark in the next 20 years. If in-depth research isn’t done in sustainable agriculture and how technology can be used to improve this sector, then the global food crisis is inevitable. In many African countries, the agricultural sector contributes a significant amount of the gross domestic product with Kenya, for instance, reaping US$ 30 billion dollars annually from this sector. Therefore, it is needless to argue that the agricultural sector holds considerable potential, particularly to young African nations that rely on the industry to provide employment either directly or indirectly. Financial technology has equally open endless opportunities to the agricultural sector, especially in facilitating financial literacy, credit access, and risk-sharing. With technological advancements growing at an unprecedented rate, it is time technological world also supports agriculture and particularly (Fintech) and other tech geared towards sustainable agriculture. However, understanding what ails this sector is pertinent in providing direction into how the industry can be improved to its actual potential.
Introduction
For close to 30 years now agricultural sector in the African continent has continued to face numerous challenges, which range from unreliable rainfall patterns, lack of updated technological input, and lack of adequate financial literacy and financial policies to support farmers. Besides, lack of stringent policies to streamline the agricultural supply chain, adoption of farming practices that don’t promote sustainable agriculture, and conservation of biodiversity have continued to hinder development in this sector. These challenges have significantly hampered the growth of this sector tremendously, and to adequately understand how technology can enhance sustainable agriculture, the problems must be depth dissected. According to the Food and Agriculture Organization (FAO) report in 2018, farmers were losing close to 35.5% of their investment in agriculture. Further, approximately about 1.35 billion tons of food is taken by the post-harvest losses, and this threatens global food security, as argued by food policy experts. However, sustainable agriculture has gained prominence globally as scholars claim that it can offer some solutions to the perennial problems the agricultural sector continues to face. But it is important to note that sustainable farming practices alone cannot provide the much-needed solution in this sector without other domains like financial technology (FinTech) offering supportive systems. Until agriculture is taken as a capital intensive venture capable of plowing back billions of dollars in the economy, nothing much is likely to come out of any investment in agriculture. Also, financial tech experts and policymakers have an uphill task in coming up with policies that will promote credit access, risk-sharing, and financial literacy.
Just to indicate the potential agriculture holds when viewed as a powerful economic venture, we will check for fortune 500 companies that deal in agriculture. In 2018 Forbes ranking listed Berkshire Hathaway Company among the fortune 500 companies with the company’s revenues hitting US$246.5 billion, and the company also acts as holding company for many agricultural-based companies like Mclane Company. McLane Company that offers supply chain services to mainly grocery and food services retailers reported annual revenue of US$49.85 billion in the 2019 fiscal year. The above example is just how productive agriculture can reap billions of dollars when taken as a commercial venture rather than just a subsistence practice. The key to the success of companies like Berkshire Hathaway dealing in agribusiness is proper financial planning and integrating financial technology in their business model. Therefore financial technology has a significant role to play in improving investments return from agriculture and boost the GDP of many countries, which depends on agriculture to sustain their economy directly or indirectly. To reduce the high level of risks in agriculture, especially in prices of farm inputs and outputs and return on investments, risks sharing is pertinent. This move is critical because through risk-sharing a farmer’s utility increases. The impacts of Fintech to the agricultural sector are as discussed below.
Mobile Money Technology Improving Credit Access
Another crucial sector of agriculture where financial technology is likely to impact is credit access, and many farmers find it hard to access loans from government-owned banks due to small financial allocation to agriculture. This scenario has changed and will continue to improve, particularly with Fintech penetrating the commercial market. Credit access has been made easier with various microfinance banks making credit access more straightforward and less involving as compared to the previous lengthy procedure of applying for loans in some of the well-established banks. For instance, in Kenya, Safaricom Company has enabled farmers to be able to access loans directly into their mobile phone numbers without necessarily having a bank account. This move has made many farmers who initially had no bank accounts to be able to access credit to boost their agricultural production. When one surveys how financial institutions were operating in the late 19th and 20th century, a lot of regulations and paperwork were involved in applying for a loan. And it is for this reason that many farmers found it hard to apply for these loans since the time taken for the loans to be approved also acted as one of the hindrances to credit access. As argued by Amazon’s founder and CEO Jeff Bezos during an interview with the New York Times in 2018, he claimed that financial technology holds the future of not only the agricultural sector but also all the areas of the economy. Therefore, besides just making credit access to farmers easier, farmers through mobile banking technology have been able to access crucial information, especially the interest rates on various loan categories and even business plan training.
One of the typical power of financial technology has been seen through M-PESA mobile money in Kenya that allows wireless transfer of funds regardless of whether one has a bank account or not. And this has enabled farmers to get credit directly into their mobile phones even from micro-finance banks since banks have linked up with M-PESA. This increased access to credit means that the unmet demand for finance in the agricultural supply chain has significantly reduced. Making banks with initially high-interest rates on loans for farmers cap their interest rates so as not to lose their clients to emerging micro-finance systems and corporative societies with substantial financial backing. Besides, mobile money and mobile phones have provided the much needed infrastructural backbone for FinTech to advance its services to the marginal sectors of the population. Other problems, such as lack of information on prices and any viable business opportunity, have been solved by mobile technology that has to enable real-time access to international market prices. Enabling farmers and investors can know the actual market prices of their produce. In a decade to come, mobile money technology will be the next significant virtual banking sector since it has made savings possible without necessarily going to the bank physically. Through this mobile saving technology, farmers have adopted the culture of saving and even understanding the time value of their investments, and this means that in the new future agricultural sector will be fully equipped with the financial investment policy to improve their return in agriculture.
Promotion of Micro Insurance in Agriculture
Further, with financial technology becoming more diverse and tech-oriented, insurance of farmers will be possible. For many decades finance experts and investments analyst did rubbish the possibility of the existence of insurance cover for investors in agriculture; however, is likely to change. Due to so many covariates shocks intrinsic in this sector of agriculture, insurance companies have been reluctant to offer indemnity cover to farmers and even investors in agriculture. Although with the recent introduction of index insurance in microfinance, farmers and investors in agriculture can obtain partial coverage to some of the covariate shocks inherent in agriculture. Despite the majority of farmers hoping for a total insurance cover, uncertainties facing farmers like fluctuations in the global prices, the unreliability of rainfall, pest, and diseases have made it virtually impossible for an insurer to provide total cover. Index insurance seeks to establish a cheap collectible substitute for the covariate shocks in agriculture and only offer indemnity to the component of variation related to the index insurance. Also, this insurance cover allows the insured to recover a part of the investments he or she had made in an event the loss happens. One of the examples considered includes rainfall. However, in instances where a farmer has correct predictions, for example of the yield let say of cotton, and the insurance can use this information to analyzing the basis upon which an index can be established to be used in offering a crop or livestock cover. This kind of insurance holds so much potential for agriculture, for it is likely to change the investor’s perception of agriculture been a hazardous environment to put your money. The questions which policy experts in finance, technology, and insurance should ask themselves is what if all the risks inherent in agriculture could be appropriately assessed and indexes upon which indemnity cover can be established is possible. Such a breakthrough would change the face of agriculture forever, meaning this sector can become of the most significant contributor to GDP globally.
Although research shows that many index insurance introduced in the agricultural market isn’t doing well, the performance problem relies solely on a lack of demand for such a cover. And this lack of need has been attributed to a lack of adequate financial literacy on the farmers’ side. Hence, if proper research is conducted on how index insurance can reduce some of the risks hindering the economic growth of the agricultural sector, then the problem of low demand at the market prices is likely to be a thing of the past. Research done by economist and psychologist suggests that one of the explanation for the surge in demand for index insurance for agriculture could be behavioral. This conclusion is because the majority of insurance policyholders dislike “ambiguity disinclination.”Where they pay for a product which they don’t understand how the covariate shocks and payout are distributed, which means that financial literacy is also an integral part of this transformation in the agricultural sector. Hence there can never be demand in such policy propositions if the individuals or potential clients of such policy products don’t correctly understand what such policies propose. All these breakthrough in index insurance is courtesy of FinTech continued research and analysis in the field of technology, agriculture and finance much still needs to be done especially in promoting financial literacy.
Financial literacy is also going to be very important in agricultural transformation. Since for the demand of specific commercial packages like index insurance of farming commodities to experience a spike in demand, policyholders must be able to understand what it entails and how they stand to benefit. One of the problems facing smallholder farmers is the price exploitation done by middlemen who exploit farmers by buying their produce at lower prices and selling them at higher prices in the global market. Therefore various innovations emerging with financial technology such as mobile money, index insurance, and even risk-sharing approaches have drastically changed the lives of farmers. Research done by multiple agricultural-based NGOs has sighted lack of financial literacy, which has created a cycle of poverty which has hindered investment in agriculture as households would instead engage in subsistence farming rather than commercial agriculture. The availability of information is one of the most crucial success factors in any venture to make profits. Therefore financial literacy in agriculture is very pertinent since, without it, financial technology will not impact positively on the lives of farmers and the economy at large. Another critical role that financial literacy will address is the role of women in improving investment return in agriculture. Women are an integral part of the success in agriculture, and if their participation is not threatened, a complete transformation of the sector may not be possible. It can be argued that financial skills enable one to make an informed decision regarding economic issues, for instance, how much to save, invest, and improve returns in agriculture. Hence, financial literacy is necessary, and this has been echoed by some of the greatest economists like Joseph Schumpeter, who claimed that without information literacy in any field of study, the realization of success would virtually be impossible. Consequently, Fintech innovations hold the future of bridging the knowledge gap in the sector of agriculture, leading to the continued marginalization of populations relying on agriculture for their livelihood.
Blockchain Technology in Organizing Agriculture Value Chain
Other technologies like the Blockchain are like to be integrated into the field of agriculture, particularly y to increase credit transactions between farmers and credit lenders or even potential markets. Although the technology has not adequately established its roots in the field of agriculture, it holds potential in reducing the number of intermediaries in the agricultural value chain who often exploit farmers by either buying farmers’ products at a lower price than the actual market prices. Although through Blockchain technology, a farmer transacting online can observe and analyze every node involved in the transaction, and this helps in proving the authenticity of such online deals. This technology, which is emerging, has impacted the financial sector through shaping and streamlining the business world, reducing intermediaries while at the same time improving efficiency in an online credit transaction. One of the questions that may linger in the minds of many people is whether the currency used in the Blockchain will seamlessly serve as a medium of exchange in the field of agriculture. Hence more research particularly in policy and how structural capacity can be put in place to allow cryptocurrency to be used as a medium of exchange in agriculture but only for those farmers and agricultural investors. Agricultural value chain has over the years experienced challenges especially in quality control and reducing instances of counterfeit products. However, with blockchain technology and the power, it brings traceability instances of poor quality in agricultural services, and products are likely to be minimized, which means that this crucial feature of Blockchain is expected to improve the agriculture value chain immensely. Multilateral companies like Walmart and even Amazon are currently piloting the trial runs of the same technology in their supply chain monitoring to allow for oversight in ensuring food safety. Chinese tech giant Alibaba in conjunction with the Price Water House Coopers have already adopted the same technology in monitoring the agricultural supply chain of food imports from countries like New Zealand. Hence the role Fintech has continued to play in agriculture is very crucial in increasing the sustainability and productivity of this sector of the economy that can contribute up to 9.5% of the global GDP.
Shaping the Agricultural Finance Policy
Currently, in many large banking institutions, there is no firm agricultural policy that can facilitate large scale collateralization of credit for agriculture; however, this is likely to change with continued integration of Fintech in agriculture. More emphasis, therefore, is needed in ensuring that more in-depth financial support is given to agricultural lenders who will make credit available to the farmers and potential investors in the sector. Besides, fiscal policies protecting banking institutions that contribute to a large pool of money in the agricultural sector are needed mainly well-organized risks markets that will mitigate against the insolvency of such financial institutions. Hence policymakers will rely heavily on financial technology to come up with policies that will streamline the agricultural finance sector. Other fiscal policies in agriculture that are likely to be influenced by FinTech include the development of large scale agricultural financing that focuses on the value chain improvement. Just as mentioned above blockchain technology is a new developing innovation that needs proper financial policies to enable it to achieve stability in the agricultural sector. Without appropriate systems been put in place, it will be hard for some of these propositions to positively impact the industry of agriculture hence the need for stringent policy implementation and integration in both the financial and agricultural sectors.
Conclusion
In summary, agriculture holds the future of humanity in terms of providing food for the ever-growing population. Currently, the agriculture sector is experiencing numerous challenges ranging from the covariate shocks caused by unreliability in the weather, price fluctuations, credit access, and financial literacy that has dramatically hampered the productivity of this sector. With financial technology expanding its capabilities in the agricultural industry, the future seems bright for investors and farmers in this field. Some innovations like index insurance, blockchain technology, and even mobile money transfer have registered positive progress towards agricultural transformation. However, more research needs to be done, especially in how policies are enacted to ensure the coexistence of close connection between financial institutions and the agricultural sector. This connection is necessary since no much agricultural transformational is likely to be realized without proper policies in place to support both the financial and agriculture industry. And for this connection to be recognized, FinTech will play a significant role in informing how the financial technology can impact agriculture and what policies are necessary to see Fintech innovations bring forth complete transformation in agriculture in terms of productivity and revenues realized from the sector.