What would a funding model ideal for African mass markets look like?
African territorial mass markets have been quietly evolving into unique institutions for decades. However, one of the big gaps has remained the absence of relevant formal financial models dedicated to these important socio-economic institutions. For instance, Zimbabwe produces more than 100 agricultural commodities of which more than 90% are traded and distributed through mass markets located in provincial districts centres, towns and cities. Major actors in these markets are traders who operate from stalls allocated by respective local authorities. Of the more than 50 000 traders registered and profiled by eMKambo (www.emkambo.co.zw) more than 85% are youth and women without access to formal funding that can enable their businesses to grow.
Limitations of existing colonial financial models
Although territorial mass markets and traders have persistently demonstrated high appetite for external funding and great potential for repayment, formal financial systems especially banks and Micro-Finance Institutions (MFIs) have failed to adjust and accommodate mass markets actors resulting in financial exclusion of these key economic drivers in African agriculture and food systems. From the research and fact base gathered by eMKambo (www.emkambo.co.zw) some of the barriers that impede traders and other mass market actors from participating in the formal financial systems include the following:
Financial institutions’ obsession with traditional collateral: A key condition for borrowers from banks and MFIs is collateral in the form of immovable property or household properties like stoves; refrigerators; televisions and others. Since more than 85% of the traders are women and youth, they do not own or have control of such forms of collateral within households. It means such conditions automatically exclude these groups from the financial system’s clientele base. This shows how banks and MFIs have refused to recognise mass markets as stand-alone legitimate institutions whose businesses can be used as collateral. Despite operating for five to 20 years in the same market and same business, most mass markets traders are still considered informal. There is something wrong with policies that consider business that operate for such a long period informal.
Too much emphasis on credit history: This is used against traders who at one time had access to loans from banks and MFIs but failed to repay loans mainly due to economic shocks and climate-induced droughts. Upon loan applications, banks still insist on the use of the colonial Financial Credit Bureau which is known for black-listing potential borrowers as bad debtors irrespective of new circumstances. Such a system prohibits some traders from accessing loans.
Bureaucracy in loan processing: It takes at least 3 weeks to a month for a bank loan application to be processed. Yet, in mass markets, when traders apply for a loan, they expect to get it within a week so that they can meet specific targets for example: i. pre-financing (buying inputs for farmers that will supply particular commodities upon harvest. ii. Advance payment for a commodity like potatoes; cabbages; butternuts and others in order to secure the product against competitors. iii. bulk purchasing and warehousing during the harvesting period iv. Using the loans during festive seasons when demand for certain commodities is at peak. All these measures are critical for ensuring traders are able to supply consistently. Since formal financial systems are not flexible to accommodate these dynamics, loans are approved and disbursed when such business targets have passed.
Loan disbursement format: Mass markets buy and sell using cash. Sluggish adoption of digital technologies in trading is due to farmers’ unwillingness to accept mobile money or bank transfers. It remains costly for farmers to convert mobile money transfers into cash because rural shop owners, agricultural dealers and other service providers like millers and transporters only accept cash for their products and services. It costs between 30 to 35% to convert mobile money into cash. This leaves traders in a catch-22 situation where banks and MFIs disburse loans through bank accounts or mobile phones. More so, cash withdrawals are limited despite the amount of loan one has borrowed. Consequently, borrowers start repaying loans with some loan amounts still in their bank accounts as they struggle to convert it into cash.
Delayed payments by formal buyers: some traders supply formal markets like supermarkets; boarding schools; hotels and restaurants. However, these markets pay after a period ranging from a week to a month. Such payment delays strain traders’ business operations as part of the restocking capital will be locked in invoices. While mass markets struggle to access capital to grow their business, the financing models by government, development organisation and private sector continue to focus on the production side. Increase in production support result in increased market supply. But lack of market buying power in the wake of increasing supply suppresses prices oof commodities which leads too failure to recover the invested resources for self-sustaining agriculture sector. When mass markets face serious shortage of capital to buy meaningful quantities from farmers, that suppresses prices offered to farmers especially during bumper harvests – negatively affecting related businesses like transport and small-scale processing.
Mass markets have built their own self-financing models
In response to exclusion from formal financial systems, territorial mass markets have developed their own finance mechanisms to keep their businesses afloat. However, these models have their own ceiling and cannot take mass markets traders and other actors to next levels of their businesses. Despite potential for some traders to graduate from one level of business growth to the next, the greatest limitation has been limited capital and recognition by other actors including policy markets.
Own savings: Mass market traders and other actors separate good example of operators who separate business from family. The money generated from their businesses is secured in their commodity stocks. Their profits range from 10% to 50% but the amounts remain small due to little quantities they buy at any given time due to limited capital.
Agent model: some traders have established strong relationships with farmers from whom they get commodities for free and trade on commission ranging from 5-10%. Traders collect the produce from farmers’ production area or from farmers’ market when farmers bring them to the market (hello-model). The hallo model is whereby traders take some farmers commodities to trade in the wholesale market and at the same time the farmer will trading the other part of the stock in the farmers’ market. At closure of the farmers’ market, the farmer goes to the trader ‘hello’ to collect the sales of stocks collected by the trader before. The greatest limitation of these models is that traders are not guaranteed of free supplies especially if the commodity is on high demand and competitors are available to buy for cash from farmers.
Contract model: This is whereby traders buy inputs for farmers to produce for them and then deduct inputs costs during sale of produce. This model guarantees supply of commodities to the trader but however leaves the trader with all the risk as s/he invests in both market and production. If production is affected for example by drought, the trader loses out on invested inputs.
‘Rounds’ model: A group of at least five traders come together and make equal contributions say per day, per week or per month and take turns to take the contributed amount. This provides an opportunity for each member to buy meaningful stocks at once when their turn comes. However, the rounds are sometimes disrupted if one member withdraws or fails to own-up the contribution to other members.
Short-term commodity loans: The market has a class of traders who have capacity to bulk purchase commodities from farmers. Some small-scale traders then come and borrow some stocks for on-ward selling and repay as they take more stocks. The commodity loans are settled by end of each day or the following day in the case of vendors who sell in residential areas. However, this model is unavailable if a commodity is in short supply and/or when there is high demand by cash buyers.
Territorial mass markets deserve a revolving fund
With barriers to access funding from financial systems still existing, an independent revolving fund should be set up for mass markets actors. The revolving fund should build on already existing and functional models in the market so that it addresses challenges faced by mass market traders in accessing capital from formal financial systems. The fund can have the following structures:
Provincial Mass Markets fund: Each province has mass markets located at district centres/growth points; towns and cities. More so, each market has its own committee that governs respective actors in each market. Through their committees, mass markets can organise traders and other actors who will take turns to access and repay loans into the revolving fund.
Infrastructure development fund: Most mass markets lack appropriate facilities for handling diverse commodities such as seasonal indigenous fruits that are sources of livelihood and food for many poor households. Part of the mass markets fund can be allocated to establishing: i. warehouses ii. Cooling facilities and iii. Ripening facilities especially for avocadoes, bananas and other fruits.
Market-driven production fund: This fund can support farmers in establishing supply relationships and contracts with specific mass market traders. Many farmers are currently supported with inputs by traders. In addition to individual farmers, the fund can also support selected irrigation schemes so that they produce commodities required by the markets at a particular period.
Vendors’ fund: This can target food vendors who buy from mass markets for resell in residential areas. The vendors can be profiled from their areas of operation and organised in groups to self-manage their revolving fund.
Charles@knowledgetransafrica.com / charles@emkambo.co.zw /
Website: www.emkambo.co.zw / www.knowledgetransafrica.com
Mobile: 0772 137 717/ 0774 430 309/ 0712 737 430