In 2015, the microfinance organization, ECLOF Kenya, launched their "Climate Smart Agriculture" (CSA) loan product in Embu, Kenya, to provide financing and training to dairy farmers in the region. Following its traditional group lending model, ECLOF launched this CSA group loan model with positive results. While ECLOF successfully launched this product, they wanted to know how to increase demand and scale it to other regions in Kenya. ECLOF partnered with Kiva and the Mastercard Foundation to try something new. Instead of only disbursing loans to farming groups as ECLOF has always done, they decided to pilot individual liability loans for the first time.
The CSA loan product began in 2015 through the support of DFID's FICCF (Financial Innovation for Climate Change Fund) as an initiative to finance productive assets to increase dairy productivity, capture animal waste for biogas, and raise the living standards of dairy farmers. The loan product finances assets like cow sheds, water storage tanks, improved cow breeds, and biodigesters for household energy needs. These assets work to increase dairy yields and provide more stable income in preparation for an increasingly volatile climate future. Kiva and ECLOF partnered together to help scale and increase the take-up of their new CSA loan product. Kiva was inspired in part by Innovations for Poverty Action studies¹‚² that showed higher loan take-up rates were possible if collateral requirements were relaxed and suggested ECLOF try this approach by offering an individual CSA loan alongside their CSA group loan product. ECLOF had never had an individual loan product before, outside of a larger small and medium-sized enterprise product, so this was a significant new step for them.
“From a strategic standpoint, ECLOF Kenya aims to diversify its portfolio by increasing the individual lending portfolio from 3% to 10% by 2022. When the opportunity to consider an individual loan for the Climate Smart Daily Loan came up, ECLOF Kenya was thrilled to test this new model. It has turned out great with positive impact in the lives of our customers.”
- Esther Moyi, Head of Credit and Marketing, ECLOF Kenya
This new individual loan is offered to farmers who are members of a partnering dairy collective and have supplied milk for at least one year. The loan size is from 10,000 Ksh to a maximum of 500,000 Ksh, with loan terms ranging from 3 to 36 months, depending on the loan's size. The loan has a one-month grace period, and the payments are collected each month through a check-off system by the dairy cooperative at a flat interest rate of 1.5% per month (15% per year). This individual loan requires milk delivery slips to certify a strong record with the dairy cooperative, two guarantors from that also supply to the same dairy cooperative, and the loan size can be no more than 66% of the average net amount received by the dairy cooperative over the past 6 months. Any loan used for purchasing dairy cows comes with livestock insurance, access to extension officers that provide training on CSA practices.
To minimize the risk of testing this new individual loan product, ECLOF fundraised the CSA loans on the Kiva.org marketplace, whose crowdlending community raised more than $70,000 in loan capital for dairy farmers in Embu. Kiva's funds were provided at zero percent interest to ECLOF and were raised for each individual ECLOF customer who was featured on Kiva's marketplace. This loan capital risk reduction through the partnership with Kiva allowed ECLOF to experiment with a new product design.
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¹ Borrowing Requirements, Credit Access, and Adverse Selection: Evidence from Kenya, 2016
² Group versus individual liability: Short and long term evidence from Philippine microcredit lending groups, 2014
Finding #1: Listen to Customers to Understand Their Preferences
Before the pilot began, Kiva researchers interviewed 580 dairy farmers. About half were existing ECLOF customers, and the other half were members of the same dairy cooperative but not yet ECLOF customers. The survey results showed that 83% of the farmers preferred individual loans, with women farmers less likely to want individual loans than men - 78% to 86%, respectively. Additionally, the farmers that preferred individual loans were more likely to be more successful farmers as they were more likely to own more Friesian dairy cows, have higher milk yields, and have higher dairy revenue.
As Silas, a dairy farmer in Embu says, "Some [group] members don't feel good when they have to sign on someone who is getting more money. Loan taking should be a secret. When it's [an] individual [loan] you will put much more effort to produce." On the other hand, an ECLOF farmer, Michael, says, "Group is better than individual because you will get advice and guidance from the group member[s] so it's safer. You will borrow with a plan rather than blindly." For the 83% of farmers who prefer individual loans, offering this new individual loan product can allow ECLOF to reach more dairy farmers than before and increase customer satisfaction.
Listening to customers is essential in successfully launching new loan products, and this is becoming easier and cheaper to do as mobile technology continues to advance. Kiva's research team programmed the survey onto mobile tablets using the free and open-source software Open Data Kit and collected the data using the affordable Ona.io data collection platform. Microfinance organizations should continue to invest in mobile data collection tools and conduct lean data surveys similar to the work 60 Decibels has led in helping organizations to understand their customers' needs during these ongoing Covid-19 challenges.
Finding #2: Don’t Be Afraid to Pivot Based on Early Feedback
After launching the individual loan product to 150 farmers in Embu in 2017, ECLOF started to analyze loan repayments and gather feedback from their loan officers to further improve the demand for the loan. ECLOF adjusted the loan term by increasing the maximum loan size from 300,000 Ksh to 500,000 Ksh to reflect the larger amounts more productive dairy farmers needed and extended the loan term duration to accommodate those larger loan sizes and help those farmers with smaller cash flows. These changes created a greater incentive for more successful farmers to take-up the individual loans rather than group loans.
Finding #3: Partnering with Dairy Cooperatives Can Improve Repayment Rates and Help Scale a Loan Product but May Skew Towards Male Borrowers
Since starting the individual CSA loan in 2017, ECLOF has now funded 185 individual CSA loans, accounting for 17 percent of their total CSA dairy farming portfolio. ECLOF has also expanded this loan product offering from one dairy cooperative to now partnering with four dairy cooperatives across Kenya. During the past year, with the challenges that borrowers faced with Covid-19, delinquency and default rates increased across ECLOF's portfolio. Yet, the CSA customers had lower delinquency and default rates compared to the other ECLOF customers. This is partly due to CSA farmers' connection to dairy cooperatives, where their loans are paid back through a weekly check-off method. Additionally, ECLOF has not seen any differences in default rates between group and individual CSA borrowers.
Farmers also benefit from access to non-financial services such as livestock insurance, veterinary support, climate-smart and agronomic training, and a guaranteed offtake from partner cooperatives. Previous research has shown that CSA Dairy Loan farmers performed up to three times better than regular dairy loan farmers, who have no access to training or guaranteed offtake. CSA Dairy Loan farmers can improve their cows' diet and upgrade their farm infrastructure, ultimately increasing yields by over 230%, from six liters to 20–25 liters per day.
One dimension to watch out for when partnering with dairy cooperatives to source loans is that men are more likely to be account owners at dairy cooperatives even if women are primarily doing the dairy farming activities. As of December 2020, 38% of ECLOF's CSA customers reflected the account ownership gender gap of dairy cooperatives.
Lastly, this loan product provides a higher customer value to ECLOF because the dairy cooperative partnership model allows loan officers to manage a higher caseload. This cost-effective and high-value model will help ECLOF to continue to scale this loan product.
ECLOF's loan innovation and Kiva's research reveal several lessons for other financial service providers looking to launch a new loan product:
ECLOF Kenya is continuing to invest in scaling their individual CSA loan product. This innovation has allowed ECLOF to provide financing to farmers who prefer individual loans while maintaining strong repayment rates and improving farmers' livelihoods. Financial service providers should continue to take risks to have a deeper impact, and Kiva can help encourage this with its patient, risk-tolerant capital.
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