Over the past six years, Indonesia has made great strides towards increasing financial inclusion; this is especially true in rural areas where agriculture is the primary income source. Currently agricultural bank account ownership sits at 38% compared to professional and government workers, who average between 89-93%. Improving financial inclusion is important because it enables smallholder farmers in Indonesia to obtain loans to grow their agricultural business and boost their income.
In the study, in collaboration with Mercy Corps AgriFin, we analyzed three areas to better understand the digital agricultural landscape in Indonesia. We looked at the needs and aspirations of smallholder farmers, the available financial services and digital solutions, and the current ecosystem of digital financial services in agriculture.
Credit is accessed through semi-formal and informal sources
Access to financial services, while not a means to an end, is critical in providing funds for e.g. farm investments in productivity, improving post-harvest practices and improving smallholder farmers’ access to markets. The study shows that in Indonesia, more than 60% of credit is accessed through semi-formal and informal sources. Even by those who have access to credit through formal sources like banks and non-bank entities (such as P2P/crowdfunding platforms, pawnshops, multi-finance).
9.9% of the people who have access to only informal credit are rural-based female farmers older than 54 years with low levels of education and from households with the lowest quintiles of the Producer Price Index (PPI) distribution. These statistics highlight the immense opportunities for private actors to provide competitive digital agricultural credit and related services to reach the underserved population.
Opportunities for Digital Services for Farmers
The structure of value chains affects smallholder farmers and the viability of implementing digital services. Plantation and premium export crop value chains can offer some quick gains while staple crops and general horticulture can unlock further impact if successful.
Palm oil, a plantation crop, is a prime example of a tight value chain because it has a finite set of buyers, and farmers either work with buyers in schemes or via traders. In fact, large agribusinesses are required to have supply chain and data management platforms for certification, traceability, and farmer information tracking requirements. Therefore, it will be easier to extend digital financial services by partnering with estates for market entry. These farmers have secure cash flows and are more de-risked for financial service providers with stable livelihoods.
Maize, a staple crop, has large but loose value chains and contributes to food security for a fast-growing population. Currently, many end-to-end service providers operate across food crop value chains at once. Most start in food crops before expanding to others. However, the high cost of customer acquisition, volatile cash flows, and perceived higher credit risk lowers the viability of digital services. Nonetheless, there is a high impact potential for digital services as many sub-commercial farmers play a critical role in national food security.
Opportunities for AgTechs and Fintechs
Value chains are important drivers for the type of digital solutions offered to smallholder farmers. But many solutions among industry players are still in the nascent stage with less than 10,000 users. Supply chain, data, and end-to-end platforms have acquired more users than others. There is potential in business models that foster partnerships across key players that focus on different sets of services, and examples exist where this is done well.
Based on our landscape work and interviews, these are the key challenges which constrain growth in digital services for agriculture in Indonesia.
Smallholder farmers may have diverse financial, information, and commercial needs but credit/savings, agronomy, and market linkages are the most urgent. Farmers can benefit from digital solutions in supply chain and data management, market access, digital financial services, digital information, and precision agriculture.
In the study, we outlined a series of twelve potential interventions of interest to development actors and funders. Rabo Foundation is currently exploring these options using our experience with digital solutions for smallholders across the globe. We’ve also gained useful insights into the feasibility, barriers and possible implementation of the interventions at a recent roundtable with leading organizations in Indonesia from across the value chain. Building on the learnings from the study you can expect more announcements of new partnerships in the digital agricultural space in Indonesia in the near future.