Going digital, or stick to cash?
“Sometimes I am forced to travel with tens of millions of shillings in my pocket and I fear for my life. Someday, something will happen”, says James Odega, a coffee trader in Eastern Uganda. James is one of hundreds of coffee traders who buy coffee from many of smallholder farmers around the Mount Elgon area and sell it to Kyagalanyi Coffee Limited (KCL) in Mbale, Uganda. After being paid for the coffee he has bought from farmers, James has to travel back to his village. This trip takes him around two hours using public transport or a ‘boda-boda’ (a motorbike taxi), often with over UGX 3 million (over USD 1,000) in his pocket.
In addition to buying from traders in Mbale, KCL operates six coffee collection stations in remote areas, where undried coffee is purchased directly from farmers in surrounding villages. Like James, KCL staff members are faced with a risk when they make one to three hour trips to Mbale multiple times every week to pick up over UGX 35 million (over USD 10,000) to pay farmers. Finally, the farmers themselves have to keep the cash safe, as this will get them through to the next season.
Instead of being paid in cash, KCL with assistance from UNCDF’s MM4P programme now offers farmers and traders the option of receiving mobile money instead. In an effort to alleviate the risks he is faced with James would like to use mobile money to pay his farmers. “I would even pay for their withdrawal fees" he says, " But I don’t think the farmers would accept.” When asked why, James says he has discussed it with many coffee farmers and most of them simply say no. “I don’t think they understand. They don’t know how it works.”
However, according to Bram Peters, Country Technical Specialist in digital finance for UNCDF Uganda, the reasons many farmers are not accepting mobile money may run deeper than simply a lack of understanding. “We have run a series of sensitization efforts and most farmers already use mobile money to send and receive remittances. The people we work with in our projects know very well what is best for them. Most of them have limited financial resources, so smallholder farmers are already used to making cost-sensitive decisions on what makes more sense for them; being paid in cash or via mobile money.”
In collaboration with CGAP, UNCDF engaged with PHB Development to take a closer look at whether being paid digitally makes economic sense for each of the stakeholders in the coffee value chain. Or in other words, is there a value proposition for each player to move from cash to digital payments?
PHB Development introduced an innovative approach to gain a deep understanding of the value propositions different players in the coffee value chain are faced with. “PHB has developed a method called Value Proposition Mapping (VPM), which borrows from traditional activity-based costing. This is a popular methodology used in management accounting, to give insight into costs associated with operational activities related to paying and receiving funds", says Ciprian Panturu, PHB Development Associate who recently joined the UNCDF MM4P programme in Uganda.
PHB Development researchers first interviewed farmers and traders that have links with KCL and mapped their market behaviour on a month-on-month basis over the course of a year. They looked at virtually all their sales and purchases, where the transactions took place and the associated transport and time costs. They then incorporated the value of risk the interviewees place on travelling with cash.
“The data gathered is used to calculate a per-activity and per-transaction average cost of cash, which allows for a comparison to what the cost of using mobile money instead would be. This is a very efficient way of comparing the cost of cash and the cost of digital payments for all players along the coffee value chain - a method which can easily be used in other agricultural value chain in Uganda in the future,” says Ciprian.
Data and information of the VPM are currently being analyzed and the first results are expected in the coming weeks, just in time for the next coffee harvest season. A momentum where the introduction of digital payments can be of real value. Depending on the results, UNCDF and CGAP are looking to use this method in other agricultural value chains in Uganda, such as tea, dairy and maize.
By Páll Kvaran, Research Consultant at PHB Development