Where To Start When Digitizing Payments for Dairy Farmers in Nepal
The dairy sector in Nepal is one of the main livelihoods for Nepali farmers.
According to FAO statistics, more than 1.6 million farmers are engaged in this sector which contributes to 9 percent of the national GDP. Dairy cooperatives are the backbone of the sector. There are more than 1,700 in the country, each one with a number of members ranging from 200 up to 2,000 farmers. In terms of employment, approximately 20,000 workers are in dairy cooperatives across the country. On average, a dairy cooperative collects 48,000 liters of milk per year which are then sold for NPR 32 per liter. While farmers working in the dairy sector earn around NPR 31,238 per year, the average salary of those farmers working in cooperatives rises up to NPR 1,561,000 per year*.
Dairy farmers range from small farmers who have 2 to 3 cows, to mid-income farmers who own 4 to 6 cows and large farmers who own 6 to 12 cows. Small farmers sell from 8 up to 15 liters of milk per day to cooperatives. Selling milk is a bridge financing mechanism for small farmers since it provides regular income for the household while the revenues out of agriculture are seasonal.
Knowing the importance of this activity for smallholder farmers, UNCDF conducted a study to assess the scope for digitization of the dairy value chain and to identify the challenges related to payments and information flow. The research showed there is a potential business opportunity for cooperatives and financial service providers to digitize payments to farmers in combination with the offering of other financial products. However, the study also highlighted a pre-requisite for such a business case. Cooperatives stated clearly that for them to meaningfully contribute to the process of digitization and use their influence on smallholder farmers to enhance digital financial inclusion, the first step should be to address the cooperatives’ challenges around payments and processes.
In such a scenario, it was not feasible to focus just on digitizing the payments between the cooperatives and the farmers while the cooperatives were still using manual records. If UNCDF would have just focused on the digitization of payments between cooperatives and farmers, it would have resulted in a complex process of first, manual record keeping of milk collection and payment due and then using digital bulk payment platforms to transfer payments to farmers. Even the payment reconciliation would have been manual.
For these reasons, UNCDF focused on addressing the challenge of transforming dairy cooperatives’ record keeping from a manual process to an automated one. To manage this project, UNCDF partnered with Prabhu Management a digital finance service provider in Nepal. Prabhu Management developed a cloud-based automated dairy ledger for the cooperatives. The milk ledger allows cooperatives to move their recordings and accounting processes on the platform. For those cooperatives that had savings and credit activities, Prabhu Management also offered a cloud-based core banking solution. The cloud-based milk ledger and integrated platform increased the operational efficiency of the cooperatives and helped them make a first step into the digital era.
Through these interventions, we learnt how critical it is to map the power dynamics in a community. This mapping showed clearly which party was the most influential in the farmers’ decisions related to financial services. It also helps connecting with the right stakeholders and institutions that may help to speed up the process of convincing and helping farmers in their digital journey. However, while on-boarding these institutions and making them ambassadors of digital financial inclusion, it is important to address their challenges in the value chain. In the case of this project, dairy cooperatives acted as influencers and thus it was imperative to offer them a digital transformation beforehand rather than only digitizing their payments process. Offering dairy cooperatives an automated ledger system integrated with payment solutions is a pre-requisite in the digitization of this value chain. The digital transformation of cooperatives also allowed UNCDF and Prabhu Management to shift to the next level of digital products and co-design digital credit products for smallholders together with dairy cooperatives.
Finally, the digital transformation of a cooperative or SACCO is a pre-requisite for transforming the payments and financial sector in a rural economies. It is important to prepare these community institutions for the future and for their role as catalysts in the process of creating digital economies.
*Based on UNCDF’s independent research on dairy value chain digitization in Nepal, 2016. Read research highlight.