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MERCY CORPS AGRI-FIN MOBILE PRODUCT DEVELOPMENT AND BASELINE RESEARCH REPORT – INDONESIA

ABRIDGED VERSION

JANUARY 2013

1.0 EXECUTIVE SUMMARY

This report demonstrates a strong demand for trusted services. Farmers consistently report an interest in accessing services from government extension workers and farmer groups, rather than from buyers and agri-input dealers. While farmers report low levels of satisfaction with these actors because of the infrequent or inappropriate nature of the information provided as well as a feeling that farmer groups lock the farmer into a relationship that may not be all that beneficial, they still reported that they wanted to receive services from such sources. This demonstrates that sources with which to farmers have familiarity are usually more trusted than new entrants. This is supported by the fact that a majority of farmers currently access information, and even credit, from fellow farmers, friends, and relatives. This logical take away from this observation is that products must be developed that are easy to use, reliable and backed by trusted, neutral sources of information. One suggestion is to have an organization that already has a sound reputation with farmers stand behind or promote the information services developed, and transmitted by mobile phones. Additionally, the majority of farmers report that they would like to obtain financial services from commercial banks. This signals that farmers trust services backed by “official” (government) or well-known (commercial banks) institutions. This is a critical guide for AgriFin Mobile as it develops products and, even more importantly, selects its partners.

2.0 INDONESIA COUNTRY PROFILE Indonesia is a vast multilingual nation which has been enjoying stable economic growth for the past five years. The government has introduced significant reforms in the financial, telecommunications and agriculture sectors. However, Indonesia still struggles with poverty and unemployment, inadequate infrastructure, a complex regulatory environment, and unequal resource distribution among regions. The government currently faces the ongoing challenge of improving Indonesia's insufficient infrastructure in industry and agriculture in order to remove impediments to economic growth, labor unrest and reducing its fuel subsidy program in the face of rising oil prices.

3.0 BACKGROUND This study provides guiding principles and concrete recommendations for the development by the Agri-Fin Mobile program of information services and financial products that can be delivered by mobile phones to assist small rural farmers in Indonesia. It is the culmination of over three months of collaboration between Mercy Corps, the Microfinance Innovation

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Center for Resources and Alternatives (MICRA) Indonesia and the Grameen Foundation. The objective of the research was to identify those services that are not being provided by current providers in an effective manner, and the problems that may be encountered in providing such services by mobile phone. The data was reviewed in the context of the overall objective of the Agri-Fin Mobile project which is to assist rural farmers in increasing farm productivity and cash flow. The research is closely aligned with the baseline study which focuses on establishing farmers’ current incomes, crop mix, profits, costs of production, yield and investment in farm inputs. The baseline study also includes analysis and qualitative assessment of efficiency, comparing bundled mobile services against standard services.

4.0 METHODOLOGY Before commencing field research, the Agri-Fin Mobile conducted a desk review in order to identify strategic value chains and geographic regions with high potential for increased profitability, improved production and enhanced income for smallholder farmers. Applying a scoring methodology, the Indonesia team selected four value chains for analysis: rice, maize, potato and chili. The short-form baseline survey related to issues concerning current production, yield and income levels for randomly selected farmers was administered. A total of 264 short-forms were distributed in all four districts (Indramayu, Bandung, Garut and Wonogiri) with 66 for each crop. The Long-Form Product Development Survey was designed to gain an understanding of current levels of farmer access to financial and information services, demand for current, improved and future services and constraints and opportunities, if any, related to improving income and yield benefits by receiving a broader range of financial and information services by mobile phone. A total of 144 long-form product development surveys were deployed across the four districts. It is important to note that when survey questions are the same in the short form and long form questionnaire, this report uses the larger sample of 408 respondents. The merchant survey designed to gain an understanding of the value chain for each commodity from the perspective of agri-input dealers, traders, wholesalers, retailers and other important private sector actors. In total, 60 merchant surveys were distributed- 8 in each sub-district and 16 for each commodity. Focus Group Discussions provided a framework for open discussion on the issue of farmer demand for financial and information services. It also includes time for participants to discuss with other farmers and facilitators their personal experiences with accessing financial and information services. Overall constraints and opportunities for improved and/or new services are identified. In total, 8 focus group discussions were held. Four of the groups were male only and four of the groups were female only.

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306

102

408

0

100

200

300

400

500

Male Female Grand Total

Gender Profile Field Survey

30

375 405

0

100

200

300

400

500

Illiterate Literate Total

Literacy Profile

5.0 FINDINGS

5.1 Farmer Profiles Although this study is limited by the small sample size, and relatively narrow geographic survey deployment, it provides a largely representative picture of smallholder farmers across Indonesia. The following graphs provide a comprehensive snapshot of the 408 respondents surveyed for this study. By selecting four different geographic survey locations and four different crops, Agri-Fin Mobile was able to capture a diverse range of experiences related to farmer demand for financial and agriculture information products and services.

5.2 Access to mobile phone, financial services and agricultural advisory Information

5.3 5.2.1 Access to and level of comfort using mobile Field survey results demonstrated that the vast majority of respondents own a mobile phone. However, mobile phone ownership differed significantly among male and female respondents, with many more males owning a mobile phone than females. Similar to field survey respondents, the majority of respondents who do not own their own personal mobile phone have access to one from within their household or from neighbors and friends. The majority (93 percent) of field survey respondents reported using the phone for personal voice or SMS communication. Importantly, it seems that farmers are using their phones for both personal and business communication. This may indicate that farmers already see utility in using the mobile phone as a business tool. This may be a key factor in supporting uptake. Out of 303 respondents only 264 or 87 percent of respondents reported that they did not use the internet on their phones. This is not surprising considering current data on mobile internet penetration levels. Of the 39 field survey respondents who did report using the internet on their mobile phone, 12 reported using it to access social networks, 6 for agricultural information and 5 for general information.

5.2. 2 Access to and use of financial services

Access to Credit: Field survey results demonstrated that across crops, approximately 55 percent of farmers accessed loan services in the past 12 months. This ranged from 35 percent for maize farmers to 71 percent for rice farmers demonstrating significant differences among crops in terms of access to credit in the reported period. Across gender categories, the percentage of male farmers who have accessed a loan in the last 12 months was

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approximately 60percent, while for female farmers, it was approximately 50percent. The majority of farmers required loans for pre-harvest input purchases. Generally, farmers reported that these loans are available but that the interest rate is normally very high. Of those farmers that accessed credit, the main credit providers included commercial bank, friends, relatives and local traders/collectors and money lenders. This means that approximately 52 percent of all respondents are currently accessing credit services through informal providers (friends, relatives, traders/collectors, money lenders, and agricultural input suppliers). Access to Savings: Approximately 54 percent of respondents reported that they save, while 46percent of respondents reported they do not save. In general, respondents are saving very little compared to their overall cash flow profile. Compared to male respondents, female respondents are saving at a much lower rate and they save though more informal means than male respondents. Of the 186 respondents who save, approximately 40percent either save for education, health or urgent needs. In addition, approximately 70percent of respondents reported that they save to purchase inputs for the production season. This is interesting because it may contradict data that shows a high level of credit being accessed for inputs rather than savings. It most likely indicates, however, that the level of savings is often not sufficient to fund the level of inputs needed to be purchased. Access to Insurance: For each district, 80-95 percent of respondents reported that they do not purchase insurance services. Across the four crops under study, insurance access is similar. Only in Bandung (Horticulture-Chili & Potato), is there a sizable group of respondents that have been exposed to insurance services. This is most likely due to the fact that the district is closely linked to a variety of government programs, providing social safety net services that mimic insurance. Similarly, focus group respondents reported very little experience in using insurance services. Out of the 70 focus group respondents, only 5-10 percent have ever used insurance. Most of these insurance services were accessed through the government’s insurance scheme although some also accessed private life and education insurance from private companies. The majority of focus group respondents reported accessing insurance services for education and emergency expenses (medical/death in the family).

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Access to Remittance Services: Approximately 67 percent of respondents across all districts reported accessing remittance services. Garut (Horticulture- Chili & Potato) and Indramayu (Rice) respondents reported using remittance services. Field survey results also show that respondents receive remittances (48 percent) more than they send remittances (22 percent). However, a sizable component (36 percent) of respondents, send and receive remittances. These numbers make sense considering that farmers are usually on the receiving end of remittances. The main channels in which farmers receive remittance services are through commercial and MFI banks and through the post office. Field survey results indicated that 81percent of respondents are accessing remittance services through commercial banks and 15percent are accessing remittance services through the post office. Probably most interesting for the purposes of Agri-Fin Mobile, farmers are also using remittances to send money to buyers and agricultural input shops for payment purposes or to other farmer business partners who do not have bank accounts, noting that the service is safe, fast and reliable.

Access to Bill Pay Services: Nearly 93 percent or 373 of 408 respondents have used bill pay services, far higher than any other financial service. Focus group respondents reported that the principle reason they use bill-pay services is to pay for electricity services. Participants noted that the bill pay services they currently access are useful because they are cheaper and easier than if they made the payments on their own. They did not know of any obligations satisfied by bill-pay services other than electricity bills. Of the 388 field survey respondents who reported using bill pay services, 53 percent reported paying the bills at the PLN payment point, 19percent reported using a neighborhood group and 13percent reported using an MFI. Only 5percent of respondents reported using a commercial bank to pay bills. Because farmers are already used to using the PPOB payment point, a electronic based Point of Sales (PoS) device, bill pay services could be a relatively barrier free point of entry for bundling agricultural information.

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5.4 Access to, and use of, Agricultural Information Services The table below provides an overview of how field survey respondents are accessing agricultural information services.

Agriculture Information Services Ranking

Service Received Did not Receive Ranking

Seed Rec. 82% 18% 1

Fertilizer Rec. 78% 22% 2

Market Prices 77% 23% 3

Pest and Disease 75% 25% 4

Input prices 73% 27% 5

Technical Production Knowledge

46% 54% 6

Weather Information 39% 61% 7

The table below provides an overview of the common types of providers for each agricultural information service. Input

Prices Market Prices

Production Information

Pest/Disease Seed Rec Fert Rec Weather Info

Government Extension Worker

20% 9% 53% 42% 28% 26% 26%

Buyer 16% 45% 2% 3% 7% 5% 1%

Ag Input Supplier

43% 16% 7% 24% 36% 36% 1%

Farmers Group 8% 6% 16% 11% 11% 12% 7%

University 0% 0% 0% 0% 0% 0% 0%

NGO 0% 0% 0% 0% 0% 0% 0%

Other Extension Officer

2% 3% 5% 4% 3% 3% 5%

Friends 2% 14% 12% 10% 10% 11% 24%

Relatives 5% 4% 3% 3% 4% 3% 2%

Local Community Leaders

1% 0% 1% 0% 0% 0% 0%

Religious Organizations

1% 0% 1% 0% 0% 0% 0%

Internet 1% 1% 1% 1% 1% 1% 1%

TV 0% 3% 0% 0% 0% 0% 15%

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5.5 Farmer Level Constraints, Financial and Information Services Constraints

The major constraints that farmers face include accessing high quality inputs at a price they can afford, drought and other weather/climate related stresses, and pest and disease management issues. Lack of access to high quality inputs: Survey results found that the majority of farmers do not have access to high quality seeds, fertilizers and pesticides. The access issue is a complicated one. High Price of Inputs: Connected to the general lack of capital for input purchases, the high prices of seeds, fertilizer and pesticides is also a deterrent. The reasons for the high prices are complex, but include high distribution and manufacturing costs and market entry barriers such as competition from government subsidized/free inputs. Drought and climate stresses: Farmers of all crops mentioned drought, climate and weather as major constraints to increasing production and income as well as major sources of risk for their crops. This should not be surprising considering the how much agriculture production depends upon the weather. Pests: Long form survey data identified pests as a major problem for farm productivity. Pests also represent a major risk for farmers. Similar to drought, weather and climate stress, this problem is not surprising. Constraints to selling goods: One of the major constraints reported by farmers in selling their harvest centered on the level of and access to market pricing data. On the one hand, farmers reported that the price they receive for their products is too low. On the other hand, farmers reported that there is a high degree of uncertainty related to the market price for their products. Compounding these difficulties is the high cost of transportation. Spotlight on Lack of Marketing Capacity: Although not identified by farmers as readily in the long form survey data, desk review and focus group discussions across the value chains studied (especially maize and potato) reported constraints in accessing markets. Farmers noted that there is a financial need to obtain a better price for their product because currently, the price offered by the collector is not sufficient to even cover costs, resulting in farmers entering into a perpetual cycle of indebtedness to the collector. Credit Access Constraints: Field survey respondents reported significant problems in obtaining adequate credit. Factors cited by this group included inappropriate repayment schedules, the difficulty of acquiring guarantors and restrictive collateral requirements. Similarly, the majority of focus group respondents reported that obtaining the necessary collateral to be able to borrow from financial institutions was very difficult. Collateral requirements often included car or land title, which is not available to most farmers. Savings Access Constraints: With respect to the 222 of 408 respondents who reported not saving, over 60percent identified the main reason why they did not save was because they did not have sufficient income. The other reasons provided included that they ‘do not want to save’ and ‘do not need to save.’ These responses demonstrate that, at least from the

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perspective of the farmer, the issue is not necessarily the lack of a savings product that met their needs-it is that farmers are not integrating savings into their overall financial management plan. Insurance Access Constraints: Of the respondents who reported not accessing insurance services, approximately 45 percent reported a lack of understanding of insurance products as the primary reason for not accessing insurance services. Another 21 percent noted that they had no need for insurance services, while 19percent reported no interest in insurance services. All of the data confirms that insurance services have very little penetration into the rural farming communities of Indonesia. Remittance Access Constraints: The only constraint reported by field survey respondents was that the branch is located too far from their home. Of those respondents who said they did not use remittance services, nearly 70 percent reported not doing so because they did not believe they needed the services. Some respondents also noted that they did not understand how remittance services worked. Bill Pay Access Constraints: No major constraints were reported for accessing bill paying services by either the focus groups or the field survey respondents. Approximately 6percent of respondents reported that the branch was too far from home. The main reason respondents do not use bill pay services is because they believe they did not need them. Information Service Constraints: Respondents are generally satisfied with the agricultural information services they are receiving. They are the most satisfied with seed recommendations and the least satisfied with weather and production information. Focus group participants reported that the two major constraints related to accessing information services included the irregularity of the services provided and the lack of trust that the information was accurate. One way that farmers mitigate this constraint is by asking successful farmers who are similarly situated to describe the types of practices that have worked for them. The respondents to the field surveys reported a low level of satisfaction with current information services provided by government extension workers and friends/relatives, such as weather, technical production assistance (extension) or market pricing information. On the other hand, when asked from whom they would like to receive additional information services, the majority of respondents noted an interest in accessing from these same providers. Two conclusions can be reached: First, farmers do not know of other providers who might be able to provide them with additional information, and, second, although not satisfied with current services, farmers at least have some level of personal trust with current sources due to familiarity.

5.6 Merchant Constraints and Perception On Farmer Activities

The service that most merchants currently offer to smallholder farmers is input sales (fertilizer, seeds and pesticides). It is also interesting to note a high number of merchants offer working capital to support the purchase of inputs and farm expansion. This is supported by desk research and focus group discussions. Farmers report that the services they usually receive from traders, collectors and agri-input shops include some type of pre-harvest credit. However, weather information, seed recommendations and fertilizer recommendations were not offered by as many merchants, most likely because of the up-

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front and time intensive work involved in providing these services. It is also interesting to note the shear diversity of services offered—every service listed above was provided by at least a handful of merchants. Currently, 72 percent of all services are provided by merchants in person. Only 4percent are provided via SMS. Like farmers themselves, most interactions across the value chain take place in-person where personal trust is paramount in importance. The following table shows what merchants view as the biggest constraints for them vis-à-vis smallholder farmers. The issues with product quality and quantity were also prominent in the literature and during stakeholder meetings that were conducted before the survey.

5.7 Farmer Level Constraints from the perspective of the merchant: Access to Finance: The major constraints for farmers accessing finance according to merchants include collateral requirements, the complicated nature of the loan application process, high interest rates and the inappropriate structuring of the loan payment process considering intermittent and difficult to predict farmer cash flow. Access to Information: Approximately, 55 percent of merchants reported that farmers have adequate access to information services, with 42 percent of merchants reporting that farmers do not have adequate access. Some of the reasons that merchants provided for farmer level constraints in accessing information services include: difficulty in accessing and using technology, distance from the information source, and the basic lack of information available. Indeed, the majority of merchants reported that the most critical information needs for farmers include input and market pricing information, production related information and additional information on how/where to access finance.

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1012141618

Constraints

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5.8 Demand for Information and Financial Services

Financial Service Demand: Credit Focus group discussions revealed a significant demand for improved technology and additional equipment in the form of tractors, processing equipment and improved irrigation infrastructure such as water pumps. A financial service product that could provide these services on credit with good terms would be highly attractive to farmers. Farmers noted that if loan installment payments were matched with the harvest cycle, they would be more appropriate for irregular farmer incomes. They also noted an interest in soft-loans that could be restructured according to production metrics—a kind of profit sharing payment scheme. Focus group participants noted an interest in reducing their dependence on the farmer group leader and collectors for pre-harvest credit so that they could pay a lower price for inputs, and get a better price for their products. Being able to access pre-harvest credit from alternative sources such as a cooperative bank or BPR could help farmers mitigate this dependence on the farm group leader and local collectors. Very few focus group respondents have a bank account, and those that do always go to the bank branch to obtain cash. Farmer’s are interested in using ATMs. The farmers noted that they understand the benefits of ATMs but currently few know how to use the service. Savings Most farmers noted that the reason they saved was not to accumulate capital for investment, but rather to have some cash to deal with emergencies. Focus group respondents also noted that current informal savings practices are more affordable and easier to use than saving through formal financial institutions. The respondents stated, however, that they would be willing to open a savings account if they had cash to cover the fees and expenses related to opening the account. Remittance Focus group participants reported that they mostly use remittance services offered at the post-office or through commercial banks, such as BRI. Field survey results determined that over 75 percent of respondents reported high demand for remittance services from commercial banks. Field survey results supported the above focus group results with nearly all respondents reporting demand for remittance services from commercial banks. Most responses reported that they would like to receive remittance services when they needed them. This could be before harvest to ‘purchase inputs’ or after the harvest. Some noted they would need remittance services when they needed to pay educational fees, when marketing their product, when there are no buyers available or when they need funds to pay off a loan. The female focus group respondents from Wonogiri (Maize) noted that they would like to be able have remittances delivered directly to their home in order to reduce the costs of having to go to the town to access the services. Bill Pay Focus group participants reported that they were not aware of any bill pay services other than those provided by the PLN payment point. Approximately 40 to 60percent of 67

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respondents reported interest in accessing bill pay services through the commercial bank. The only other provider mentioned was the post office, but only 5 of 67 respondents reported demand for accessing bill pay services from the post office. This information continues to support the argument that respondents seem to be interested in accessing financial services from official sources. This most likely demonstrates the overall lack of satisfaction with accessing any financial service from traders and collectors or other informal sources/providers. Insurance Focus group respondents in all districts noted that they would be interested in accessing agricultural insurance that protected participants from loss of harvest, natural disasters or drought. Focus group participants from Indramayu (Rice) and Wonogiri (Maize) reported that they would like to access additional credit-life insurance products. Male respondents in Wonogiri (Maize) also noted a demand for educational insurance. Although only 40 responses were actually collected, field survey results identified that approximately 60 percent of respondents would like to access insurance services from commercial banks and 30 percent of respondents would like to access insurance services from a cooperative bank. Perhaps interestingly, no respondents discussed accessing insurance services from an insurance company.

Information service demand Agri-Fin Mobile research revealed a demand for trusted agricultural information services. This can be seen by the high number of respondents who want services from government extension workers and farmer groups and who wish to access services through face to face interaction. Research did reveal some demand for services via SMS and voice (i.e. mobile). However, this was never more than 20percent of respondents. Generally, surveys revealed that farmers do not have a very high willingness to pay for services. However, there are farmers who are willing to pay and often this can reach nearly 40percent of the sample. Survey respondents would like to receive fertilizer and seed recommendations, weather information and market prices mainly from farmers groups. On the other hand, they would like to access technical production and pest/disease management information from government extension workers. Additionally, they would like to access input price data from the agri-input shops. Generally, this means that more technical information is seen as trustworthy when it comes from an official government or trusted source. Pricing and recommendations for seed and fertilizers is viewed more as a communal activity in which discussion may be able to provide further assistance to the farmer. Although farmers do not currently use the mobile phone to access agriculture advisory services, focus group participants agreed that the mobile phone would be highly effective channel to deliver information to the farmer as it perceived to be cheap and fast. However, farmers noted that the data would have to be accurate and updated.

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6.0 GAPS AND RECOMMENDATIONS At least three major gaps that exist for farmers in accessing appropriate and high quality agricultural information and financial services that will increase farm productivity and cash flow:

1. Lack of access to financial services appropriate for the needs of rural farmers 2. Lack of knowledge concerning the range of buyers available in the value chain, and

price information 3. Lack of access to timely, reliable and personalized information related to farm

management practices

6.1 Recommendations:

1. The provision of credit and financial services by mobile applications

A critical need exists to expand the range of credit services and other financial products currently available to rural farmers in Indonesia. The neglect of this market by the commercial banks and the limitations of cooperatives and BPRs have created a gap that is being partially filled by informal, local lenders to the disadvantage of the rural farmer. The acceptance of bill pay and remittances services demonstrates that farmers recognize the benefits and cost savings that can be achieved by accessing financial services by mobile phone.

2. The provision of information concerning alternative buyers and price information by mobile phone

All survey and interview respondents indicated a need for better information on potential buyers and pricing data to assist them in obtaining the best price for their products. This presents the opportunity to pursue the provision of such information by mobile phones. Mobile applications present the opportunity for buyers outside the immediate geographic location of the farmer, to learn about the volume and quality of produce the farmer may have available for sale, and for the farmer to receive price quotes from a wider range of buyers than is currently available to them. The supply of this type of market data would seem to be particularly suited to be delivered by mobile applications.

3. The provision of timely, accurate and reliable farm management practice information by mobile phone

Farmers noted that one of the main constraints in accessing information from government agricultural extension officers, agri-input suppliers and other providers was the irregular and infrequent nature of the information they were receiving. The information is provided is quite general and for some farmers not all that useful. In the face of these challenges, Agri-Fin mobile has the opportunity to develop a series of farm management best practices products which can educate farmers on the benefits of hybrid seeds and cultivars, fertilizer and pesticide application techniques, input availability and pricing, crop rotation suggestions, post-harvest value added possibilities and weather information. The potential educational possibilities that could be delivered by mobile communications may be the most practical and far reaching mobile application subject are identified by this research project.