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Kenya has been lauded as a pioneer of mobile solutions, which are now being harnessed by the commodity finance market. Shannon Manders reports.

Mobile technology and the low cost of communication has had a massive impact on Kenya in the last few years and the result has been a proliferation of payment systems and an increasing connectivity among markets. Trade finance bankers are now exploring these options as a way of increasing the efficiency of their clients’ commodity supply chain.

Kenya’s software industry has recorded almost double growth annually for the past couple of years, and the country is carving a niche for itself in designing unique mobile solutions.

“Kenya’s big story is information and communications technologies (ICT),” says Paras Shah, partner at Kenya-based law firm Hamilton Harrison & Mathews (HHM), referring specifically to its mobile solutions. “Many international players believe that this country is far more advanced in these products than many developed countries in the world.”

Mobile solutions

The firm is currently involved in the feasibility stage of a Nairobi-based “IT city”, which Shah refers to as the “biggest infrastructure project apart from roads and ports that the country has ever seen”.

The access to communication is a huge driver for this economy, and the penetration rate is growing at a fast pace.”

Financing for the project, which the IFC is rumoured to be advising on, has yet to be finalised as the Kenyan government continues to consider its options.

Shah believes that if the project goes ahead, it will have a definite macro effect for the country and its economy.
The cost of telecommunications in Kenya has dropped significantly in the last year as a result of the installation of various undersea fibre optic cables running to the Kenyan coast in June 2009.

“The access to communication is a huge driver for this economy, and the penetration rate is growing at a fast pace,” says Shah.

In Kenya, mobile telephony has emerged as one of the most important tools in terms of cash management – especially as far as money transfers and mobile banking services is concerned. In 2007, Kenyan mobile network operator Safaricom launched M-PESA, the mobile phone-based money transfer service which has since become a full payment service. It has been cited as a driver for the doubling of bank accounts from 6 million to 12 million in just one year.

Today, all of Kenya’s mobile phone services offer money transfer services.

Statistics show that Sh2.45bn (US$30mn) is transacted daily by means of the country’s mobile money platforms. “What has happened is that the velocity of money has shot up incredibly,” explains Shah at HHM, who notes that some reports indicate that households that make use of M-PESA have increased their wealth by as much as 20%. “The product moves more money in this economy than many banks put together,” he adds.

Moreover, the product has enabled markets to become better connected. Small producers in the rural parts of the country have gained a particular advantage.

Banks and telecoms companies are becoming increasingly keen to partner with one another to reap the benefits that mobile services can offer.

In November 2010, Telkom Kenya teamed up with Equity Bank to launch Iko Pesa, a mobile money product which also allows users to make interbank cash transfers, payment of bills and even loan applications.

And in late January this year, a new mobile money transfer service was launched which enables users to buy or sell stocks on the Nairobi Stock Exchange directly from the mobile platform.

Meanwhile, the World Bank has called for Central Bank regulation of telecommunication companies offering mobile banking services in order to combat the risk of money laundering – one of the key challenges affecting mobile telephony.

Trade applications

With these new innovations come much potential for mobile solutions in the trade finance arena – particularly in the areas of crop financing and distributor financing.

Trade financing experts have predicted that mobile telephony solutions will replace the use of smart cards.”

“Trade financing experts have predicted that mobile telephony solutions will replace the use of smart cards, which are commonly used to support structured financing transactions in other parts of the world,” says Kennedy Shimekha, head, trade finance at Barclays Bank of Kenya in Nairobi.

Shimekha lists Kenya’s dominant tea industry as an area where trade financiers are already exploring possible solutions. “Kenya’s tea producers are supported by hundreds of thousands of farmers. Leading trade financing banks are already exploring ways to finance these farmers via mobile phones. “The advantage of this form of financing is that it not only increases efficiency in the tea producer’s supply chain but also reduces transaction costs for the farmers,” he says.

Kenyan software company Virtual City develops mobility solutions for just such scenarios. Although the company has yet to incorporate mobile money transfers into its solutions, its products have done well to improve distribution systems for small and medium enterprises (SMEs)

In late 2010 the company won an award from Nokia for its ‘Mobile Distributor’ solution – aimed at streamlining the supply chain for distributors and retailers of fast-moving consumer goods in emerging markets.

The company’s supply chain products offer an alternative to traditional paper-based solutions, which can be particularly time-consuming during end-of-day reconciliations.

The solution aims to boost profitability of SMEs by increasing the number of transactions and improving inventory management, the accuracy of records and reporting from the field – all through the use of mobile phones.

The system also allows all produce to be tracked from source to final destination. This element of traceability benefits farmers by allowing them to access the premium markets.

“There are other traceability methods, but these are generally handwritten, while ours are automated,” explains Silas Macharia, Virtual City’s chief commercial officer.

He explains that the system also benefits farmers by reducing the time that it takes for them to be paid. “In the past, once a farmer had delivered his goods, it took 90 days for them to be paid; 60 days to reconcile the farmer’s details and 30 days to process the payment. Our solution reduces the reconciliation to one day, thus enabling the organisation to pay the farmer 31 days from his delivery date.”

Warehousing solutions

In order to cover the whole aspect of the supply chain from the farm to the retail outlet, Virtual City has also turned its attention to warehouse receipt solutions for agricultural produce.

“Traditionally, the local cereal and produce board bought and on-sold farm produce at specified rates, normally leaving farmers with little or no say in the sale of their produce. Our receipt solution has helped the local board create an efficient auction process to trade produce within farmers’ specified rates.

“The solution has also assisted the board to track produce movement in and out of their warehouses, thus giving a process of authorisation for goods leaving any warehouse,” says Macharia. “Some of them are based on our radio frequency ID solutions, tied in with our mobility solutions.”

He adds that the success of these programmes has encouraged banks to lend to distributors and farmers. “The solution yields historical records from which they can support the distributor with credit to purchase more goods and the farmer with funds to purchase farm inputs,” Macharia says.

The Eastern African Grain Council (EAGC) piloted a warehouse receipt programme in Kenya in 2008, following a bumper harvest in the maize crop. Thus far, only Equity Bank has embraced the initiative, issuing loans to farmers with warehouse receipts as collateral.

The product not only helps farmers move out of subsistence farming and into commercial growth, but also increases production and improves household incomes for farmers and the country’s food security, says Esther Muiruri, general manager: marketing agribusiness at Equity Bank.

“This is a graduation of the bank’s initiative for the financing of the production process through to post-harvest management,” explains Muiruri. “The product works through strategic partnerships with other players in the agriculture value chain, including agro-chemical manufacturers and seed companies.”

Although other banks are jumping on this bandwagon, in the past, most have been reluctant to accept warehouse receipts as sufficient collateral for loans. It is thought that an appropriate legal framework that defines the parameters of warehouse receipt financing would encourage banks to develop and adopt collateral management strategies.

This lack of legislation for warehouse receipt financing has hindered both banks and farmers, who feel that there are no clear legal provisions on who bears the risk of loss. GTR