DeFi-enabled Credit for Smallholder Farmers
Developed in partnership with Mercy Corps Ventures
In a pilot partnership with Mercy Corps Ventures, Cinch tested the use of DeFi blockchain technology to offer credit products for smallholder farmers in Kenya.
Website: Medium Article
HQ: Nairobi, Kenya
Active Markets: Africa
Problem Addressed
An estimated 500 million households (2.5 billion people) depend on smallholder farming for their current and future livelihoods. Yet $170 billion — or 70% — of the smallholder demand for agricultural and non-agricultural finance goes unmet. Traditional financial institutions are often reluctant to offer credit products to smallholders and agricultural workers as it’s both expensive and unprofitable to lend small amounts of money to groups deemed ‘risky’ with a higher likelihood of defaulting due to limited and low-income streams. Other credit options require guarantors or savings or come with predatory terms.
Project Description
In April 2022, Mercy Corps Ventures launched an employer-based lending pilot in Nanyuki, Kenya with Cinch, Celo, Kotani Pay, and Moola Market. Cinch Markets, a Kenyan-based land management company, currently provides closed-loop payroll advances to their landowners, casual laborers, and full-time employees as a value-added service, but this can be administratively intense which is a bottleneck to scaling.
This pilot set out to test the potential for scale when integrating a decentralized finance (DeFi) solution into Cinch’s offering to enable fast credit at affordable rates and reduce the administrative burden for end borrowers. DeFi allows a scalable architecture that can integrate cleanly with Cinch’s internal systems, reducing the administrative burden. Joining the Cinch ecosystem, either as a land leasor, casual worker, or full-time team member provides a clear path to larger, manageable credit secured against a borrower’s Cinch income.
Users deposited collateral into the Moola DeFi lending protocol. Cinch then delegated deposited collateral to Kotani Pay – a Web3 on/off-ramp service — wallet addresses belonging to employees. The borrowers could then request the amount of money they desired by dialing Kotani Pay’s USSD code (able to borrow up to an equivalent of four months lease payments or four months salary) and received a confirmation message that the money had been deposited in their mobile money wallet. Transactions were facilitated by Kotani Pay converting Celo stablecoins to fiat value and transferring through M-Pesa. Cinch employees then had the option to repay through M-Pesa or for Cinch to garnish wages, paying off outstanding balance.
Business Data
Status: Pilot complete
Constituency Served: smallholder farmers
Networks: Celo
Known Investors: Mercy Corps Ventures
Additional References: Cinch, Celo, Kotani Pay, Moola Market, Celo Foundation Article
Progress to date
The initial pilot has been concluded. The DeFi integration into the product enabled a reduction in interest cost — the product interest rate was 8% APR, less than half of what was available on the market — and also led to a drastic reduction in the administrative burden for the end borrowers (as against applying for a loan from a local bank or cooperative).
Business Model
Revenue is generated versus modest transaction fees; efficiencies gained via using crypto rails allow for lower cost interest rates while still covering overhead.
Traction
At the pilot launch, 68 landowners (with small farms of around four acres each), Cinch employees, and casual laborers were registered to receive a Kotani Pay wallet. Cinch then delegated cUSD collateral to each borrower wallet created using Moola Market.
In surveys, most participants expressed excitement to use these funds for school fees, household expenses, and livelihood needs, and were very happy with the 8% interest rate offered by Cinch — significantly lower than the next best alternatives available to the borrowers in the market. Over 9 in 10 borrowers said they could not find a good alternative to the Cinch income advance.