Page 229 - The Digital Financial Services (DFS) Ecosystem

ITU-T Focus Group Digital Financial Services
Ecosystem

Executive Summary

Agriculture is critical to alleviating poverty in developing countries. Developing countries can derive more than
30 per cent of their GDP from agriculture, compared to less than two per cent within a developed country, such
as the US. A common approach for alleviating poverty is through commercial value chains. In this framework,
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policy makers and stakeholders examine the spectrum of ‘farm to fork’ activities and identify tactics that will
benefit smallholding farmers (SHFs). These tactics include incorporating SHFs into existing value chains or
improving value chain performance through financing, better training, better fertilizer, and so on. Commercial
value chains differ by crop but often have similar activities such as input supply or warehousing. At one end of
the commercial spectrum are ‘loose’ value chains in which growers sell excess crops primarily in local markets.
At the other end are ‘tight’ value chains typically focused on exports and cash crops (e.g., coffee, tea, sugar).

eMoney is a good fit for tight value chains because:

• A single entity typically pays the SHFs.
• eMoney provides an audit trail and reduces cash handling costs and leakage.
• Payment flows are often complex: Payments can leapfrog or be split between value chain participants.
eMoney with an accompanying management system can automate this process and provide an audit
trail.

• Additionally, eMoney facilitates credit, which is a critical component of agriculture due to uneven cash
flows.

eMoney in commercial value chains is clearly beneficial, but will it improve digital liquidity for SHFs? For
meaningful improvement to occur, eMoney within value chains would need to reach critical mass and continue
circulating in digital form. Otherwise, digital liquidity would be small and temporary. For a number of years
into the future, critical mass and electronic circulation seem unlikely. Several issues attenuate the potential:

• Limited reach – only seven per cent of SHFs participate in tight value chains.
• Agriculture is only part of SHFs’ lives – for example, diaries from a Pakistani farming community revealed
only 39 per cent of all income and expenses were from agriculture. Even if agriculture cash flows were
completely electronic, the majority of the cash flow would remain in paper form.

• Digital liquidity requires digital lending – given the SHFs uneven cash flows, credit is essential. Unless
loans are disbursed electronically, the proceeds will likely circulate in cash as there is little incentive to
convert the disbursement to eMoney.
• Cashing out is better – even if SHFs are paid electronically, cashing out is preferred since they avoid
transaction fees and other issues such as interoperability and connectivity.
eMoney within value chains, although more efficient, is clearly not a silver bullet for creating digital liquidity.
Besides having limited reach, value chains by themselves do not remove the incentive to cash-out to any
meaningful degree.

Given these limitations, is there a role for tight value chains in creating digital liquidity? Is eMoney somehow
less important to tight value chains?
One needs to look at payment-enabling these tight value chains as just one part of a holistic approach to
digital liquidity – an approach that considers the lifecycle of money and introduces solutions that encourage
a digital version(s). A holistic approach gives SHFs and, more broadly, the bottom of the pyramid (BoP) ample
opportunity to receive, retain, and pay with eMoney. Within this construct, crop buyers, banks, governments,
and urban relatives would inject eMoney into the local BoP economy because it is faster and cheaper than
cash. The BoP would retain this money in electronic form until needed because doing so helps them access
credit lines, manage household petty cash, and gain other benefits. When the BoP needs to make a payment,

1 World Bank’s World Development Indicators. Agriculture value-add as a per cent of GDP in 2013. Low-income countries (less
than $1,045 GNI per capita) were at 32.4 per cent and the United States was at 1.4 per cent.

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