Funding the farmers: crowdfunding as an option

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By Jochebed B. Gonzales
Senior Researcher

WITH the agriculture sector being perceived as high-risk, finding a source of funding is a tall order for farmers, more so when they have little or no assets to pledge as collateral. This leads them to borrow money from informal lenders at predatory rates, which makes them susceptible to a cycle of poverty that would last generations.

Fortunately, there is an alternative: crowdfunding.

Crowdfunding makes use of online channels to raise fresh capital from willing donors or lenders, who buy into the business pitch or goal presented by the proponent.

In the agriculture sector, there are two known platforms: those from Cropital Enterprises Corp. and FarmOn Agri-Community Corp., who hope to change this notion on agriculture as a risky venture.


“If you look at the perspective of Cropital, the problem we’re really trying to solve is ‘how do we minimize the risks in lending to farmers?’” said Ruel T. Amparo, chief executive officer (CEO) and founder of Cropital.

“It is the problem of big institutions like banks because they perceive [agriculture] as having very high administrative costs with high risks and low returns.”

Cropital serves as a platform that allow registered individual lenders to lend directly to at least one farmer at lower interests compared to informal lenders who usually charge a minimum 20% after harvest season.

“It is a loan,” Mr. Amparo said. “Basically, there is direct relationship between you and the farmer you are lending money to.”

Now on its third year, Cropital has funded around P34 million in loans, according to Mr. Amparo. Based on its website, an investor gets a fixed return of 3.5% in four to six months for short-term funding.

Meanwhile, FarmOn’s approach is providing a “package of technology” to each farmer from planting season to post-harvest after which investors and farmers split profits through a 50-50 sharing.

Presently, FarmOn caters to thousands of farmers of around 20,000 hectares of land in Cagayan Valley, said Teodulo O. Otoman II, CEO and founder of FarmOn. Investors finance a farmer’s inputs which are products provided by FarmOn.

“The number one problem of farmers in Cagayan Valley is [the need for] capital. Second, most of the parents convince their children to study hard and look for other jobs besides farming… We want to show them that there’s money in farming. It’s a business,” said Mr. Otoman.

“We have technologies to make the job easier. It’s more of an awareness program, a movement to show that there’s future in farming.”

Other than the P250 registration fee and P300 notary fee, Mr. Otoman said their platform does not collect fees from investors and farmers.

The online platform is just 10% of FarmOn’s operations, Mr. Otoman said, while the other 90% are activities done “offline” such as providing farmers inputs and farming equipment such as reapers, tractors, rice mills, and post-harvest facilities.

“FarmOn’s profits come from its own products and services — seeds, fertilizers, chemicals, reaper, tractor, trucking, etc.” Mr. Otoman said. “We get our income in the same way as other rice-processing companies and facilities get theirs.”

Rather than a threat, some players in the banking sector see crowdfunding platforms as an alternative to financing the needs of farmers that some banks cannot provide.

“Crowdfunding platforms can fill a credit gap in the sector by bridging farmers and small agri-enterprises to the wider investing and lending public — providing an alternative to bank financing,” said Pia Bernadette Roman-Tayag, managing director and head of Financial Consumer Protection Department and Inclusive Finance Advocacy Office at the Bangko Sentral ng Pilipinas (BSP).

For Bank of the Philippine Islands (BPI) head of corporate credit products Eric Roberto M. Luchangco: “Crowdfunding institutions complement the agricultural financing sector by helping the ‘unbankable’ scale of their business and eventually become ‘bankable.’”

Raymundo C. Roxas, president of Rizal MicroBank — A Thrift Bank of Rizal Commercial Banking Corp., shared the same view, but cited the need for supervision among crowdfunders to prevent abuse.

“Somehow they’re contributing to some things, like answering a gap. Crowdfunding is a good concept because it responds to the financial requirements of sectors who have difficulty in addressing their capital requirements. But I still believe there needs to be someone to provide oversight,” he said.

“The issue is, who are the people behind? Do they have the business skills to really take care of these investments that will pass through their platform? Now there’s direction to regulate them especially if they are bordering or venturing into what formal financial institutions do which is highly regulated.”

BSP’s Ms. Tayag concurred: “Investor protection is a key consideration in crowdfunding. Investors need to be adequately informed of the risks and recourse mechanisms, and to be screened for suitability.”

“As the intermediary, regulating the platform providers for investor protection and anti-money

laundering duties would be a natural course of action, especially as the crowdfunding market significantly expands,” she added.

In November last year, the Securities and Exchange Commission released a draft memorandum circular providing rules and regulations for crowdfunding. The draft rules limit the amount to be raised by an issuer to P10 million. The amount sold to an investor “across all issuers” is also capped at P50,000. A waiver must be signed by the investor should he intend to exceed the P50,000 limit requirement.

Banking institutions are mandated by the Agri-Agra Law to allocate at least 15% of their loanable funds to the agriculture sector and another 10% for agrarian reform beneficiaries (ARBs).

But the banking industry in general often underperforms in this regard.

Based on data from the BSP, total loanable funds generated in the banking sector has reached P4.605 trillion as of June 2018, but loans to the agriculture sector only amounted P584.928 billion, equivalent to 12.7% of the industry’s total loan portfolio versus the 15% requirement.

Lending to the ARBs was far worse as compliance rate in the entire industry was reported at 1% (P45.052 billion) against the 10% (P460.533 billion) required.

“In terms of ‘other agricultural loans,’ Rizal MicroBank is over compliant because it is our market. However, our cost to serving this market is equivalent to 90% of our gross revenue,” Mr. Roxas said as he described hours of trekking by his team to reach their target clients.

Mr. Roxas also cited a study made by the bank wherein only those who own at least two hectares of land were likely able to pay back their borrowings.

“Whether it’s palay or corn, a farmer needs at least two to three hectares of land to generate income or to be able to pay his loans. And that is barring unforeseen events such as typhoons…,” he explained.

“It’s a function of the challenges of serving that kind of market.”

Meanwhile, BPI’s Mr. Luchangco showed more optimism for the agriculture sector than the ARB segment.

“We believe that full compliance with the agri component is possible because a wide scope of sectors in the supply chain, from producers to traders, are qualified…,” he said.

“Full compliance with the agra component continues to be a challenge, as there is a restriction to ARBs. Most ARBs operate informally and would not pass the bank’s credit criteria.”

Mr. Luchangco also noted the “bit of mismatch” between 25% Agri-Agra compliance rate and the agriculture sector’s contribution to economic output which stood at 8.5% last year.

BSP’s Ms. Tayag admitted that “not all banks are equipped” to lend to the agriculture sector which “requires a certain level of expertise and focus.”

“Most of the big banks have not developed — and have not invested in developing — the required capabilities to aggressively pursue the agri-agra sector, given that they have a different strategic positioning and may not find the sector promising in light of the challenges,” she said.

“I can say the banks are concerned with our presence,” said Cropital’s Mr. Amparo. “[But] at the end of the day, we’re aiming for collaborations and partnerships.”

He said Cropital’s focus is “devising a scheme that will allow individual and institutional lenders to lend directly to individual farmers.”

“In the long run, what we see is more of a partnership between banks and Cropital in serving the needs of the farmers,” Mr. Amparo said.

There were also reactions coming particularly from informal lenders and rural banks, explained FarmOn’s Mr. Otoman. “But we are trying explain to them that we are not into competition. What they provide is money. Ours are the needs of the farmers,” he said.

Currently, FarmOn is dealing with individual investors. When asked on the possibility of working with institutions, Mr. Otoman said: “We do not accommodate yet. There are so many farmers who wanted to join the program. There are so many investors who wanted to invest. But we limit it to our capacity of 20,000 hectares for now.”

Rizal MicroBank’s Mr. Roxas acknowledged the disruption brought about by crowdfunding platforms while also citing the importance of adapting to modernization.

“As a banker, [I] do not look at them as direct competitor because their business model is a lot different than ours. In a way, they’re disrupting, but disruption is inevitable when it comes to business.”

Crowdfunding or not, Mr. Roxas said that banks have to adapt in an ever competitive business landscape.

“To bring down the cost of serving this market, it’s high time that banks and financial institutions like us should really look into digital and technological innovations,” he said.

“What we’ve realized, if we are going to do it the traditional way by putting up branches, it will exhaust all our resources. In the plan that we have, we are always on the lookout for Fintech companies whom we can partner with, whom we can use their platforms to reach out our target market without necessarily building a branch.