When farmers’ pain points and challenges boil down to financial and trust issues, neobanks and digital inclusiveness are the sustainable remedies.

The agricultural sector in the Philippines is overdue for a revival, but reforms are needed not only off the farms but also on the premises. 

Despite having a large rural and agrarian society — 47% of the country’s total land area of 30m hectares is agricultural land—the Philippines has seen its agricultural sector contribute only 10% to the overall economy in recent years.

However, this was not always the case. In the 1960s and 1970s, the Philippines was regarded as a major exporter of fruit and coconut oil exports. Issues emerging from low productivity and inefficient agricultural land plots that prevented economies of scale had deterred private sector agricultural investments over the decades, which prevented gains that could have been realized through the application of technology, capabilities-building and better organization.

Tackling an urgent agricultural crisis

This trend needs to be addressed for two key reasons.

    1. One is the impact on the Philippines’ overall economic growth. It was recently reported in the Philippines media that if the country’s agricultural sector were to grow by 2 – 3% in the next five years, its economy could grow by a considerable 8 – 10%: up from the 6 – 7% percent it currently targets. In that report, the country’s finance chief Benjamin Diokno that, “because agriculture has failed all these years, it also has the biggest potential.”
    2. Second, the Philippines needs its agricultural sector to be more productive to reach its food security targets. Like other places in the world, the country faces skyrocketing food inflation due to supply issues and high fuel costs — but with addition exacerbating factors such as its reliance on imported food, and its expanding population.

With these high stakes in mind, it is no wonder that the Asian Development Bank (ADB) has approved a US$500m policy-based loan this year aimed at helping the Philippines government carry out reforms in the agricultural sector. 

The bank’s Principal Natural Resources and Agriculture Economist for South-east Asia, Takeshi Ueda, had noted that “extreme climate events and economic shocks are exacerbating the struggles of the agriculture sector to raise their productivity. This new loan aims to support the Philippines’ efforts to attain food security by building a competitive and inclusive agriculture sector characterized by improved efficiency, enhanced diversity, strengthened climate resilience, and higher farm incomes.”

Daniel Stuart-Smith, Chief Finance and Investment Officer, MatchMove

Going government dole-outs and loans

Clearly, enhancing financing and improving farm incomes are key to boosting the farm sector in the Philippines. 

However, government financing and loans can only go so far. Many of the schemes are tied to productivity gains and capability enhancements — the benefits of which can only impact farmers’ incomes after a few harvest cycles. Yet, farmers need urgent access to financing and liquidity to fend for themselves and make quick fixes to equipment, seeds, fertilizers and processes to achieve immediate productivity gains. 

The farmers who need to repair their tractors to begin ploughing will need cash urgently, with minimal prerequisites or bureaucratic hurdles. Yet, in January this year, the government had passed a new law granting cash assistance to small farmers of rice crops. Farmers of other crops who may still need more access to cash were not included.  

The existing solution has been to provide an abundance of “rural banks” that are specifically meant to support farmers. Despite an abundance of these rural banks, farmers’ access to them is restricted by “unseen” factors:

    • The farmer tends to weigh the opportunity costs of travelling to the bank and navigating administrative and bureaucratic processes, which equates to unproductive working hours in what is a very labor-intensive sector.
    • Moreover, many rural farmers are often deterred from going to the rural banks because they lack education and are concerned about the documentation they must complete and provide.
    • Lastly, based on their previous experience or their stories from their peers, many farmers assume that approaching a traditional bank for credit will be futile.

Digitalization can help

Many of these problems can be addressed through the proper implementation and adoption of digital finance. According to agricultural economist and member of the Philippines’ Monetary Board, V. Bruce J. Tolentino: “Today, rural banks have room to build on the relationships and market familiarity they have established with their rural communities. It is strategically possible for financial technology to enhance these relationships.”

    1. For one, since smartphones have achieved very high penetration rates across the Philippines, bringing banking services to farmers’ fingertips through this ubiquitous gadget will lower the opportunity cost.
    2. Second, the presence of neobanks touting different lending criteria based on more holistic credit assessments (and whose platforms are integrated with national identity databases), means that many of the unbanked and underbanked in farming sector will be able to enjoy reduced collateral requirements and much lower interest rates than they would pay an informal lender.
    3. Third, digital banks and neobanks improve overall financial inclusion in the rural community, including empowering women to be independent. It empowers many members of the Philippines’ rural communities, especially women, to engage in micro-entrepreneurship and small-scale farming. This positive impact has been seen and documented in many parts of the world, including South Asia and Africa. It should see a similar effect in the Philippines.

Through these avenues, the digitalization of agricultural finance can help the private sector improve its support of agricultural reform.

Finally, improving the adoption of digital finance to boost the growth of the country’s agricultural sector will lead to cascading benefits to other pillars of the economy, including the financial sector (particularly fintech) — and these sectors will need to move in tandem to leverage the agricultural boom.