Rewriting Smallholder Finance in Africa - With Watson Vuyo Matsa

Greg: welcome to No Free Lunch, Africa's freshest business and tech podcast with me, your host, Greg Stewart. And we'll be tackling an important topic in the African agri landscape today. we'll be talking about the rewriting of smallholder finance in Africa and how AI is changing this game. And my guest today is Watson Vuyomatza, the co-founder and CEO of IsusFarm.

eSUS Farm is an agri tech, fintech startup building agricultural financial infrastructure for smallholders and smallholder farmers in Africa. Watson's background includes logistics and supply chain management, as well as several years' experience in the banking sector. We handled project. governance, credit systems and audits on SMEs, which I suppose is a good background for what he's doing now.

And Watson also holds a BCOM accounting and economics from Rhodes University. Welcome to No Free Language, Watson. Watson: Thank you very much, Greg. Thank you for having me.

It's a pleasure. It's a pleasure. Thank you for the intro. Very big intro.

It's my first time being announced like that. So lovely. Love it. Greg: Well, it's always good to know who you're talking to.

but let's just talk a bit about East Sus Farm. You you founded this company, And it's building financial rails for agriculture and and Connecting this whole telco insurance, banks, farmers, and and it's got some quite interesting features. Tell us a bit about ESOS Farm. What actually drove you to developing this quite unusual operation or company?

And what actually drove you to do that? Watson: Yeah, no, thank you very much, Greg. So yeah, it's a company that was started seven years ago when we registered it seven years ago. But actually, its roots idea comes from Rhodes University when we were still students, me and my co-founder.

He was doing his his PhD in agriculture economics. has published, I think, one of the most interesting PhDs I've seen, Turning Grass into Profit. And that was quite cool. Changing the Kuru actually from what it is into something like that.

It really healed a lot of the returns of the Kuru and also restoring the grasslands in that area. So very interesting guy. And then myself, do a double major at Rhodes. And I think what we're trying to do at that point in time is our studying accounting and economics and in the EECOS class, the book said that financial flows flow when the information is actually equal, right?

I found that very interesting because I was like, no, man, this can't be true because then that means all the SMEs can get financed, right? So why aren't they not getting financed? And a critical question came that the book was actually far ahead of the realities of Africa, right? In terms of the information isn't flowing as we wish it would flow.

There's lot of asymmetric information across the market and And I thought about, you know, let us do this for SMEs, small businesses, collect their data in some sort of way, manner, to then give them access to the stock exchange or to micro investors who want to invest more pieces of investment there. And I would do that to my co-founder, was like, what's the same problem? I work in agriculture, but I know a lot about large farmers. They've got big systems, they monitor other things, but for small farmers, which about 2.

5 million South Africa, we barely know anything about them. From our own experience, national registries are only around 250,000 smaller farmers currently in South Africa. So you can imagine the 2.5 from what stats essay says in the 250, you only are all about 10 % that we actually know about.

So this is another sort of great improvement to actually allowing these guys to be visible at least at the very least. Greg: Yeah. Watson: But then it went further to say, kind of information do we want to attract, right? To make them have access to financial inclusion.

And then we built our own proprietary sort of management data tool that collects the farmer's behavior, allowing us to understand how the farmer performs on ground, helping him sort of respond to prompts via a feature phone, which is basically back in the day at 3310, which you don't need, know, Wi-Fi, internet. And you can sort of buy, so right now we'll buy airtime using it, right? But we thought, no, there's, think it's still untapped in terms of what it can do for other more complex services like insurance and loans and data gathering.

And by doing that, actually we made a very cool proprietary solution around farm management and behavioral data. Something closer to what Vitality does, right? Understanding how well you jump. to better your financial positioning or your health.

And that's sort of the same sort of mindset we were thinking on. Greg: So just explain something to me. you use a system that essentially captures data from the farmers. Do the farmers volunteer that data?

do they have to sign up to a program? How does that work? How do you recruit the farmers? Talk us through that process.

Watson: Yeah, so we started off, I think, we're some lazy, smart people. So we didn't want to go door to door and, and go talk to every farmer that we see to say on board in the system. So we asked ourselves a critical question for so for this proprietary data collection of farmer behavior, who needs to manage it? Who needs to monitor farmer behavior?

And at the time, there were a lot of programs for the culture development, right? In South Africa, we worked with Agda. I think you know Agda, the owner, the CEO of them, and they have a lot of different programs in South Africa with Potatoes SA and the like. And they wanted a system that can help them understand where their farmers are as a baseline understanding.

one of the... first systems actually which they adopted. So we're able to go into that ecosystem, have their engine and be able to sort of leverage their engine to get into this small settings. And by doing that, the program owners, are the NGOs, were able to get data about their farmers and a, building out their own registries in that regard.

And I think we did that also for SWATINI, the government. Greg: You're right. Watson: And that's how we're doing it. So we're using those sort of institutional plays to go inside there.

And that was quite a good strategy because it meant that they're really, some of them are really curated. There's really relationships. We can put them on better and we can train them in a more focused way while also training our models in terms of how it learns how to ask the right questions, get the right responses on a USSD, reduce the friction of how much questions you ask you, but you're still getting the same outcome. instead of information and then realizing that, okay, farmer-reported outcomes are great, but you need to layer that data with additional data, then bringing in now more climate data inside of them, geofencing the farm, and then allowing us to take more NDVI, EVI data layering on top of each other.

And then being able to partner with local OEMs to build a soil probe. That's a mobile soil probe. So our teams can go to those farms and do soil tests that take the soil nutrients plus also soil carbon and sort of layering all that data into a man away by for the first time, you've got five different signals about one farmer, right? You've got his soil signal, he's got his climate signal, he's got his biological signal, he's got his management signal.

And by doing that, you've got a specific score you can create that hasn't been introduced in the market before. And you can do that scale in calculating exactly which small farmer falls into what category of risk. Greg: So do you also then get income data from the farmers and and things like turnover costs? W how how do you how do you aggregate that kind of data?

Watson: So that's where it becomes interesting, right? Because we are trying to introduce a level of unsecured lending in terms of allowing farmers not to have collateral to be able to, what you call it, to get loans. So we use the four signals that I talked about first to sort of classify what this farmer is. And then after that, from his yields, we then unlock credit based on how well he's done the previous season.

So we then start from that, basically understanding his farming behavior and the farming behavior informs us to say, fine, let's try out for credit line for insurance, for example, then also then focus on how we also do collections because now we're talking about micro entrepreneurs here, right? So they earn money almost every day, right? So they're going to very fast cash flow, but micro crash flows. So you want to tap into that kind of cash flow.

So working with a telcos, so our biggest telco that we work with is MTN. We've got a five-year agreement to rule this out through their ecosystem. And through that, these farmers will have wallets. So Momo is quite big in Africa.

And in these wallets, you're able now to sort of do monthly collections, daily collections, or eight-time-based collections, and allowing us to collect micro repayments. And by doing those micro repayments on an insurance premium of like 800 rand over, let's say, six months, you're able to understand the farmer's repayment behavior. So every day it sort of changes, gives us a signal as we build out actually the true credit score of this firm because they started zero or unscored.

So by the time they go through our system, day by day, they earn a signal that they never had before. So we of build it from scratch in that regard. Greg: And just in terms of s again, going back to I'm I'm circling back a bit here because I'm trying to get a full picture in my head of how this system works. so going going back now to you say you aggregating contacts via agricultural organizations and co ops or whatever else that you you're accessing I assume then there still has to be some sort of communication with the farmer to say, look, we'd like to sign you up on this program.

And then the farmer needs to agree to be part of the program. so how many farmers have you signed up? Watson: We have profiled over 380,000 farmers across three countries. Our biggest country is Uganda.

I think we're on 320. Our second biggest country is Swaziland on like 20,000. Then South Africa, think, goes on the 10,000, 5,000 spectrum. that's sort of the breakdown of the farm populations.

Yeah, it's been quite interesting in that regard. Greg: And then obviously that leads now to you you talk about insurance and so on, but that also leads now to providing loans. is that happening via the MTN money solution or where is that those loans being channeled from? Watson: Yeah, so we operate in a Capiton Lite infrastructure, right?

So we have been quite, Innovative in this way. So we're looking at a blended finance model that we're actually operating on. So we have raised quite a bit of non-deletive grants and we keep on going to raise that because we believe that have grown should act as now subsidies to the insurance and to the loans, right? So that's sort of a channel that we plug in over there.

And then we bring in third party capital providers like the MTNs who have their own loan book through their Bantek division. They also want to expand that. So their own book right now is grown by 103 % year on year. So that's one of their growth levers to expand further.

And they don't have a way to deploy that capital in that segment of small to farmer. by using our milestone based financing mechanism, than the way to sort of deploy some capital inside of there and also crowd in further capital. I think the gap is too big. It's about a 65 billion annual finance shortage.

So I don't think one service provider can quench that thirst. But by allowing yourself to have data about exactly repayment rates, farming rates, you're able then to crowd in more capital, but also using not a lot of grants, can also reduce the cost and sort of provide probably the continent's most cheapest fastest to obtain in all markets use that infrastructure. So it's quite an interesting little way we are going to build it out. Greg: And then those loans that you provide, I assume that then you have a similar payment structure to the insurance thing that you take sort of daily payments or weekly payments, depending on the operation and and and how the cash flows into their money wallet.

Okay, so so then Watson: next Greg: Do you provide because these these farmers are then trading? They're going into small local markets, they're providing the local community. is there a a card payment system attached to this? Talk to us a bit about how that works, how the money gets into the wallet.

a lot of people still using cash. How does that operate, especially in places like Eswatini or or or Uganda? Watson: Yeah, so this is a lovely question. It's basically our strongest point, Our unique advantage or unfair advantage.

So by partnering up with the telcos, the telcos have grown in terms of distribution network. They've got what they call agent networks, Or merchants which are positioned in these local communities, And these merchants earn via commission. So what I mean is that Greg: Mm-hmm. Watson: If I'm in a local community of Ladysmith and I'm a merchant at my store, I can sell you the ability for you to pay for your DSTV account, right?

And each payment that you pay, I get a commission of that, So these agents now have become a node of trust. And because their earnings are also not consistent, the more services you can provide into that service, the more you can stabilize their earnings. Greg: Yes. That Watson: We then teach them and get them licensed to be now insurance salespeople for crop insurance.

And the underwriter is not us. It's in South Africa, our primary underwriter is Santam and secondary Godrisk. And that's also quite interesting and the different products which they provide, but they still want the same solution. They still want their products to reach the last mile, right?

So which is now the agent comes into play to say, okay, fine, hey guys. UMI community is a new product for you and also designed in a manner where it repays even the way that your money actually comes in. Instead of assuming a repayment method, we try and make it more easier and more cheaper to pay it on a more frequent basis than it is on a more monthly, more structured and so on. that agent network is quite strong and they became our sales force in establishing the connection with the farmer, but also teaching the farmer how to also use the system.

Cause now there will be a corresponding of course self-service system on the U.S.S.D.

The farmer needs to also use. So encouraging the agent to sell the insurance, he gets commission, but at same time, the farmer also gets to learn from the agent how the whole U.S.S.

D. works on his side. And we also releasing this on WhatsApp as well. So therefore you can have a nice balance between farmers that do have WhatsApp and some of them don't.

Because we didn't believe in creating a whole new app. We just didn't feel as if you need an app already. You need to embed yourself into existing infrastructure because everyone's looking to serve these people, but everyone's working in silos and not able to leverage exactly how these things can work together. And that's what we look at and I leave it off of.

Greg: Yes. So so the farmer would basically take their goods, sell the goods. If they need to, if they get cash, they can they can deposit the cash via the agent, or if there's a card payment, they can use the agent in terms of a card payment. And then that would get that would reflect in their wallet less a service fee from the a that gets paid to the agent and whatever the service charges they are.

So is that making life a lot better for these farmers? Watson: Great. Yes. Yes, yes, yes.

Correct. I would say yes because number one, if you wanted to get insurance in your area. So I always say this before that in terms of people get the position of the farmer wrong. People thought that the farmer needs to have more information, more advisory.

You're talking to a 50 year old farmer who has been farming for the past 20 years. You know, the one we hear from someone called Watson of his age about trying to tell him how to farm better. What he wants to find out is from where I am right now. How can you make me plant more hectares?

How can you make me buy the right seeds? Where is the financial backing to take me from where I'm at? So I think we've got a different positioning on how we see farmers. We don't see them as people that are incapable.

They've been farming before. And so the incentive now is they want capital to grow. so yes, so the farmer will get the funds in his wallet. And from then onwards, he can start transacting in terms of, number one, getting insurance.

Greg: Yeah. Watson: getting qualified for loans, hiring tractors, and that way, like you sort of keep the system lubricated because that's what he really, really wants. They don't want a information base. He's done that before.

And I think we've seen that's the probably majority of the farmers we see. We call them skeptical buyers or skeptical survivors, right? They don't want a new app which can download their phone and really yields no value. What's valuable to them is that if I do one or two actions, I'm able to qualify for even more financial support.

I think that's where farmers are currently. Greg: So just in wrapping it up, it's a full ecosystem and it's now providing services that they perhaps didn't have available to them, such as insurance cover and such as small loans. What sort of size loans of are are are there and what difference has that made? So has it enabled people to plant more, produce more, What is that trajectory that you see in?

Because it must be some sort of benefit coming to the farmer at the end of the day. Watson: Yeah, so I think the first benefit is that being able to qualify for financial services, the way you're at is quite important, right? So your search costs of being able to find services that relate to you have drastically been reduced because now it's digitally available. And then at the same time, the value of the loans is because the milestone based approach, we also finance within the value chain.

So If you buy insurance from us, the next season we'll finance the insurance. If you say, no, I'm going to buy seeds, the next season we'll then finance seeds and insurance. So each time you participate in the ecosystem, we are building this track record for you. And eventually your whole input possibly can be financed.

So you can go as low as about a thousand rand. And this thousand rand can just cover one hectare for the insurance policy for your specific crop. Greg: Okay. Watson: We're seeing also sort of an interesting development in the forestry space, right?

So you've got big forestry companies and they've got smaller farmer programs and they're suffering from fire, right? Law of fires in those areas, your Cape Town, your KZN, Richard's Bay, law of fires and they're looking for a fire index product that can reach those kinds of people. that is a talk about... thousand rand worth or even more worth of that insurance.

And the issue with forestry, the money comes in after what, seven years, right? So someone needs to sort of create a product that sort of takes into account that they can't be paying upfront the insurance premium on an annual basis, right? You have to finance the policy on an annual basis, then collect monthly or weekly to the also the year. that allows them to still be covered, but still also get what you call it access to a service that you would normally not get.

Greg: Mm. Watson: Those are the kind of solutioning that we're seeing. So I think it really helps them on a cash flow basis, because at the point of sale, liquidity is always a problem. So being able to unlock that liquidity in a more cash flow easy manner, you're able to sort of tap into latent cash that normally banks would also miss, right?

Because they don't do that kind of solutioning. Greg: Yeah. Well, it's absolutely a fascinating development. And I'm sure you've got plans to scale and expand this right throughout Africa.

because it sounds like it's the kind of solution that could be implemented anywhere across the continent. And so where where to next? Ugh, Swatini, South Africa, where where's your next port of call? Watson: Currently we signed a five-year agreement with TM South Mozambique in November, so we are busy getting that office nicely up and running.

It's going to be a bit slower because everything's in Portuguese. So there's a whole new learning curve. But I think Portuguese market differently from a climate perspective, insurance becomes a very big thing in that specific sector. And that's sort of one area that we're going inside.

think that's one of them. I think Ghana is a good one. Greg: What? Watson: And Zambia already, we are registered in Zambia and Malawi.

So, Guru, I think for the first year, you can in South Africa, then maybe next year we do Mozambique and maybe Ghana. Yeah, so it just depends how we can, think, but I'm excited. There's lot of room for growth. And hopefully by getting all this data, we can also be qualifying for additional funding in the international space because as said, The quantum of funding needed is so much that not one funder is probably able to provide you with enough of it.

So you need to sort of have a system that allows external funders to vet your system and vet your results and be able to deploy capital in that regard. Greg: Well, absolutely fascinating, Watson. It's been fantastic chatting to you and wishing you and Isas Farm much success going forward and really keen to hear about future successes coming from your company. Watson, thank you for being on No Free Lunch.

Watson: Thank you very much, Greg. Appreciate it.