A crowdlending platform to finance small-scale farmers in Mexico: The case of EticHub
Crowdlending is an alternative financing mechanism by which a large number of retail investors pool together small amounts of funding and channel the resulting sum -in the form of a loan- towards a specific project[1]. Once the project reaps a profit and the borrower repays the loan, what is earned is shared among the retail investors according to their contribution. A crowdlending system usually relies on a dedicated digital platform that hosts a variety of projects that can be funded, for the investors to peruse. Borrowers that seek to raise financing from the investors’ collective can upload their own projects, together with key information such as a detailed description of the business model, core investment risks, their track record of past projects already brought to completion, a projection of potential investment returns, and so forth. The specific socio-environmental impacts that the project is expected to generate also represent a key data element that potential borrowers have an interest in providing, as many investors look for projects that pursue developmental gains in areas that matter to them (e.g. gender empowerment, climate resilience, education), beside an economic return.
When it comes to financing small-scale agriculture, crowdlending can be a powerful instrument to compensate for the scarcity of conventional financing solutions in rural areas of developing countries. With that being said, it must be remarked that agriculture is a sector that carries substantial and varied risks when investing. In this sense, a retail investor is most likely bound to have considerably less skill and experience in accurately evaluating a range of factors that might impair the project’s capacity to meet its goals and reimburse the loan, compared, for example, to an FI that has long-standing expertise in agriculture. Nevertheless, crowdlending platforms that seek to be successful are expected to vet very agricultural projects submitted for financing with a high degree of care, as keeping loan default rates at a minimum is crucial to ensure investors continued buy-in with the model.
An interesting application of the crowdlending approach in the area of agricultural financing is that of Etichub. EticHub is a Fintech company founded in 2017 and based in Spain, which focuses on connecting groups of small-scale coffee producers in Mexico with retail investors across the world. EticHub works through a blockchain-based crowdlending platform, allowing digital investors to peruse a variety of agricultural development projects and decide which to finance, in a rapid and secure manner, and for amounts that range from EUR 20 to a maximum that is set for each project. The average duration of the loan is 20 months, and the average net return is 8%. The investment capital can be transferred through credit/debit card or, if the investor owns it, a specific cryptocurrency: xDAI[2]. EticHub receives a commission as a percentage of the loan provided, together with another commission charged every time that the farmer network it works with sells coffee to buyers in Europe or China. To encourage farmers to join, Etichub employs a network of local “nodes”, i.e. trained agents that visit farming communities and offer the services of the company, explain Etichub’s system and its functioning, support farmers in forming a collective to apply for the loan, validate the information provided by the farmers, and monitor that the loan received is used for the intended purposes.
EticHub models carry considerable benefits for all parties involved: the investors active on the platform gain the opportunity to invest in a collaborative manner on projects characterized by good return prospects and moderate risk, contributing at the same time to the generation of a socio-environmental impact within these smallholder communities. The buyers, from their side, gain access to a stable input market, characterized by a sustainable product of exceptional quality, and whose production is completely traceable. The farmers gain access to investment capital that is critical to finance their businesses, under terms that are considerably more advantageous than what commercial banks could offer. EticHub also generates a credit history for every farmer in its network, based on individual repayment behaviour, which can be leveraged by the farmer to improve to a greater extent his or her loan terms. As of 2022, the platform had successfully financed 300 projects through more than 10 000 investments made on the platform, with a default rate of 1.2%. The system had benefitted 1250 smallholder households, spread across 21 communities.
The case of EticHub is indicative of the great potential that blockchain technology carries as an enabler of digital crowdlending mechanisms in agriculture, as it fosters the transparency, security and convenience of transactions, both for investors as well as farmers. This specific example, furthermore, is only one of the countless possible applications of blockchain to agricultural financing. Nevertheless, it must be underlined that the use of this technology to enable agricultural finance-related innovations remains strictly at an early pilot phase, and only in a handful of developing and emerging contexts. There are numerous factors that would limit the replication of experiences such as that of EticHub on a larger scale, which represent critical barriers that governments would have to tackle in order to enable the promotion of blockchain-based agricultural finance solutions. These barriers include, among others:
- A scarcely developed regulatory framework in the vast majority of developing countries for what concerns the use of blockchain-based technologies;
- Limited ICT infrastructure and lack of standards that would enable the sustainability, growth and legal validity of blockchain-based transactions, which are critical to foster the outreach of innovations based on such technology and achieve a concrete impact on financial inclusion levels (LACChain Alliance, 2019);
- The (still) low number of successful pilot applications whose example could trigger a phenomenon of replication on a larger scale;
- The lack of familiarity with these types of technologies (and its implications) among rural populations;
- The lack of institutional knowledge on these types of technologies among the majority of local banks and other traditional FIs;
- A dearth of reports, analyses and overall data available to both public and private decision-makers related to the impact of this technology on different aspects of inclusion (e.g. financial, socioeconomic), which would facilitate the implementation of policies and initiatives promoting the use of blockchain from a development angle.
[1] Crowdlending can be viewed as a form of debt-based “crowdfunding”, which is a general term that refers to the channelling of financing provided by a large and atomized group of retail investors, in various forms. Other arrangements are also possible, including (but not limited to) equity-based crowdfunding, by which investors purchase a share of the project’s ownership, or donation-based crowdfunding, which is a form of grant provision that donors use to pursue development-related and non-economic returns in areas that matter to me, such as the environment or social justice.
[2] xDAI is a “stablecoin”, a cryptocurrency that aims to keep its value as close as that to the US dollar as possible. Note that if an investor decides to provide funding with a credit card, the USD amount is converted to xDAI in order to be used in the platform. If an investor decides to withdraw money from the platform back to his/her bank account, the amount is again converted to USD.
