Post on 15-May-2015
transcript
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SCAA Symposium 2009
Show me the Money New Financing Models at Origin
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Presentation Overview
The need for finance by specialty and sustainable coffee producers
The existing barriers to the provision of sufficient finance for the coffee sector – the “financing gap”
Overcoming the financing gap – ways of increasing the availability and flow of lending
A Proposal: Consumer Driven Guarantee Fund
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Brief Introduction to SCI & FAST
Sustainable Commodity Initiative (SCI): Partnership of IISD and UNCTAD Focused on building an enabling infrastructure for
sustainable consumption and production technical assistance; impact assessment; financing and policy
support In 2006 partnered with the Social Venture Network in the
formation of FASTThe Finance Alliance for Sustainable Trade (FAST) Membership based trade association focussing on
improving access to finance for sustainable trade producers by: Reducing transaction costs and risk Improving investment and economies of scale
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Why Financing Matters for Sustainable Coffee
Key Barriers to Market Entry and Continued Growth of Sustainable Coffee Producers:
Poor Market Information Inadequate Physical Infra-structure
Under-developed Management Capacity Low Savings and Capital
Finance is a vital element for overcoming these “natural” market barriers
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Financing Issues and Experiences at Origin:
Views From the Floor
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Financing Needs of SME Coffee Businesses
Pre-financeto cover inputs into production prior to harvest
Trade credit to enable SSMEs (producer organizations) to buy on
credit to produce and sell on international markets
Term loans to enable SMEs (and farmers) to invest in
infrastructural improvements
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Domestic Bank Financing for Agriculture
Country Agricultural Share of GDP (%)
Bank Lending to Agriculture
(%)
Burundi 34.9% 10.7%
Kenya 27.9% 6.4%
Malawi 37.8% 15.2%
PNG 34% 4.5%
Uganda 32.7% 6.8%
Zambia 18.5% 9.3%
Local / Domestic Banks are reluctant to lend to their agricultural sectors
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Causes of Low Levels of Financing to SME Agricultural Producers Historical Issues with lending to the agricultural sector –
high(er) default rates (due to price and weather volatility)
Lack of bank understanding of agricultural enterprises Perception that smaller agricultural enterprises are
higher risk than larger enterprises Perception of higher returns with lower transaction costs
for urban sector lending Perception of poor management in SME agri enterprises Lack of collateral available for banks to secure lending
against Issues with reclaiming lending following defaults, the
inability to seize assets used to secure loans
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Impacts of the Coffee Financing GapImpacts on coffee producers:
restricting infrastructure improvements increasing risky behaviour due to sub-optimal coping
techniques preventing new entrants into sustainable and specialty
sectors Raises costs, reduces quality of production
Specific Impacts on Roasters: May be forced to provide direct financing to secure supply
(threat to own balance sheets) May be forced to buy through importers who can provide
financing Higher risk of default Less choice in supply
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Alternative Sources of Finance for Coffee Producers
Local / Domestic Banks
Local Intermediaries (Coyotes) Microfinance Institutions Multi-national Traders Importers / Roasters Socially Oriented Lenders
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Systemic Challenges Facing Alternative lenders in the Coffee Sector
•Intermediaries:•Higher interest rates•Low $$$ capacity•Only pre and short term financing
Traders:•don’t have lender expertise•have limited capital and are non-neutral•Don’t have proper infrastructure of managing risk and due diligence
•Buyers and Roasters:•Same as traders with added challenge of smaller size and greater distance from producers (higher risk management costs)
•Social lenders:•Rely on social investment small capital base•Additional transaction costs of international lending
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The Scale of the Financing Shortfall in Sustainable Coffees
Estd. Value of Sustainable Coffee Exports:
Estd. Trade Finance Requirement:
Estd. Domestic Bank Financing:
Estd. Socially Oriented Lender Financing:
Estd. Importer / Buyer / Trader Financing:
The (Trade) Financing Gap:
$2.11 billion
$1.26 billion
$400 million
$210 million
$200 million
$450 million
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The Financing Gap is Now Affecting All Global Trade
The current crisis provides us with the opportunity of raising awareness of the harm that the sustainable trade financing
gap is causing to the growth of global sustainable trade.
“The credit crunch adds an additional squeeze [to the global
recessions reduction in global trade], thanks to an estimated shortfall of $100 billion in trade finance, which lubricates 90% of
world trade.” (Economist March 28th)
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Agricultural Lending in Honduras Honduras provides an interesting case study of the agricultural sector
and the reasons behind the lack of financing for the sector by local banks
39.2% of the country’s labour force are employed in agricultural production, yet only 11% of bank lending is made to the agricultural sector
Reluctance to lend rose dramatically following Hurricane Mitch in 1998 and this reluctance has remained
Hurricane Mitch brought excessive rainfall, major flooding and extreme winds, which greatly damaged agricultural production.
Following the hurricane many agricultural enterprises were unable to repay their bank loans and the government implemented a debt forgiveness program, leaving banks with significant levels of non-performing loans on their balance sheets
As a reaction to this high level of agricultural bad debts banks started focussing their lending onto other economic sectors, primarily retail and commercial property and industry
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Honduran Bank Survey
A survey of Honduran banks (2007) identified the following six reasons (in order of prominence) for their reluctance to expand lending into the agricultural sector.
1. Weather Risk / Climate2. Price Risk (Agricultural Price Volatility)3. Politics4. Technical Capacity / Administration5. Plagues and Disease (affecting crops)6. Culture of non-repayment
Source: World Bank CRMG/AHIBA
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Bank Concerns about Agricultural Lending
Source: World Bank CRMG/AHIBA
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Weather Risk Rainfall (and other weather) variability leads to major
differences in production and yields year to year – coffee yields are dependent on rainfall, sunshine and other climate variables
The Malawi Maize Index, 1962-2008
0
20
40
60
80
100
120
140
1962 1967 1972 1977 1982 1987 1992 1997 2002 2007Harvest Year
MM
I Valu
e
Malawi Maize Index, MMI
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Coffee Price Volatility
Coffee Prices (international and local) are highly volatile
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Existing Mechanisms and Tools for Agri-Lending
Coffee Coop /SME
Warehouse
Coffee Transported
WarehouseReceipt Bank
Credit
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Benefits: The coffee in the warehouse provides realizable security to the
banks, increasing their willingness to lend, even to clients that would normally not meet their “due diligence” standards
Provision of lending is related to need – i.e. as volumes of coffee grow lending increases
Disadvantages / Limitations: Potentially higher transaction costs for borrowers (fees and
storage costs) Banks may offer low % lending against stocks – and/or use a
$/lb valuation that is unrealistically low Timing can be problematic with borrowers timing their
transactions based on their lending requirements not on optimal market conditions
Useful for harvest finance and trade finance, not for pre-harvest / pre-season finance
Warehouse Receipt Based Lending
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Contract Based Lending – Socially Oriented Lending
1.order
2.credit
3.delivery
4.payment
5. Payment (minus loan &
interest)
Buyer(1) Places order with Producer Org
Social Lender(2) Provides credit based on order volume and value
Producer(3) Delivers coffee to Buyer
Buyer(4) Pays full value to Social lender
Social Lender(5) Pays order value minus loan amount and interest to Producer Org
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Contract Based Lending – Socially Oriented Lending Benefits
Security is based on the value of the contract and the relationship between producer, buyer and lender
Often amounts of lending are higher per contract due to the sustainable premiums included in the contracts
Repayment is simplified as fully payment arrives with lender first
Disadvantages / Limitations: Occasionally lenders demand contracts have fixed prices – raising
price risk unnecessarily for producers Rates and fees can be relatively high due to high transaction
costs Available funding can be limited due to size / scale of socially
oriented lenders Requires strong relationship between buyers, producers and
lenders – not always possible Lending may not be available for coffee production that is sold
outside of certified schemes, even when the producer is certified
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Existing Mechanisms - Summary The socially oriented lenders exist due to the unwillingness of local
banks to provide sufficient lending to producers Warehouse receipts are a mechanism for providing security for
banks lending to producer organizations that they arguably don’t fully trust as credible clients
Contract based lending is great for producers that have large volumes of sustainable orders but as a result is often focussed on the strongest (not weakest) of sustainable producer groups
Both forms of lending may influence the trading behaviour of producer organisations resulting in sub-optimal trading patterns based on the need for financing rather than the maximization of income
Neither fully addresses the underlying problems that are restricting sufficient domestic credit being accessed by producers
Neither of the existing primary mechanisms provides opportunities for longer-term lending for infrastructural investment
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Overcoming the Financing Gap
Existing Initiatives for addressing the financing gap include:
Limited Term Lending based on Long Term Contracts
Guarantee Services to Encourage Local Banks to Lend long term
Pre-Finance built into Sustainability Programs (fairtrade contract)
Expansion on leasing services in developing countries
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Term Lending based on Long Term Contracts Some socially oriented lenders will provide long term
loans for infrastructural investment Infrastructure funded includes:
Washing stations Warehouses Trucks Investment in converting production methods to meet
sustainability requirements and improve quality Requires long term relationship and contracts with a
buyer, who commits to pay for their coffee purchases via the socially oriented lender
Main issue: limited scale and limited number of loans
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Guarantee Services The Rabobank Sustainable Agricultural Guarantee Fund
(SAGF) provides a guarantee for local banks providing new finance to sustainable coffee producer organizations
The fund charges an annual fee which is met by the producer
The fund provides local banks with protection against default by the borrower
The guarantee level diminishes each year (over 3 to 4 years)
By the end of the fourth year the bank will know the client well and be able to continue lending
The guarantee is based on coffee contracts and hence is suitable for trade finance rather than long term investment
The size of the fund limits the number of loans possible
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Pre-Finance Built into Sustainable Programs The Fairtrade Coffee Standard suggests that fairtrade
buyers provide 60% pre-finance on signing of the contract
This financing has been calculated to be the minimum amount of finance that a coffee cooperative trading business requires to adequately fulfil the orders
The finance can be provided by the importer / buyer or provided via a lending institution
However the requirement is voluntary and not all fairtrade buyers will provide finance
As fairtrade penetration grows and more commercial entities start purchasing fairtrade coffee the provision of pre-finance may reduce
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Overcoming The Financing Gap
What else can be done to assist coffee producer organizations in overcoming the financing gap?
1. Expansion of guarantee services2. Improved domestic bank education in the coffee
industry – better risk assessment3. Improved risk management for coffee producers–
both price and weather4. Improved financial management training of
sustainable coffee producer groups5. More support for pre-financing by the sustainable
coffee programs and their buyers
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The Need to Get Banks Lending Ultimately sufficient financing for coffee producers is
dependent upon local banks, in their countries, providing sufficient lending services
This requires all in the coffee industry to start assisting their producers in improving their attractiveness as clients to the banks, by improving their managerial skills and risk management practices and processes
This requires banks to start better understanding the coffee sector and lending to well-managed coffee producers
This requires the socially oriented lenders to focus more on educating local banks in how to lend successfully to coffee sector clients – moving from talk to action
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Honduran Example Work is being undertaken that directly targets the underlying
causes of insufficient bank lending to agriculture
Barrier to Lending
Activity Being Undertaken
Weather Risk Development of Index Based Weather Insurance
Price Risk Risk Management Training (Banks and Agri SME’s)
Political / Regulatory
Identification of Regulatory Barriers
Agri SME Mngt. Training and Capacity Development
Culture – Non-Repyt.
Reducing Agri Gtee’s and Marketing Campaign
Agri Knowledge Training of Banks in Agri Lending
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Risk Management Training for SME’s WB online training course enables a coffee sector SME to
be: introduced to price risk develop the systems and processes required to identify and
monitor risk learn about the means for controlling risk (financial
instruments and through physical contracts) receive direction in establishing price risk management
programs into their businesses CRMG is currently looking for institutions who would be
interested in rolling out the course to coffee sector SME’s CRMG will be demonstrating the online training course
for interested institutions on Sunday at 10:30 – 11:30 am room A406.
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What FAST is DoingLeading collaborative projects involving coffee supply chain participants that directly improve access to finance, including:
Financial Literacy Training Toolbox for Sustainable Commodity Producer Organizations
Expanding Access to Guarantee Services for Sustainable Producer Organizations
Assisting Socially Oriented Lenders in Raising Additional Capital and Expanding their Lending e.g. Social Impact Assessment
Assisting Producers with Finding both Local and International Lenders through the Online Lending Marketplace
Advocating with Development Agencies and Technical Support Groups to Increase their Focus on Provision of Finance
The coffee financing gap is a global problem that requires collaborative multi-stakeholder solution.
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What Roasters Can Do A few initial suggestions:
Work alongside socially oriented lenders to raise their profile with coffee drinkers who are potential investors
Offer hedging services to SMEs Work with social lenders and FAST directly on producer’s behalf Work with NGOs and development agencies to secure training
and education for their producers so that they can become better
Consider providing financing (or guaranteeing financing) for their smaller producers who are struggling to gain access to necessary funds
Advocate with national agencies and sustainable certification agencies to put more focus into raising the availability of finance for sustainable producer organizations
Any others?
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A suggested practical step…….. Establishment of a new consumer-driven guarantee
fund for smaller sustainable coffee producers
Guarantee fund created through the financial investments of North American and European roasters, consumers and other stakeholders
Roasters invest in and publicize the fund to assist the growth of new sustainable and specialty coffee producer groups
Guarantees used to secure lending for trade finance for new entrants into the sustainable coffee sector
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Consumer Driven Guarantee Fund
Coffee Roasters
Consumers
Investors
FAST Guarantee
Service
SME
Lenders
(including Lending Buyers)
Coffee Buyers /
Importers
$ investment
GteeFee
Gtee
Payment
OrderCoffee
TradeFinance
Outstanding
payment
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Consumer Driven Guarantee Fund
Benefits for Investors (Roasters, Consumers and Others)
Preferential access to apply guarantees preferred producers (based on level of investment)
Guarantee facility helps ensure secure, quality and sustainable supply
Secure investment (but low or no returns)
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Consumer Driven Guarantee Fund
Prerequisites of the Guarantee Fund:
Sufficient interest of the roasters (and consumers) in investing in and promoting the fund
Sufficient willingness to invest in the fund without a financial return – only a social return
Low cost operations to minimize interest charges to SME beneficiaries
Marketable publicity for investors
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For more info on financing options at origin, please visit www.fastinternational.org
Thank You!