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Sabine Spohn , Asian Development Bank/PSDIPacific Microfinance Week, Nadi, Fiji, 21-25 October 2013

Agricultural Finance

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Agenda

1. What is AgriculturalFinance?

2. Should we do it?

3. Smallholder Loan ProductExample

a. Loan Applicationb. Credit Appraisal

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What is Agricultural finance?

... and should we do it?

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Definitions*

Type Farm Size (hectares) Net Income

Subsistence farmer /Semi-commercialsmallholder

< 2 ha < 30% of skilledworkers salary

Commercialsmallholder

2 20 ha 30 - 80% of skilledworkers salary

Medium sized farm 20 500 ha 80 - 200% of skilledworkers salary

Large farm > 500 ha > 200% of skilledworkers salary

Agribusiness Large farms;

Plantations; Processingplants; Trading house

> 100,000 USD p.a.

* based on IFC and GPFI (2011): Scaling Up Access to Finance for Agricultural SMEs, Policy Review and Recommendations

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Microfinance

Agri Finance

RuralFinanc

e

RURAL

URBAN

MICRO-LOAN

LARGELOAN

Smallholder

Finance

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MFIs starting agricultural finance should first targetcommercial smallholders

Family-owned and -managed farms Farm location usually in clusters (more or less remote) Large households, labor-intensive production Traditional values, low education levels, lack of modern

management and financial skills No written records, private and business affairs are not separated Other income sources (on-farm and off-farm) with seasonal

variations

Main Challenges for Lender:

Risk, Cost, Seasonality

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Opportunities & Threats in Smallholder Finance

Opportunities

Virgin market

Diversification of loan portfolio

Good for MFIs reputation

Availability of external support

Threats

Government interference

High up-front and operationalexpenses

High risk

Liquidity problems (seasonal andterm loans)

Lack of infrastructure

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Five pathways to smallholder finance

1. Replicate and scale existing financing models (esp., shortterm loans to producer groups)

2. New financial products (e.g., term loans, leasing)

3. Finance out-grower schemes of multinational buyers incaptive value chains

4. Finance through alternate points of aggregation in the valuechain, such as warehouses, procurement networks, andinput providers

5. Direct finance (microfinance model; mobile banking)

Source: Catalyzing Smallholder Agricultural Finance (2012, Dalberg Global Development Advisors)

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Lending approach must match the value chain

Simple VC (local markets; staples) Complex VC (export markets; high value crops)

Retailers

Middlemen(traders)

Smallholders

Retailers

Wholesaletraders

Processors

Collectors

Smallholders(contract farmers)

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Source: Vinay Chand Associates; Data for South East Asia, 2003

High value crops can be very profitable

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Smallholder loanproduct example

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Finance Options

Individual working capital loans tosmallholders for fertilizer, pesticides, labor Forming smallholder groups or associations

to channel working capital loans

Contract farming model: loan repayment isdeducted from the buyers payments tofarmer

Small investment loans for selected farmers

who also buy and dry beans

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Product Features

Cluster Approach (reduces operational costs)

Individual Working Capital Loan for fertilizers,pesticidies or hired labor

No collateral required

Max. loan size: 3,000 USD for 9 months Interest rate: 20% p.a. (on actual loan balance)

Monthly repayment schedule adjusted toseasonal income fluctuations

First loan: decision within 5 working days Automatic follow-up loans for good clients

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Cluster Approach

BRANCH

CLUSTER 3(10 farmers)

CLUSTER 1(20 farmers)

CLUSTER 2(30 farmers)

CLUSTER 4(15 farmers)

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Cluster Selection Criteria

Lower Risk Good soils Protected locations (cyclones, floods, droughts) Access to irrigation Normal or lower pest and disease pressure

Local know how and/or advisory services Lower Cost

Number of interested farmers (competition?) Distance from the branch office Quality of roads

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Credit Cycle Management for Individual Loans

Application

Appraisal

Decision

Administration

Monitoring

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Application Checklist (first loan)

Farm is located in a cluster Minimum 7 years of cocoa farming experience

Cocoa trees in full production

Other income sources Good reputation in the local community and

with cocoa bean buyers

Positive financial track record (savings, loanrepayments)

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Simplified Credit Appraisal

Site Inspections(farm and home)

Interviews with farmer, family,neighbors, village headman,cocoa bean buyers

Cash Flow based on Tech-Card

Individual loan repaymentschedule

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Cash Flow of Client: 2000 cocoa trees

J F M A M J J A S O N D

Netcoco

1000 1200 1200 600 (300) (300) (300) (700) (300) 400 600 600

Add.inc.

50 50 50 50 100 100 50 50 50 50 50 50

HHexp.

(300) (300) (300) (300) (300) (300) (300) (300) (300) (300) (300) (500)

NetCF

750 950 950 350 (500) (500) (550) (950) (550) 150 350 150

Accu 750 1700 2650 3000 2500 2000 1450 500 (50) 100 450 600

Loan 500 (120) (120) (120) (120) (120)

Accu 750 1700 2650 3000 2500 2000 1950 880 210 240 470 500

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Excursion: collateral

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Using Movable Collateral

Works in all industries and with many types ofmovable property: Agriculture: livestock/crops as collateral for

seeds or a tractor loan

Manufacturing: tools , existing equipment ascollateral for new equipment purchases Grocery store: the inventory on the shelves as

collateral for a loan Wholesalers: accounts receivable as collateral

for a loan

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ADBs Support to lenders

Provide an easier way to use movableproperty as collateral for loans

How does the reform process work?

Legislative changes that provide for an efficientframework

Implementation of on-line collateral registry toassist lenders in evaluating borrowers

100% predictable results in the case of default

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Sample Client Registry Page: Tonga

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How the reform really works

Business case example: restaurant expansion

Owner needs a loan, visits lender

Lender willing give $$$, but demands collateral

RestaurantNo land ownership

Does own kitchen equipment, chairs, etc.

Restaurant owner can pledge movable assets as collateraland keep those assets working while paying off loan

Lender registers security interest (collateral) online

If owner fails to pay loan, lender can seize the collateral andsell it to pay off the loan

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Thank you....

Questions?

More information contact :

Sabine Spohn , Pacific Liaison and Coordination Office www.adb.org/plco sspohn@adb.org