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Sources of Funding and Support System for Value Chain Finance: Lessons from KfW ExperiencesJohannesburg, 15.11.2012

Dr. Thomas Duve, Director Africa supra-regional

2Sources of Funding and Support System for Value Chain Finance

Content

1 In brief: KfW and KfW Development Bank

2 Support for Value Chain Finance

3 KfW’s perspective and leading questions

In brief: KfW and KfW Development Bank

4Sources of Funding and Support System for Value Chain Finance

More than 60 years of KfWFinancing with a public mission

• Promotional bank of the Federal Republic of Germany• Founded in 1948 as

Kreditanstalt für Wiederaufbau• Shareholders: 80% Federal Republic,

20% federal states• Headquarters: Frankfurt am Main

Branches: Berlin, Bonn and Cologne• Representative offices: around 70 offices and

representations worldwide• Balance sheet total at end 2011: EUR 494.8 billion• Financing volume 2011: EUR 70.4 billion• Around 4,763 employees (2011)• Best rating: AAA/Aaa/AAA

5Sources of Funding and Support System for Value Chain Finance

KfW BankengruppeA bank with a wide array of functions

Promotion of developing and

transition countries

International business

Promotion construction

of new housing and modernisation

as well as education

Promotion SMEs, business founders,

start-ups

Financing municipal infrastructure projects and global loans

We promote Germany

International project and

export finance

We ensure internationalisation

We promote development

Promotion of environmental and climate protection

Business Area Mittelstandsban

k

Business Area Privatkundenba

nk

Business Area Kommunalbank

Business AreaExport and Project

Finance

Business Area Promotion of

Developing and Transition Countries

Domestic promotion

Financing Volume 2011: 50.9 bn EUR Financing Volume 2011: 13.4 bn EUR

Financing Volume 2011: 4.5 bn EURFinancing Volume 2011: 1.2 bn EUR

KfW Ipex Bank

KfW DEG

KfW Development Bank

6Sources of Funding and Support System for Value Chain Finance

Worldwide presence Over 70 representative offices

0

1000

2000

3000

4000

5000

6000

1948 1950 1960 1970 1980 1990 2000 2010 2011

KfW employees

7Sources of Funding and Support System for Value Chain Finance

Balance sheet total vs commercial banksin EUR billions (2011)

2164

662

495427 396 373

166

0

500

1000

1500

2000

Balance sheet total vs promotional banksin EUR billions (2011)

759

495472

421

274 262

69

0

100

200

300

400

500

600

700

800

KfW BankengruppeA large promotional bank worldwide

8Sources of Funding and Support System for Value Chain Finance

International business: we promote developmentKfW Development Bank

Governments, other governmental and non-governmental institutions in developing and transition countries, and bilateral and multilateral donors

Task

As development bank of the German Federal Government, we provide support and advice for reform processes and investments in developing and transition countries.Objectives

• Climate and environmental protection• Promotion of the financial sector• Sustainably improvement of economic and social conditionsPartners

EUR 4.5 billion

Financing volume 2011

EUR 28.5 billion, 1,884 projects in over 100 countriesPortfolio

9Sources of Funding and Support System for Value Chain Finance

Budget funds (2011: EUR 1,614 million)

Financial Cooperation (FC)

2. FC development loans2.1 Mixed financing2.2. Composite financing2.3. Reduced-interest loansBudget funds: EUR 134 millionKfW funds: EUR 1,579 million

3. FC promotional loans EUR 996 million

KfW funds (2011: EUR 2,575 million)

1. 100% budget funds1.1 Grants: EUR 1,336 million1.2 Loans at IDA conditions:

EUR 133 million1.3 Loans at FC standard

conditions: EUR 12 million

Concessionary Financing

KfW Development BankHow we finance our programs and projects

Mandates 2011: EUR 343 mn

10Sources of Funding and Support System for Value Chain Finance

KfW Development BankBilateral and regional cooperation

› Support for national poverty reduction strategies

› Strengthening and developing democratic institutions at provincial level

Agreements with Countries

› Encouraging regional integration is a focal area of Germany's development cooperation

› Consultations in strategic dialogue with the partner organizations to provide joint support and finance for specific programmes and projects

Funding of regional institutions

11Sources of Funding and Support System for Value Chain Finance

KfW Development BankFinancing volume by region and by sector

Financing volume by regionin EUR millions (2011)

Financing volume by sectorin % (2011)

417

626

172

134

232

895

182

574

79

448

98

66

66

3

88

20

33

397

Asia

SubsaharaAfrica

Europe andCaucasus

Latin America

Middel East /North Africa

Transregional

Budget Funds KfW Funds Mandates

31%

25%

23%

4%

17%

Social infrastructure Financial sectorEconomic infrastructure OtherIndustry and production

501

400

535

812

874

1,411

Financialsector25%

Socialinfrastructure

31%

Economicinfrastructure

23%

12Sources of Funding and Support System for Value Chain Finance

Financial Sector DevelopmentProjects in more than 87 developing and transition countries

Direct investmentIndirect investment*

Direct AND indirect investment*Selected investments by: ProCredit, Access, Finca, Advans, EFSE, Regmifa, MEF, ICF

13Sources of Funding and Support System for Value Chain Finance

Financial Sector Development Our financing products

Elaborate products (in order to mobilize private resources)

• Structured finance, e.g.• Microfinance Investment Funds• Issuance of local bonds• TCX, local currency exchange fund

• Deposit insurance schemes

Basic products•Credit lines•Guarantees•Equity•Technical Assistance

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Support for Value Chain Finance

15Sources of Funding and Support System for Value Chain Finance

Specific Challenges for Financing Agriculture remain high

● Frequently poor quality of value added products,

● low quality of local suppliers due to lack of management capacities

Quality

● High cost to build knowledge on crop cultivation in Africa to identify viable market opportunities

● High costs of necessary tailor-made financing solutions; Standardization of financial products beyond microfinance difficult due to specificities of each crop and substantial differences across Africa

● High costs to reach into rural areas (distances and infrastructure)

● High risks in complex market structures

● High risk exposure to weather hazards and disease

● Lack of collaterals● Manage country/currency risks

Finance

● Frequently no link to public markets

● Lack of on-time delivery based on market demand

● Complexity and product-specific Variety of trade patterns

Value Chains

16Sources of Funding and Support System for Value Chain Finance

Agricultural Financing within the value chainThe different layers

Financing within the Value Chain

Financing through Savings

Family workOther income

Producers ProducerOrganizations

Local Traders+ Processors

ExportersIntern. Traders+ Processors

Input CreditInput Credit / Contract farmingWarehouse Receipt financing

pre-export trade financing

Financing from Financial Institutions

Short/medium termFinance

MicrofinanceMedium term

FinanceMedium/Long term

FinanceEquipment Finance

Export Finance

Equipment Finance

Value-Chain Financing – linking more actors in the Value Chain

17Sources of Funding and Support System for Value Chain Finance

Support Financial Institutions with regard to: • Identify progressive farmers in specific value chains• Learn on farmer’s investment needs to improve value addition (equipment, processing, irrigation)

• mid- and long-term loans and accompanying technical assistance to structure adequate financing products

Financial institutions need to understand product-specific characteristics of value chains

Financial institutions need to know how to build collaborations with small progressive farmers and aggregators in value chains

FIs need to finance small and medium farmers

Over 70% of agricultural output is produced on farms of 1 to 5 ha

Input suppliers, producer organizations, processors and offtakers are engaged in value chains (pre-financing of production) = > potential aggregators

A new generation of younger, more educated agro-entrepreneurs is emerging

Key trends in African countries Implications for agri-finance

Promotion of agriculture / food security through banks A new approach for German Financial Cooperation

18Sources of Funding and Support System for Value Chain Finance

ImplicationsHow to combine the best in agri- and rural finance

Target clients

› Farmers who are part of stable, profitable value chains› Rural households with ag and non-ag incomes› Range of poor and non-poor customers

Multi-products as platform for profitability

› Broad-based savings, insurance and payment products› Loans to progressive farmers with strong market links› Loans and payments to/through agribus, dealers, coops

Distribution channels and key collaborations

› Strategic, limited use of bank branches, leveraging› Leverage strategic collaborations with agribusinesses, agro-

dealers, companies with strong rural distribution networks

Need to know how to

› Deliver cost effective, responsive credit, savings, insurance, payment products

› Do cash flow appraisal of rural households› Build high yield collaborations and distribution channels

19Sources of Funding and Support System for Value Chain Finance

Lessons from leading countries

For each, identify the extent to which these countries, and the key private sector players, have been successful in adding value to the basic commodities, and the strategies deployed.

Provide comparisons in production, productivity, exports and value chains with leading emerging market exporters and where relevant, other African countries.

Derive conclusions for the commodity value chain in the targeted country.

Analyze the value chains, strategies, business models, key players and trends among the global leaders in each commodity group with particular attention to emerging markets.

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KfW’s perspective and leading questions

21Sources of Funding and Support System for Value Chain Finance

KfW‘ PerspectiveCurrent approaches

› A debt investment fund focussing on investments into the agricultural sector for the benefit of the poor. › Target: agricultural farms as well as agricultural businesses along the entire agricultural value chain which will

be financed indirectly (financial institutions) or directly. A dedicated effort is to support contract farming arrangements

› A public-private-partnership working on market-oriented terms

Regional level: Africa Agriculture and Trade Investment Fund (AATIF)

Increase small farmers’ productivity, incomes and capacity to repay Help financial institutions mitigate risks in agri-finance

Provide financing for small farmers and value chain companies

Bilateral level: Nigeria and Uganda

› Interventions still in the planning phase› Focus on agricultural value chains with the potential to reach out to small farmers› Support to the agricultural sector through the cooperation with financial institutions

22Sources of Funding and Support System for Value Chain Finance

Leading Questions for Agrifinance Interventions

Additionality:› Avoid crowding-out of private sector - subsidized lending does not bring

additionality› Address specifically smallholder farmers and SMEs – but not exclusively

Adress Social and Environmental Issues:› Clear line on Land issues: involve people on the ground › Ensure proper guidelines› Monitor compliance to guidelines

Manage Financial risks:› Cooperation with “aggregators” within the value chain › Needed: ability to structure more complicated financing contracts

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Thank you for your attention!

24Sources of Funding and Support System for Value Chain Finance

Africa Regional ProgrammesDr. Thomas DuveDirector

KfW BankengruppePalmengartenstrasse 5–960325 Frankfurt am Main

Fon +49 69 7431-3449Fax +49 69 7431-4723thomas.duve@kfw.de

Contact information

25Sources of Funding and Support System for Value Chain Finance

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