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Making Risk-Sharing Models Work with
Farmers, Agribusiness and Financial Institutions
FAO Ford Foundation IFAD
International Conference on Rural Finance Research:
Moving Results into Policies and Practice
Theme 2, Session III: Institutions for Expanding Outreach of Financial Products and Services in Rural Areas
Presentation by Bettina Wittlinger, ACCION InternationalMarch 20, 2007
Presentation Outline
• Research Objective and Methodology
• Risk-sharing Models
• Replication
• Key Achievements and Findings
• Future Research Areas
Research Objective and Methodology
Industry Learning
Multi-organizational Learning
Individual Organizational
Learning
Practitioner-led Research Methodology
Competitive, Thematic Small Grants Program
Implementation + Learning
Process-oriented
Industry-focused
Research Stages
1. Assessing the Market
3. Implementing Solutions
2. Forming Strategic Alliances/Partnerships
4. Developing Exit or Replication Strategies
Research Objective
To develop and pilot-test risk-sharing models between farmers, agribusinesses and financial institutions to increase farmers’ access to markets and financial and non-financial services.
Indian farmers migrating from villages after the monsoon in search of job opportunities.
Risk-Sharing Models
Risk-Sharing Models at a Glance
Model Institutions Actors
Model 1Market Facilitator Partners with
Bank to Develop Credit Franchisee Model
IDE India
Commercial bankEquipment dealers
Model 2Market Facilitator Links Buy-
Back Arrangements as Guarantee for Drip Irrigation
IDE India
BankSugarcane factoryFarmer
Model 3Financial Institution Creates
Risk-Sharing Model with a Trust Fund to Finance Red Pepper
Farmers
Caja Nor Peru
CNPExporterInput suppliersFarmers
Model 4Financial Institution Uses Buyer
Contract as Guarantee for Soybean Farmers
ACCION/El Comercio (Paraguay)
El ComercioStorage providersFarmers
Model 1: Credit Franchisee
Bank Scales-Up Rural Credit Outreach
FARMERS Receive credit from Dealer to purchase drip irrigation
MARKET FACILITATORFacilitator to ICICIFacilitates Dealers in becoming credit franchisee
DEALERS Credit is Leveraged by ICICI
I D E I
EID PARRYSUGARCANE FACTORY
FARMERS
BANKS
DEALERS
Farmers register land
with sugarcane Factory
Dealers supply drip equipment to Farmers on
receipt of money from
Bank
Factory pays farmers after
deducting loan installments due
to banks
Farmers present letter
from Factory to Bank and bank
lends to Farmer through
Dealer.
6
2
5
4
3
1
Model 2: Buy Back Arrangements as Guarantee
Farmer sells sugarcane to Factory
I D E I
Models 1 and 2:Challenges & Lessons learned
• Defining realistic goals• Investing in demonstration plots• Keeping your principles &
negotiating hard
I D E I
• Structuring a win-win scenario• Defining clear roles• Designing the loan product & operations• Negotiating incentive schemes
MFI - CNP
Input suppliers
Buyers/Processors
TRUST FUND
Farmers
Network Manager
Model 3: Risk-Sharing Trust-Fund CAJA NOR PERU
Model 3: Composition of Trust Fund
CAJA NOR PERU
TRUST FUND RISK SHARING PERCENTAGES
Agribusiness supply irrigation
systems $12,075 ; 10%
MFI (Caja Nor Peru) $50,424; 42%
Agribusiness Buyer
(CAMPOSOL) $15,439 ; 13%
Agribusiness supply fertilizers and pesticides $41,299 ; 35%
Programmed: $ 111,086 Real : $ 119,237
Model 3:Challenges & Lessons learned• Developing role of network manager
• Providing sufficient, quality technical assistance
• Selecting the Value Chain
• Dealing with external factors
• Generating commitment from agribusinesses
CAJA NOR PERU
Model 4: Buyer Contracts as Guarantee
BANKS
EL COMERCIO
BANKS
EL COMERCIO
BANKS
EL COMERCIO Personal Savings
Small farmers
Landlords
Cooperatives, Farmer Associations
Medium and large size Farmers
Transport Companies
Small transporters
SILO (SMALL, MEDIUM AND LARGE SIZE)
Medium /Large Scale Exporters
Local Processors (oil & byproducts)
Local Consumers
El ComercioMFI, Finance companies,
Banks
Large scale input suppliers
In kind credit & Training, paid by harvest (contract farming)
Cash credit Credit in Kind
International Market Local Market
Model 4 – Buyer Contracts as Guarantee
Rural Branch – El ComercioSilo
Farmer
Model 4: Results
369 360239
1991
38 102 1251062
7
12
10
0
500
1000
1500
2000
2500
Dec 2003 Dec 2004 Dec 2005 Dec 2006
0
2
4
6
8
10
12
14
Number of small loans Number or medium loans
Number of Strategic Alliances
Portfolio at risk - less than 3%
Replication
Replication – Experience from Model 4
Attributes for potential silos• Extensive experience in the
region• Relationship with farmers and
agribusinesses• Good references from
agribusinesses • Financially viable and stable• Commitment to small farmers
& El Comercio
EL Comercio replicated the soy – silo risk-sharing modelwith tobacco, cotton and sesame
Value Chain Selection• How similar is the value chain to the soy value chain?• Does El Comercio staff members have existing knowledge about
the region?
Attributes for small farmers
• Diversification of income (required in weaker value chains)•Farming experience
Key Achievements and and Findings
Risk-sharing models – Key Achievements
Model Description
Model Achievements
Advantages DisadvantagesLower
Price Risk for
Farmer
Enhance Production
Quality
Guarantee for
Repayment
Lower Cost for
Financial Institutio
n
Model 1: franchisee model
No goalThrough Drip irrigation
No goalGuarantee offered by Franchisee
Potential for scale where drip dealers are located
High investment in training, internal control
Model 2:Buy-back arrangements as guarantee for drip irrigation
-access to markets- agrees on price
Through Drip irrigation
Agreement
Recovery delegated
Potential for scale where buy-back arrangements are present
Existing debts could prevent farmer from accessing credit
Model 3:Risk-sharing model with a trust
-access to markets- agrees on price
Network manager: missing technical expertise
Buyer did not cover losses incurred after pilot
CNP covered losses
Risk-sharing will be helpful to farmers
Develop an entrepreneurial network manager
Model 4:buyer contract as guarantee
-access to markets
- agrees on price
Through Technical assistance by silo
Contract used as guarantee
Transaction costs, recovery delegated
Scale and replication is possible in other value chains.
Also possible to replicate in weaker value chains
Risk-sharing Models: Key Findings
1. Analysis & Mapping of Value chains is critical to form risk-sharing models
2. Developing the profile each potential partner is crucial
3. Gaining commitment from all stakeholders & structuring operational details requires time & investment
4. Dynamic & organized value chains offer more possibilities, but are not
required5. Market facilitators can be
catalysts for linking farmers to formal
financial institutions
6. Pilot-testing should be done
before replication
Areas for Further Research• Developing a value chain
analysis tool for financial institutions
• Validating a decision making matrix for financial institutions and market facilitators
• Measuring of impact on
financial institutions and farmers
• Further examining the role of market facilitators
• Further studying risk-sharing arrangements in weaker value chains
High
VOLUME
Low
Buyers Matrix Model for Farmers
Need of technical assistance
Agreement with producer or farmer to avoid selling
Throw out Find more or
new markets
Low QUALITY High
Thank you
CAJA NOR PERU
I D E I