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LINKING RURAL FARMERS TO FINANCIAL SERVICE IN
AGRICULTURAL VALUE CHAINS
CMA/AOC - Conférence des Ministres de l'Agriculture de l'Afrique de l'Ouest et du CentreLead institution for CAADP-Pilar IITel: (221) 33 869 11 90www.cmaoc.org
ABRAHAM SARFOCONFERENCE OF MINISTERS OF AGRICULTURE OF WEST
AND CENTRAL AFRICACAADP PILLAR II LEAD INSTITUTION
Strategic Area C: Value Chain Development and access to Financial services
OUTLINE
INTRODUCTION AND CONCEPT NOTES
CHALLENGES IN AGRICULTURAL FINANCING
TRENDS AND INNOVATIONS IN RURAL AGRICULTURAL FINANCING
TOOLS IN MANAGING RURAL FINANCING
TOOLS IN MANAGING RISK IN AGRICULTURAL FINANCING
LESSONS LEARNT AND THE WAY FORWARD
Africa Agriculture Can Only Work if Supported by ……
• MARKET STRUCTURE• Strong Web of Actors
that facilitate efficient links between farmer supply and consumer demands
• TOOLS• Interventions to fix
Specific bottlenecks in a region, crop or stage along the value chain
• INFRASTRUCTURE• Roads, railways, ports,
communications links that facilitate the movement of people, goods services and ideas
• POLICY• Frameworks and
incentives that protect people, attract investments and facilitate development
Policy Infrastructure
Market StructureTools
Sustainable Virtuous
Cycle
The Problem of Agricultural Financing
• Over 60% percent of Africa’s population lives in rural areas where they are engaged in agriculture, both as a source of food and income.
• In Africa, as in other developing markets, there have been significant and sound developments in functional financial markets, as well as in the uptake of latest lending and other bank-related technologies.
• These improvements are, however, not vested in the agricultural sector to any large extent, even though investment in this sector is seen as the main engine of economic and social growth, especially in the Sub-Saharan African countries, for the years to come.
04/09/2023 04:48 PM 5
Major Risks Associated With Agric Microfinance
Risk Factors EffectsWeather Adverse Weather, pests
and diseasesLow yields and loss of income
Price Market Forces (demand and Supply)
Lower prices and income
Financial Higher than anticipated input costs.Length of production cycle linked to inflation risk.High cost of creditCash flow problems.
Uncertain cash flow
Regulatory Regulatory changes affect cost of production
Changes in inputs costs
Is Risk the Only Problem?
• Because of long-term neglect, the agricultural sector needs large investments by both the farmers and, through the provision of financing for such investments, by financial institutions in order to boost production.
• However, increased investment also means increased exposure to risks and, in many cases, this translates into exposure to new and little known-about risks.
• Improved and new risk management techniques and instruments must, therefore, accompany investments, both at the financial institutions and farmer levels, as well as along the whole value chain. HOWEVER RISK CAN BE REDUCED IF OTHER FACTORS ARE IMPROVED
Primaryproducers Traders
ProcessorsIndustry
Bridging the period between - purchase of inputs and sale of harvest - delivery of produce and payment of buyers
Bridging the period between
- purchase (in bulk) and retail(store value)- Export of product and payment of overseas buyers
Market
Short termup to 12 months
Bridging the period between - Purchase of intermediate products and sale of product- delivery of products and payment of buyers Long term
1-7 yearsInvestment into - tree plantation - greenhouses- storage space- equipment, machinery
Investment into - buildings- equipment, machinery
Investment into - buildings- vehicles
Financing needs along the value chain
Typical financial needs of VC operators
1
PrimaryProducers MarketIndustry Traders
Financing value chain development
SupportServiceProviders
Physical & Financial Capital
Institutional &Human Capital
Investment into…
LT capital (equipment)ST working capital
Support service capacity (LT plus ST)
Rural infrastructure(from NRM to communications)
Forming Coop´sVocational training
Association buildingStaff training
Admin. Proceduresand organization Government
(national or regional)
1
PrimaryProducers MarketIndustry Traders
Financing value chain development
SupportServiceProviders
…physical & Financial Capital
…institutional &Human Capital
LT capital (equipment)ST working capital
Vocational trainingForming Coop´s
Support service capacity (LT plus ST)
Association buildingStaff training
Government(national or regional)
Rural infrastructure(from NRM to communications)
Admin. Proceduresand organization
Public Funds Public Funds
Private Fundsprimarily !
Public/private Co-Financing
The role of public funds to pay for…
Public/private Co-Financing
Public/private Co-Financing
1
New Definition of Agriculture Financing
agriculture inputs
crop and livestockproducts
agriculture production activity harvest time
consumer
processing, storage, packaging marketing
activities etc.
AGRICULTURE VALUE CHAIN – FROM FARM TO CONSUMER
FINANCIALREQUIREMENTS
FINANCIALREQUIREMENTS
OLD DEFINITION NEW DEFINITIONFARM BUSINESS AGRIBUSINESS
Current
Potential
Medium/Large- Scale Exporters
Producer Association
Wholesalers
International Market
EXAMPLE OF AGRICULTURAL VALUE CHAIN AND FINANCIAL INSTITUTION ANALYSIS
Smallholder Producers
Input Suppliers(seeds, pesticides, fertilizers)
Retailers /Local Market
Processors
Commercial Banks
Commercial Banks
Commercial Banks
MFIs, family & friends, personal
savings
Beehivemaker
Honey, Kenya: Integrated arrangement (+factoring)
HoneyProduction
Cleaningpackaging
Primaryprocessing
Retail Bulking Secondaryprocessing
Honeymarket
Beekeeper,producer
Producergroup
Collectioncentre
Traders ProcessorTARDA Retailer
K-RepBank
K-Rep Fedha(business) Services
N=10 N=50
FinServicesAssociation(Credit ooperative)
Factoring
RefinancingLT Loan
Source: adapted fromKIT: „Value chain finance“, 2010
Problems financing VCs, especially farmers
High risk and cost of lending to small-scale farmers
Weak value chain structure and governance
• High transaction costs due to small scale of farms • Little to no hard collateral of smallholders• Many farmers don´t have a credit history and no bank accounts. • The inherent risk of agriculture is high (crop failure, post-harvest loss)• Agricultural markets suffer from price volatility and high price risk.• Smallholders may see borrowing as a risk to their livelihoods.• Informal moneylenders compete with the formal system. • Rural and agricultural credit has a bad reputation due to past experience
with low payback rates and political interference
• Weak organization of business linkages entails high contract risk• Fragmentation of operations, lacking business leadership • Demand / market risk of final products
Financial institutions lack VC knowledge• Financial institutions lack knowledge of agriculture and food markets• Financial institutions have little to no experience in VC finance.• The offer of agriculture-specific financial products is limited.
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Challenges faced by Financial Institutions agricultural finance service provision
Low volumes of transaction, due to limited pieces of land/agricultural projects. Income too meager from such low value transactions.
Spatial dispersion of farming enterprises rendering them very costly to administer through follow-ups and projects monitoring.
Long gestation periods of most agricultural projects Sugarcane, Tea, Coffee etc. This causes a challenge especially when resources are scarce as huge capital outlays are tied up. Subsequent shortages push up the cost of credit due to a high unmet demand
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Challenges faced by Financial Institutions agricultural finance service
provision Seasonality of agricultural credit demand dictated by
seasonal nature of enterprises. The flip side is a strain on farmers to undertake their financial obligations during off seasons
Due to the high seasonal nature of rain fed agriculture, huge investments are incurred during planting seasons and relatively low during other times of the year generating a pattern of high credit demand during planting seasons. This demand cannot be adequately fulfilled at this time
High covariant risks (vagaries of weather, pests, fluctuating and often unpredictable produce prices and markets etc).
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Innovations In Rural Finance
Financial Services Provision
Innovations
Micro- financial services
Value-chain financing
Futures markets
Using moveable goods as collateral
New technologies and transfers
of money
17
Definition Of Microfinance Institutions (Mfis)• An MFI is an organization that provides financial services to
low-income individuals who have no access or limited access to the formal financial sector (mainly commercial banks)
• MFIs refer to a wide variety of organizations, differing in– size (number of members or groups) – level of structuration – legal status
• Depending on the country, these institutions may be regulated or unregulated, and supervised or unsupervised by the financial authorities or other entities– some operators who may in practice be significant players in
microfinance are sometimes only allowed to offer credit Financial Services Provision
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How To Support MFI Development In Rural Areas
• Financial support– Over time, the funding needs of MFIs change. – While subsidies or participation of donors in guarantee funds
might be needed to establish the institutions, the mature structure can prove to be profitable, attracting new financing sources: equity capital from private investors, commercial loans from formal financial institutions, investment funds and dedicated investments fund, and even flotation.
• Staff training and information• Potential client training and information• Support partnerships
– financial services delivery can piggyback on existing local networks – support greater use of technology and support relevant
partnerships in this area
Financial Services Provision
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Definition Of Value Chain Financing• Relationships between actors in the value chain
may facilitate financial flows– directly (credit from one value-chain actor to another)
or – indirectly (by making the potential client more
attractive to ‘traditional’ financial institutions)
• In general, the majority of agricultural finance in developing countries is provided either from savings or from within the value chain (i.e. direct value-chain finance), with no direct involvement of financial institutions
Financial Services Provision
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Forms Of Direct Value Chain Financing
• Trader credit involves short-term, seasonal loans (for working capital)between producers and either input suppliers or
produce buyersis usually provided in cash or in kind for suppliers
(inputs retailers, shopkeepers, etc.)
• Contract farming or out-grower schemes are relationships in which buyers lend funds (either in
kind or in cash) to producers as part of a purchasing agreement
Financial Services Provision
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What Is Indirect Value Chain Finance?• It is a link that is established between a financial institution
and value-chain operators thanks to the intermediation of a value-chain partner– this may be the case in contract farming
• bank lends to a producer based on that producer’s relationship with a well-established buyer
– warehouse receipts• bank lends to a producer based on the fact that a given quantity of
produce (detailed on the receipt) is stored in a certified warehouse – when a buyer (or supplier) with a sufficiently strong reputation is
willing to stand surety for its producers, even small producers become more attractive clients to financial institutions
– futures contracts, or long-term relationships with a strong partner can be recognized and act as a guarantee
Financial Services Provision
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Advantages Of Value-Chain Financing• It builds on existing relationships and networks
– it overcomes information gaps – it needs no additional infrastructure
• It would offer reduced non-repayment rates – due to the familiarity and trust between actors– it has easy ‘embedded’ repayment mechanisms (good
for cash-strapped farmers) • It could provide technical assistance to producers,
thus increasing production revenue and improving the profitability of the credit for the producer
Financial Services Provision
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Commodity Exchange Market• Futures contract, in finance, refers to a standardized contract
to buy or sell a specified commodity of standardized quality at a certain date in the future, at a market-determined price (the futures price).
• The price stipulated by the agreement that should be paid in the future upon delivery of the goods, reflects the present expectation of future market conditions.
• Both parties of a futures contract must fulfill the contract on the settlement date. To exit the commitment prior to the settlement date, the holder of a futures contract has to offset their position by either selling or buying it back (assuming any financial gain or loss this may represent).
Financial Services Provision
24
Future Markets: In Practice• Futures contracts are a common practice, and can
take many formsThey can take the simple form of an oral or written
agreement between the buyer and the seller, with short- or longer-term engagements (such as in contract farming in the latter case)
However, in some countries, the futures market has developed towards a real futures commodity exchange – this is a virtual marketplace
In Brazil, most commodities, from cattle to grain are traded on open online futures markets
Financial Services Provision
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How To Support Futures Market Development• To develop, the futures market needs the existence of a well-functionning
bourse for commodities, including in particular– Norms and grades– Certification bodies– Warehouse network
• The exchange's clearinghouse acts as counterparty on all contracts, sets margin requirements, and crucially also provides a mechanism for settlement
• The staff of the exchange and main operators within the targeted sectors should be trained in futures exchanges and the specificities and market fluctuations of the products to be traded
• A reliable market information system needs to be created
But not all operators (in particular small-scale farmers) can trade in such a virtual marketplace. This would rather benefit larger-scale farmers or intermediaries. However, its advantage can trickle down the value chains.
Financial Services Provision
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Moveable Goods As Collateral
Banks used to take as collateral only large fixed properties like land, buildings or large equipment
In many African countries, land titling is not well developed and lack of documentation or the unclear status of the property prevents its use as collateral for most of farmers
Alternative goods and documents are now progressively used as a guarantee
• the harvest can be used as collateral, e.g. with warehouse receipts / warrantage
• the purchased equipment, e.g. with equipment leasing
Financial Services Provision
Warehouse receipts in practice
Financial Services Provision 27
Farmer
Warehouse
Client
Bank
orderreceipt
harvest
warehouse receipt
warehouse receipt
credit
payment
repayment
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Advantages Of Warehouse Receipts
This system will enable farmers to avoid rushing to sell their produce in accordance with their need for cash, but rather with prevailing favorable market conditions• this may be very useful, particularly in the cross-financing of
successive crops or with animal production• farmers will be able to keep a higher share of the added value of
downstream activities
In addition, by bulking the products in a central modern storage facility, this system could contribute to
• structuring the market and improving retained price for farmers• improving the quality of the products
Financial Services Provision
29
Supporting Warrantage Development
Develop a network of modern warehouses across the country
Support the establishment of clear norms and grades
Train and supervise managers for the development of a reliable warehouse receipt system• Training In Norms And Grades, And Administrative Issues• Supervise And Build A Certification System In Order To Build Trust In All
Stakeholders
Inform and involve financial institutions in the scheme
Financial Services Provision
30
Equipment Leasing: Definition• A lease is a contractual arrangement between two parties,
where the provider (the lessor) owns the asset and lets the client (the lessee) use the equipment asset in exchange for regular payments.
• In a finance lease, the lease period typically extends for most or all of the equipment’s useful life, and the lessor recovers the equipment costs plus interest through a regular stream of lease payments. The lessee bears all the costs of maintenance, damage and insurance and the lease usually cannot be canceled. Furthermore, at the end of the lease, the lessee usually has the option to purchase the asset for a nominal price.
Financial Services Provision
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Equipment Leasing In Practice
Financial Services Provision
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How To Support The Development Of Equipment Leasing
• The legal and institutional frameworks should be supportive of such arrangements by– adopting clear definitions of leasing concepts; and the rights and
responsibilities of lessor and lessee, in particular regarding the priority of lessor’s claims over leased assets; and clear ground rules for repossession of leased assets.
• Support the creation of links between leasing companies (often urban based) and the local network of rural shops that could provide maintenance, monitoring and other support services
• Support links between equipment providers and financial institutions to develop such offers in rural areas
Financial Services Provision
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Definition Of Mobile (And Internet) Banking • Mobile banking refers to the ability to perform balance
checks, account transactions, payments, etc. via a mobile device such as a mobile phone. Mobile banking today is most often performed via SMS.
• The advent of the Internet has already revolutionized the financial services industry with the emergence of new players, thanks to the considerably reduced fixed costs.
• The mobile banking development is in turn entering a new era with a new generation of operators and in particular mobile operators.
• Mobile phones are used to do a wide range of operations such as payments and money transfers, savings, and withdrawals.
Financial Services Provision
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Functioning of mobile banking
Financial Services Provision
Payment order sent by mobile holder
Payment order processed within central database and account status checked
Confirmation of the transfer received by the local agent
Money transferred from one account to another
Cash or goods are given
Commercial transaction
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Advantages Of Mobile Banking• Mobile banking has proved useful in many parts of the world with little or
no infrastructure development, especially in remote and rural areas – this aspect of mobile commerce is also very popular in countries where most of the population is unbanked
– thus in turn it should support microfinance development both for savings and credit
• With mobile technology, banks can offer a wide range of services to their customers, such as doing funds transfer while traveling, at low costs
– the ease and automation of some transactions would reduce operating and transaction costs, making handling small amounts viable
• This technology should ease the collection of savings in financial institutions and could help build on remittances or other source of non-farming income for agricultural financing
• Much more people are equipped with a mobile phone than have a bank account, creating tremendous potential for market development
Financial Services Provision
And Finally!!!• Many of these initiatives are based on the premise that there is a
supportive policy environment that allows innovation to flourish. • The gravest risks to sustainable financing for agriculture often come
not from inherent business risks or the inability of financial institutions to design profitable financial products for the rural population, but rather from misguided government interventions such as– subsidized interest rates and lack of or non-enforcement of appropriate
rules and regulations. • Conversely,
– an enabling environment and legal framework– enforcement of regulations– and a supportive rural infrastructure
• would eventually lead to lower but sustainable interest rates by reducing transaction costs and risks and increasing competition.
• All this would contribute immensely to making sustainable access to finance a reality