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© FAO January 2008

Strategies for Financing Farm Activities

Module 3: Investment and Resource Mobilization

Session 4: Strategies for Increasing Farm Financing Resources

F A O P o l i c y L e a r n i n g P r o g r a m m e

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© FAO January 2008

By

of the

FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS

Strategies for Financing Farm Activities

Maria Pagura, Rural Finance OfficerRural Infrastructure and Agro-Industries Division, FAO, Rome, Italy

About EASYPol

The EASYPol home page is available at: www.fao.org/easypol

This presentation belongs to a set of modules which are part of the EASYPol

Training Path Policy Learning Programme – Module 3: Investment and Resource Mobilization, Session 4: Strategies for increasing farm financing resources

EASYPol has been developed and is maintained by the Agricultural Policy Support Service, Policy Assistance and Resource Mobilization Division, FAO.

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© FAO January 2008

FAO Policy Learning ProgrammeModule 3: Investment and Resource Management

Session 4: Strategies for Increasing Farm Financing Resources

Objectives

Provide an overview of different strategies, instruments and institutions that improve farmers’

access to finance.

Study in detail four case studies highlighting the strengths and weaknesses different farmer finance innovations.

Summarize lessons learned in the institutional planning, financing and implementation of rural financing systems

reform.

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© FAO January 2008

FAO Policy Learning ProgrammeModule 3: Investment and Resource Management

Session 4: Strategies for Increasing Farm Financing Resources

Demand for agricultural finance

See

notes for

details

Retailers/Exporters /Wholesalers

Rural Households

Rural Households

Non-Agricultural Rural Businesses

Non-Agricultural Rural Businesses

Off-farm Microenterprises

Off-farm Microenterprises

Processors

Input Suppliers

Farmers / Producer Groups

Local Traders & Processors

Multiple

economic

actors in

rural space

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© FAO January 2008

FAO Policy Learning ProgrammeModule 3: Investment and Resource Management

Session 4: Strategies for Increasing Farm Financing Resources

Financial service needs

Build new plantPurchase new equipmentCash flow management

Processors�

Input Suppliers�

Farmers / Producer Groups

�

Local Traders & Processors

�

Retailers / Exporters / Wholesalers

Purchase truckPurchase farm inputs and outputCash flow managementIncome smoothing

Purchase of fixed assets (land, tractors)Purchase inputs (seed, fertilizer, labor)Mitigate risk (crop insurance)Cash flow managementIncome smoothing

Purchase InventoryCash flow management

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© FAO January 2008

FAO Policy Learning ProgrammeModule 3: Investment and Resource Management

Session 4: Strategies for Increasing Farm Financing Resources

Financial service needs

Rural Households

Rural Households

Non-Agricultural Rural BusinessesNon-Agricultural

Rural Businesses

Off-farm Microenterprises

Off-farm Microenterprises

Purchase inventoryPurchase of fixed assetsCash flow management

Cash flow managementRisk management Fixed investments

Income/consumption smoothing

Savings instrumentsMitigate risk

Access to remittancesLife events

Financial service needs of non-agricultural actors are also broader than credit and include:

Short term credit Term creditDepository and transfer servicesInsurance

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© FAO January 2008

FAO Policy Learning ProgrammeModule 3: Investment and Resource Management

Session 4: Strategies for Increasing Farm Financing Resources

Supply of finance

Formal bank finance

Non-bank finance

banks, investment, insurance, leasing, and cash transfer companies

finance between value chain actors, rural MFIs, coops, NGOs, personal finance

Multiple suppliers of

finance in rural space

Public finance government

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© FAO January 2008

FAO Policy Learning ProgrammeModule 3: Investment and Resource Management

Session 4: Strategies for Increasing Farm Financing Resources

Formal bank finance

Short/long term loans

Lines of credit

Emergency loans

Payment/transfers

Saving facilities

Insurance

Leasing

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© FAO January 2008

FAO Policy Learning ProgrammeModule 3: Investment and Resource Management

Session 4: Strategies for Increasing Farm Financing Resources

Financial institution suppliers

Strengths:offer broad range of financial servicesaccess to external capitalpositioned to take on new clientsoffer credit histories that are easy to take from one institution to anothercredit generally not tied to a crop/product continue if market conditions changemarket-based structure results in less monopolistic or predatory relationships

Weaknesses:reluctant to lend for agricultureinsufficient systems to reach rural areaslarge systems and procedures making it difficult to innovateconventional lending practices, e.g., accept only physical assets as collateral

See

notes for

details

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© FAO January 2008

FAO Policy Learning ProgrammeModule 3: Investment and Resource Management

Session 4: Strategies for Increasing Farm Financing Resources

What is a ‘Value Chain’?

Value Chain = series of actors and activities needed to

bring a product from production to the final consumer

Value Chain Finance: Credit or other financial services flowing through actors along

these chains

Value Chain Finance: Credit or other financial services flowing through actors along

these chains

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© FAO January 2008

FAO Policy Learning ProgrammeModule 3: Investment and Resource Management

Session 4: Strategies for Increasing Farm Financing Resources

Benefits of value chain finance

Value Chain Finance can: Improve the overall effectiveness and efficiency of the value chain by:

identifying relationships along the value chain

mitigating constraints

exploiting opportunities for value chain finance

exploring how formal financial institutions can enter the equation

If designed well, value chain finance interventions can increase the competitiveness of small producers, as well as a range of agricultural and agribusiness enterprises.

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FAO Policy Learning ProgrammeModule 3: Investment and Resource Management

Session 4: Strategies for Increasing Farm Financing Resources

Processing

Financial and Information flows

Physical flows

Inputs

Enabling environment (policies, regulations, institutions: the business climate)

Production Distribution Consumption

Finance and supporting services

Adapted from da Silva and Batalha, 2000

A value chain at work

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© FAO January 2008

FAO Policy Learning ProgrammeModule 3: Investment and Resource Management

Session 4: Strategies for Increasing Farm Financing Resources

Value chain actors

Actors in the Chain

Actors outside of the Chain

Rural Households

Rural Households

Non-Agricultural Rural BusinessesNon-Agricultural

Rural Businesses

Off-farm Microenterprises

Off-farm Microenterprises

Processors

Input Suppliers

Retailers / Exporters

Farmers / Producer Groups

Local Traders & Processors

Retailers / Wholesalers

See

notes for

details

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© FAO January 2008

FAO Policy Learning ProgrammeModule 3: Investment and Resource Management

Session 4: Strategies for Increasing Farm Financing Resources

Value chain finance

Trade credit

Input supplier finance

Contract farming

Inventory credit/warehouse receipt finance

Collateralized lending –

factoring, repos

Import/export finance

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FAO Policy Learning ProgrammeModule 3: Investment and Resource Management

Session 4: Strategies for Increasing Farm Financing Resources

Value chain financing

Strengths:

Cost-effective ways to screen potential clients

Tap new assets for securing loans

Help to increase yields and prices

Help to lower costs

Change the way agricultural products are sold

Weaknesses:

Most loans are for short terms

Lenders more focused on profits from products

Usually less transparent in pricing and less efficient in accounting

Strong power relationships from value chain lenders could be negative

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FAO Policy Learning ProgrammeModule 3: Investment and Resource Management

Session 4: Strategies for Increasing Farm Financing Resources

Agricultural finance -

Case studies

South Sudan Agricultural Market InvestmentInnovative Use of a PPP to Build Institutional Capacity Rapidly

DrumNetAn Enterprising Third Party Transaction Manager

Financing A New Value Chain Divine Chocolate

Mobile Banking

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FAO Policy Learning ProgrammeModule 3: Investment and Resource Management

Session 4: Strategies for Increasing Farm Financing Resources

Standard financial sector reforms are not enough to stimulate financial intermediation in rural space.

Investments in innovations and experimentation in rural finance is missing from most contexts.

Multiple actors and ways to finance activities have emerged at the farm level despite of lacking enabling environments.

Conclusion

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FAO Policy Learning ProgrammeModule 3: Investment and Resource Management

Session 4: Strategies for Increasing Farm Financing Resources

Christen, R.P. and D. Pearce, “Managing Risks and Designing Products for Agricultural Microfinance: Features of an Emerging Model,” CGAP Occasional Paper No.11, Washington, DC: World Bank, 2006.

Gonzalez-Vega, C., “Deepening rural financial markets: Macroeconomic, policy and political dimensions,” commissioned paper at the Paving the Way Forward in Rural Finance: An International Conference on Best Practices, www.basis.wisc.edu/rfc/, Washington, D.C., June 2003.

Meyer, R., R. Roberts, and A. Mugume, Agricultural Finance in Uganda: The Way Forward, Ugandan Financial Systems Development Programme, FSD Series No. 13, German Technical Co-operation and the Swedish International Development Agency, June 2004.

Pearce, D., A. Goodland, and A. Mulder. “Rural Finance for Agriculture,” Agriculture Investment Sourcebook. Washington, DC: World Bank, 2004.

Further readings

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© FAO January 2008

FAO Policy Learning ProgrammeModule 3: Investment and Resource Management

Session 4: Strategies for Increasing Farm Financing Resources

Links to Module 3

: Sessions 1-8

Session 1: Investment in agriculture & rural development

Session 2: Environment for private investment in agriculture & rural development

Session 3: Sources and uses of financial resources

Session 4: Strategies for increasing farm financing resources

Session 5: Risk mitigation in agricultural investment

Session 6: Sector-wide approaches (SWAps)

Session 7: Socio-economic & livelihood analysis

FAO Policy learning programme

Module 3: Investment and Resource Management

FAO Policy learning programmeCapacity Building Programme on Policies and Strategies for Agricultural and Rural Development

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© FAO January 2008

FAO Policy Learning ProgrammeModule 3: Investment and Resource Management

Session 4: Strategies for Increasing Farm Financing Resources

T h a n k y o u !