Improving the Provision of Financial Services to the Livestock Sector in Ethiopia

Presented at AFRACA’s East Africa Sub Regional Workshop: Financial Intermediation for Growth and Wealth Creation in Africa by Wolday Amha (PhD) Kampala, Uganda, May 19-21, 2010

The Role of Livestock Sector

• • Source of food Provide inputs for crops in the form of draft power and organic fertilizer • • • • Contributes to the export earnings Used as a form of wealth accumulation Hedge against crop failure Source of cash to cover major incidental expenses • Serves as a means of transport

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Livestock Population of Ethiopia

Livestock Type

Cattle Sheep Goats Horse Donkey Mule Camel Poultry Total Livestock Population

Population

49,297,898 25,017,218 21,884,222 1,787,211 5,421,895 373,519 759,696 38,127,504 142,669,163

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Interventions to Improve the Livestock Sector

Improve productivity through breed improvement Develop livestock technology package for pastoralist areas Expand the availability of feeds Expand small ruminants in the highland Upgrade the veterinary services Promote semen production center (AI) Integrated and range land management Expand poultry production Improve the processing of livestock products Improving access to markets

Objectives of the Study

• • • • • The overall objective of the study is to improve and enhance access to financial services that are appropriate to livestock producers and their enterprises in Ethiopia. The specific objectives include: Review the performance of livestock credit in selected countries Review and analyze previous credit programs (for the past 20 years) in Ethiopia Review the lessons learned in delivering financial services to livestock sector Identify the strategic interventions to improve financial access to livestock producers

Study Approach and Methodology

• Both quantitative and qualitative instruments were used to obtain information on the delivery of financial services in the livestock sector. The study involved in reviewing the literature, conducting field surveys and in-depth interviews/discussions with key informants and personal observations of the researcher.

Limitation of the Study

• This study is mainly constrained by the non-existence of reliable disaggregated and consistent data on livestock credit. Many of the available secondary information and reports focused on agricultural credit or rural finance, which made it difficult to get disaggregated data on livestock credit.

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The review of past projects indicate the following

Adoption of livestock technologies increase production and productivity and income of households and rural finance is a key intervention to assist farmers to use the technologies. Credit demands of smallholder dairy farmers with crossbred cows are expected to be higher than those subsistence farmers.

Borrowers are not homogeneous in terms of their need for credit and that the marginal productivity of credit would be different even among different borrowers in different locations. An accurate assessment of farmers’ liquidity position is important for the finance providers in order to obtain the greatest impact from credit. Credit can have the desired impact where there is a functioning and sustainable credit delivery system that allows smallholder livestock farmers’ access. Market participation and savings mobilization are major determinants of the amount of credit demanded by farmers.

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• • • • • • Subsidized credit delivered by formal banks and government/donor projects has been a common feature of formal livestock credit programs in Ethiopia. The AIDB, currently know as the Development Bank of Ethiopia (DBE), provided credit component provided funds for: (a) Service Cooperatives to purchase flour and oil mills and construct storage building; (b) farmers to purchase draught oxen and implements (funds are channeled through Service Cooperatives); (c) Producers Cooperatives and Service Cooperatives in the dairy farming through the purchase of crossbred heifers (using loans channeled through Service Cooperatives); and (d) Miscellaneous lending to enable AIDB to diversify its lending for agricultural development.

Continued

• • • • • • • • • The major problems of AIDBs’ credit extended to rural households included: (a) inappropriate credit policy and delivery system which limited coverage in terms of outreach and credit diversification; (b) dissolution of cooperatives in 1990 which took the loan from the bank; (c) problems of enforcing contracts; (d) limited branch networks and proximity; (e) unfamiliarity with the bank procedure to access loans; (f) low productivity and lack of technologies for productive investment; (g) inadequate infrastructure; (h) inadequate provision of complementary services; and (i) lack of coordination between the bank and government institutions.

Contd.

• • • • • • • The ACDI/CEE study revealed that financial schemes of NGOs and institutions do not follow sound and sustainable financial principles in Ethiopia. The micro-credit initiatives before the issuance of the microfinance law of 1996 in Ethiopia had the following features: The entire orientations of the micro-credit initiatives or activities in Ethiopia (pre 1996) were geared towards a project concept. The real interest rates (the actual interest rates deflated by the annual rate of inflation) in subsidized government and NGO programs were negative.

High default rates The lending institutions and employees did not enforce financial discipline, provided donor and government funds kept on flowing.

The micro-credit programs focused entirely on the provision of loans to beneficiaries. Saving products were forgotten in the delivery of financial services to the poor.

• • • • • With few exceptions, formal credit programs in Sub Saharan Africa have fallen short of expectations. Subsidized credit programs have led to misallocation of resources, have typically not led to significant increases in adoption of new technologies, or have not succeeded in replacing traditional money lenders. The inefficiency of the lending institutions contributed to the high default of clients Inappropriate financial products which did not match with the needs of the livestock producers and their enterprises. Subsidized loans.

Lessons learned

• • • The use of credit is more efficient when the structure of the loan term is tailored to meet the needs of livestock producers, processors, traders, etc. Loan duration and repayment conditions should be related to the size of the loan, the nature of the activity to be financed, the cash flow pattern it generates, and the risks involved. Focus should be given on saving mobilization, charging lending interest rates on a market basis and financial sustainability of the lending institutions.

Contd.

• • The effectiveness of the delivery of financial services to livestock producers and their enterprises also depends on the legal and regulatory environment in which the finance providers operate. Given the above problems of government projects, banks, service cooperatives and NGOs, policy makers and individuals involved in development activities to rethink and redesign new strategies for the delivery of financial services to smallholder livestock producers through sustainable financial institutions.

Continued

• • Access to finance has a significant impact on increasing production, productivity, adopting improved livestock technologies and increasing the income of smallholder livestock producers; Developing a financial systems or institutions that reach the remote and disadvantaged households is a critical challenge in delivering financial services to the livestock producers than the finance or capital;

Contd.

• • • Livestock producers and their enterprises require a range of financial services such as loans, savings, insurance, etc. Savings by livestock producers should precede and have linkage to credit so that the members have a sense of ownership to the scheme and also understand that it is not charity but a loan repayable as per the terms of the contract; The financial products of finance providers should be demand or market driven and flexible in nature which addresses the needs of livestock producers and their enterprises; Financing the livestock sector creates an additional set of risks;

Contd.

• • • • • Smallholder livestock farmers in rural areas face high transaction costs compared to those residing in urban and peri-urban areas and collateral is relatively limited, often less documented and more difficult to liquidate; Information to assess ability and willingness of borrowers to repay the loan is difficult and expensive to obtain; Formal banks hardly provide financial services to smallholder livestock producers; Finance should be given essentially for livestock production, processing and marketing activities; Linking finance providers themselves;

Contd.

• • • • • Subsidized loans were unsustainable and, in most cases, distorted the financial markets and developed dependency behaviour on the side of beneficiaries.; Many of the subsidized projects/programs drained the scarce government budgets; There is a need to ensure capacity building and training of livestock producers, members and managements of livestock cooperatives and commercial livestock farmers; There is need to build the skills of livestock producers through relevant training; The financial providers, particularly the rural finance providers, require capacity building support to address the needs of livestock producers and their enterprises;

Contd.

• • • Formal banks, MFIs and financial cooperatives should tailor their activities to provide financial services to livestock producers and livestock enterprises; Proper coordination has to be ensured between the various stakeholders involved in livestock production, processing and marketing and finance providers; There has to be a clear law on property rights and a dedicated judicial mechanism like debt recovery tribunals to assist banks, MFIs, financial cooperatives and others in recovering their dues expeditiously;

Contd.

• • • • • • Government projects and NGOs forgive loans for political and social reasons which undermined a sound credit culture and blurring the distinction between grants and loans.

Community sensitization and mobilization strategies adopted should focus on ensuring that money is given out on a loan basis and not a grant; There should be provision of leadership training to both leaders and members of cooperatives; Directed loans to finance specific livestock activities influence borrower decision on what to produce; Development of sustainable market opportunities; There should be an enabling regulatory framework which promotes innovations in delivering financial services to livestock producers and their enterprises.

Challenges

• • • Huge demand for livestock loan Absence of tailored financial products Very limited effort to provide financial services to pastoralists (absence of sustainable finance providers) • High production and market risks and absence of livestock insurance • Weak member managed financial institutions to serve remote producers • Lack of innovations

Strategies to Improve Financial Access to the Financial Sector

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Creating an Enabling legal and Regulatory Environment Establishing Sustainable Finance Providers

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Operational and Financial Sustainability and Increasing Outreach

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Building the Institutional Capacity of Finance Providers

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Human Resource Development

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Systems Development

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Capacity to Mobilize Loan Capital

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Continued

Developing Demand Driven Financial Products Loan for oxen in order to provide draught animal power Loan for to purchase improved livestock breeds Loan for cattle fattening Loan for rearing sheep and goat Loan for dairy development Loan for poultry production Loan for honey production Loan to purchase feed, veterinary drugs Loan to establish small-scale livestock processing enterprises Loan to build barns, water supply systems Loan for livestock traders Loan for transporters MFIs in Ethiopia provide 65% of their loan to the livestock sector

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Continued

Additional products and innovations –

Value chain financing

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Improve Access through Credit Guarantee Fund

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Use of In-kind Credit System

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Inventory Finance

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Savings Mobilization

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Livestock Insurance (AEMFI’s initiatives) Capacity Building of Livestock Producers Developing Appropriate Project to Promote Financial Access to Livestock Producers and their Enterprises

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