Transcript Mainstreaming Agricultural Credit

Calvin Miller - Senior Officer, Rural Finance
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Holder of M.S in Agricultural
Economics, currently Senior Officer
for Rural Finance in FAO, has over
twenty-five years of worldwide
experience in economic development,
in the design, implementation and
evaluation of financial services
programs and institutions, production
and marketing, and institutional
development.
Has extensive experience in agricultural
value chain development and finance
for both national and international
markets.
Has worked as the Country Manager
of MEDA in Bolivia and carried out
many international consultancies
Mr. Miller provided leadership and
technical support for over 200 CARE
micro and small enterprise, and
agriculture and natural resource
projects in over 40 countries.
He also founded and developed,
MicroVest
Perspectives of Value
Chain Finance in Africa
Agri Forum: Value Chain Finance Conference
Nairobi, Kenya 16 – 18 October, 2007
Calvin Miller
FAO Rural Finance Senior Officer
Rome, Italy
Presentation Profile
1.
The changing agricultural
scene
2.
Using strategic alliances
3.
Value chains as a business
approach finance
4.
Innovations
5.
Addressing risk
6.
Lessons and policies
New Agriculture Driven by Dynamic
Markets
World Dev. Report: DeJanvry
1.
An Evolving Agriculture:
Supermarket vs Subsistence Farming
with Open Markets and Cell Phones
Market integration and specification
 Conglomeration of market leaders
 Open trade with international y regional
competition
 Segmented demand with stringent standards and
conditions
 Instant access to information
But also,
 Subsistence agriculture, food aid and HIV-AIDS
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Stages of Agricultural Finance
Agricultural Credit Era
Donor Microfinance Era
(1950 a 1985)
(1980 a 2000)
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Directed production credit
Subsidized credit
High transaction costs of
lending
High loan losses
Government and donor
refinanced lines of credit
through agricultural banks
and others
Informal family and trader
finance for small farmers
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Rapid, small working capital
loans
Group lending approaches
Focus on non-agricultural
activities
Forces groups savings
Separation of financial
services and business support
services.
High cost of microfinance
Stages of Agricultural Finance (cont.)
Commercialization of
MFIs
Value Chain Finance (2005 to present)
 Strategic focus on market potential
(2000 to present)
of businesses
 Formal MFIs
 Linkages among suppliers,
 Little subsidy
producers & marketing companies
 Multiple Products
 Expansion and competition  Growing importance of standards
 New technologies
 Greater use of risk mitigating tools
 Interest by capital market
 Growing integration between banks
investors and lenders
and business
 Growing use of new technologies.
Some underlying challenges affecting
rural finance
Demand
 How to increase economic opportunities?
 How to build farm management capacity?
 How to mitigate risk?
Supply
 How to cost-effectively introduce flexible and longer term
loan products?
 How to promote effective management?
 How to mobilise support for sound financial markets?
Multiple Services; Multiple Providers
Commercial
Banks
Credit
Unions &
SACCOS
MFIs
Overdrafts/
Credit Lines
Savings
Suppliers and
Traders
Inputs
Transfer
Payments
Marketing
Companies
Loans
Insurance
Insurance
Companies
Leasing
Equipment
Companies
Family /
Friends
2. Financial Linkages
MFIs
NGOs
Private Banks
Credit Unions
State Banks
Village Banks
Postal Banks
Agro-processors
Insurance Cos.
Input Suppliers
Non-bank financial
institutions
Marketing Companies
Investment funds
Leasing Companies
Farmer
Associations
Farmers /
Rural Clients
Warehouse Operators
Supermarket Chains
Partnering for better access, services and efficiency
3. Agricultural Value Chain Finance
Medium and Large
Exporters and Wholesalers
Processors
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Linking finance with
agriculture and agribusiness
Aligning and structuring
finance with the chain
Collector/Traders
Farmers & Producer
Groups
Input Suppliers
Strategic
engagement for
common benefit
Trader Credit
Bank
Inputs Importer/
Wholesaler
Exporter/ Wholesaler
or Processor
Large Scale Trader
Input shopkeeper/
Farmer
Small Scale Trader/
Organization
Farmers
Key
Input
sales
Trade credit Trade / seasonal credit
Product
sales
Value Chain Finance Flows
Enabling business & financial environment
Financial and Information flows
Inputs
Production
Processing
Distribution
Physical flows
Finance and supporting services
Consumption
4. Technology Innovation
• Communication Technology --
M-PESA–Kenya; G-Cash--Philippines
• Purchases & sales
• Commodity prices
• Money transfers
• Payments
• Point of Sale Access
•ATM & Smart Cards
The Economist, 15/02/07
Product and System Innovation
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Risk management tools; futures, hedging
Warehouse receipts finance
Factoring y securitization
Contact farming and outgrower schemes
Facilitation Models (Ej. DrumNet)
Integrated Models (Ej. LA-FISE)
5. Risk Analysis – Incorporating New
Elements
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Client /business capacity
Repayment capacity
Security coverage
Cash flow
Market growth and risk
Competitiveness
From supply-driven “how we lend”
to
client driven “how can we structure finance
to address client needs and risks”
Tools to Mitigate Market Risks
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Use of futures and options
Warehouse receipts as well as warehouse
storage capacity
Market information services
Contract farming
Insurance
Access to technical assistance
Some risk management tools are more practical for agroindustries and wholesalers, but can stabilize prices and
reduce risks for all producers and bankers.
6. Banks: New Perspective toward Agriculture
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Banks should invest money & knowledge in the
agribusiness
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market trend knowledge
understanding of key risks
alliance and linkage opportunities
But
 Bankers are not technical advisors
Helping farmers & agribusinesses achieve their goals
Business
and Loan
Counsel
Loan
Analysis
Loans and
Services
Consultation
Reality: New Mitigants are Required
Measures
Price Risk
Methodology
• Use of market based
• Couple with Loan
price instruments
• Hedge own portfolio or Loan
• Use microfinance institutions
• Use international Banks and
brokerage houses as partners
Crop/Weather Risk
• Index based weather
insurance
• Rely objectively on specific
weather events
• Compares yield to measurable,
objective, correlated risk
• Need conducive policy and
regulatory environment
Collateral Risk
• Use innovative
structures
• Capture cash flows
• Use “organized” intermediate
agencies
TA providers play a key role in ‘importing’ innovative successful practices
Government: Policies to Support Value
Chain Finance
Business capacity building and market integration
 Contract farming and out grower schemes
 Technical capacity in market norms and standards
 Commodity exchanges and active futures markets
 Insurance innovation, data collection and initiation
 Market information and access
 Infrastructural investment
 Product and service innovation and diversity
 Technology adaptation and access
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Key Factors for Consideration
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Understanding
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Administration
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Risk
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Service
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market and industry
client and strategic partners
fund the chain at most strategic points
insure effective and transparent
partnerships
innovate with new technologies and
products
take advantage of the value chain
analyze and structure loans properly
offer timely, multiple and flexible
financial services
focus on the client and business
»FAO, Agricultural Department
www.fao.org/ag
»Rural Finance Learning Centre
www.ruralfinance.org