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Calvin Miller -Calvin Miller - Senior Officer, Senior Officer,
Rural FinanceRural Finance Holder of M.S in Agricultural Holder of M.S in Agricultural Economics, currently Senior Economics, currently Senior Officer for Rural Finance in FAO, Officer for Rural Finance in FAO, has over twenty-five years of has over twenty-five years of worldwide experience in economic worldwide experience in economic development, in the design, development, in the design, implementation and evaluation of implementation and evaluation of financial services programs and financial services programs and institutions, production and institutions, production and marketing, and institutional marketing, and institutional development. development.
Has extensive experience in Has extensive experience in agricultural value chain agricultural value chain development and finance for both development and finance for both national and international national and international markets.markets.
Has worked as the Country Has worked as the Country Manager of MEDA in Bolivia and Manager of MEDA in Bolivia and carried out many international carried out many international consultancies consultancies
Mr. Miller provided leadership Mr. Miller provided leadership and technical support for over 200 and technical support for over 200 CARE micro and small enterprise, CARE micro and small enterprise, and agriculture and natural and agriculture and natural resource projects in over 40 resource projects in over 40 countries. countries.
He also founded and developed, He also founded and developed, MicroVestMicroVest
Perspectives of Perspectives of Value Chain Value Chain
Finance in AfricaFinance in AfricaAgri Forum: Value Chain Finance
Conference
Nairobi, Kenya 16 – 18 October, 2007Calvin MillerCalvin Miller
FAO Rural Finance Senior OfficerFAO Rural Finance Senior Officer
Rome, ItalyRome, Italy
Presentation ProfilePresentation Profile
1.1. The changing The changing agricultural sceneagricultural scene
2.2. Using strategic Using strategic alliancesalliances
3.3. Value chains as a Value chains as a business approach business approach financefinance
4.4. InnovationsInnovations
5.5. Addressing riskAddressing risk
6.6. Lessons and policiesLessons and policies
New Agriculture Driven by New Agriculture Driven by Dynamic MarketsDynamic Markets
World Dev. Report: DeJanvry
1.1. An Evolving Agriculture:An Evolving Agriculture:Supermarket vs Subsistence Supermarket vs Subsistence
FarmingFarmingwith Open Markets and Cell with Open Markets and Cell
PhonesPhones Market integration and specificationMarket integration and specification Conglomeration of market leaders Conglomeration of market leaders Open trade with international y regional Open trade with international y regional
competitioncompetition Segmented demand with stringent Segmented demand with stringent
standards and conditionsstandards and conditions Instant access to informationInstant access to information
But also,But also, Subsistence agriculture, food aid and Subsistence agriculture, food aid and
HIV-AIDSHIV-AIDS
Stages of Agricultural Stages of Agricultural FinanceFinance
Agricultural Credit EraAgricultural Credit Era(1950 a 1985)(1950 a 1985) Directed production Directed production
creditcredit Subsidized creditSubsidized credit High transaction costs of High transaction costs of
lendinglending High loan lossesHigh loan losses Government and donor Government and donor
refinanced lines of credit refinanced lines of credit through agricultural through agricultural banks and othersbanks and others
Informal family and Informal family and trader finance for small trader finance for small farmersfarmers
Donor Microfinance Era Donor Microfinance Era (1980 a 2000)(1980 a 2000) Rapid, small working Rapid, small working
capital loanscapital loans Group lending Group lending
approachesapproaches Focus on non-Focus on non-
agricultural activitiesagricultural activities Forces groups savingsForces groups savings Separation of financial Separation of financial
services and business services and business support services.support services.
High cost of High cost of microfinancemicrofinance
Stages of Agricultural Finance Stages of Agricultural Finance (cont.)(cont.)
Commercialization of Commercialization of MFIs MFIs
(2000 to present)(2000 to present) Formal MFIsFormal MFIs Little subsidyLittle subsidy Multiple ProductsMultiple Products Expansion and Expansion and
competitioncompetition New technologiesNew technologies Interest by capital Interest by capital
market investors and market investors and lenderslenders
Value Chain FinanceValue Chain Finance (2005 to present)(2005 to present) Strategic focus on market Strategic focus on market
potential of businessespotential of businesses Linkages among suppliers, Linkages among suppliers,
producers & marketing producers & marketing companiescompanies
Growing importance of standardsGrowing importance of standards Greater use of risk mitigating Greater use of risk mitigating
toolstools Growing integration between Growing integration between
banks and businessbanks and business Growing use of new technologies.Growing use of new technologies.
Some underlying challenges Some underlying challenges affecting rural financeaffecting rural finance
DemandDemand How to increase economic opportunities?How to increase economic opportunities? How to build farm management capacity?How to build farm management capacity? How to mitigate risk?How to mitigate risk?
SupplySupply How to cost-effectively introduce flexible How to cost-effectively introduce flexible
and longer term loan products?and longer term loan products? How to promote effective management?How to promote effective management? How to mobilise support for sound financial How to mobilise support for sound financial
markets?markets?
LoansLoans
Multiple Services; Multiple Providers Multiple Services; Multiple Providers
InsuranceInsurance
Transfer PaymentsTransfer
Payments
SavingsSavingsCredit
Unions & SACCOS
CreditUnions & SACCOS
MFIsMFIsCommercialBanks
CommercialBanks
Marketing CompaniesMarketing
Companies
Insurance CompaniesInsurance
Companies
LeasingLeasingFamily / FriendsFamily / Friends
Suppliers and Traders
Equipment Companies
InputsInputs
Overdrafts/Credit LinesOverdrafts/Credit Lines
2. Financial Linkages2. Financial Linkages
Private Banks
State Banks
Postal Banks
Insurance Cos.
Non-bank financial institutions
Investment funds
MFIs
NGOs
Credit Unions
Village Banks
Agro-processors
Input Suppliers
Marketing Companies
Leasing Companies
Warehouse Operators
Supermarket Chains
Farmers / Rural
Clients
Farmer Associati
ons
Partnering for better access, services Partnering for better access, services and efficiencyand efficiency
3. Agricultural Value Chain 3. Agricultural Value Chain Finance Finance
Linking finance with Linking finance with agriculture and agriculture and agribusinessagribusiness
Aligning and Aligning and structuring finance structuring finance with the chainwith the chain
Processors
Input Suppliers
Farmers & Producer Groups
Medium and LargeExporters and Wholesalers
Collector/Traders
Strategic engagement for common benefit
Trader CreditTrader Credit
Large Scale Trader
Inputs Importer/
Wholesaler
Input shopkeeper/ Small Scale Trader/
Farmer Organization
Bank
Farmers
Trade credit
Trade / seasonal credit
KeyProduct
salesInput sales
Exporter/ Wholesaleror Processor
Processing
Financial and Information flows
Physical flows
Inputs
Enabling business & financial environment
Production Distribution
Finance and supporting services
Value Chain Finance Flows
Consumption
4. Technology Innovation4. Technology Innovation
The Economist, 15/02/07
• Communication Technology -- M-PESA–Kenya; G-Cash--Philippines
• Purchases & salesPurchases & sales• Commodity pricesCommodity prices• Money transfersMoney transfers• PaymentsPayments
• Point of Sale Access•ATM & Smart Cards
Product and System Product and System InnovationInnovation
Risk management tools; futures, Risk management tools; futures, hedginghedging
Warehouse receipts financeWarehouse receipts finance Factoring y securitization Factoring y securitization Contact farming and outgrower Contact farming and outgrower
schemesschemes Facilitation Models (Ej. DrumNet) Integrated Models (Ej. LA-FISE)
5. Risk Analysis – Incorporating 5. Risk Analysis – Incorporating New ElementsNew Elements
Client /business capacityClient /business capacity Repayment capacityRepayment capacity Security coverageSecurity coverage Cash flowCash flow Market growth and riskMarket growth and risk CompetitivenessCompetitiveness
From supply-driven “how we From supply-driven “how we lend” to client driven “how lend” to client driven “how
can we structure finance to can we structure finance to address client needs and risks”address client needs and risks”
Tools to Mitigate Market RisksTools to Mitigate Market Risks
Use of futures and optionsUse of futures and options Warehouse receipts as well as Warehouse receipts as well as
warehouse storage capacitywarehouse storage capacity Market information servicesMarket information services Contract farmingContract farming InsuranceInsurance Access to technical assistanceAccess to technical assistance
Some risk management tools are more Some risk management tools are more practical for agro-industries and practical for agro-industries and wholesalers, but can stabilize prices and wholesalers, but can stabilize prices and reduce risks for all producers and bankers.reduce risks for all producers and bankers.
6. Banks: New Perspective toward 6. Banks: New Perspective toward AgricultureAgriculture
ConsultationConsultationLoans and Loans and ServicesServices
Loan Loan AnalysisAnalysis
Business Business and Loan and Loan CounselCounsel
Helping farmers & agribusinesses achieve their goalsHelping farmers & agribusinesses achieve their goals
Banks should invest money Banks should invest money && knowledge knowledge in the agribusinessin the agribusiness market trend knowledgemarket trend knowledge understanding of key risksunderstanding of key risks alliance and linkage opportunitiesalliance and linkage opportunities
ButBut Bankers are not technical advisorsBankers are not technical advisors
Reality: New Mitigants are Reality: New Mitigants are RequiredRequired
Price RiskPrice Risk• Use of market basedUse of market based price instrumentsprice instruments
• Couple with Loan Couple with Loan • Hedge own portfolio or Hedge own portfolio or LoanLoan• Use microfinance Use microfinance institutions institutions • Use international Banks Use international Banks and brokerage houses as and brokerage houses as partnerspartners
Measures Methodology
Crop/Weather RiskCrop/Weather Risk• Index based weather Index based weather insuranceinsurance
• Rely objectively on Rely objectively on specific weather eventsspecific weather events• Compares yield to Compares yield to measurable, objective, measurable, objective, correlated riskcorrelated risk• Need conducive policy Need conducive policy and regulatory and regulatory environmentenvironment
• Use innovative Use innovative structuresstructures
• Capture cash flowsCapture cash flows• Use “organized” Use “organized” intermediate agenciesintermediate agencies
Collateral RiskCollateral Risk
TA providers play a key role in ‘importing’ innovative TA providers play a key role in ‘importing’ innovative successful practicessuccessful practices
Government: Policies to Government: Policies to Support Value Chain FinanceSupport Value Chain Finance
Business capacity building and market integrationBusiness capacity building and market integration Contract farming and out grower schemesContract farming and out grower schemes Technical capacity in market norms and standardsTechnical capacity in market norms and standards Commodity exchanges and active futures marketsCommodity exchanges and active futures markets Insurance innovation, data collection and initiationInsurance innovation, data collection and initiation Market information and accessMarket information and access Infrastructural investmentInfrastructural investment Product and service innovation and diversityProduct and service innovation and diversity Technology adaptation and accessTechnology adaptation and access
Key Factors for ConsiderationKey Factors for Consideration
UnderstandingUnderstanding
AdministrationAdministration
RiskRisk
ServiceService
market and industrymarket and industry client and strategic partnersclient and strategic partners
fund the chain at most strategic fund the chain at most strategic pointspoints
insure effective and transparent insure effective and transparent partnershipspartnerships
innovate with new technologies innovate with new technologies and productsand products
take advantage of the value take advantage of the value chainchain
analyze and structure loans analyze and structure loans properlyproperly
offer timely, multiple and offer timely, multiple and flexible financial servicesflexible financial services
focus on the client and businessfocus on the client and business
»FAO, Agricultural FAO, Agricultural DepartmentDepartmentwww.fao.org/ag
»Rural Finance Learning Rural Finance Learning CentreCentrewww.ruralfinance.org
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