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INTERNATIONAL BANKING FORUM 2015Brescia, 11-12 June 2015
Insights for Commercial Banks and Agricultural Finance
Robert Peck ChristenPresidentBoulder Institute of Microfinance
GlobalPopulation
6.5 billion
7 billion
9.6 billion
2006
2012
2050
Food insecure:
+800 million people
3 billion more people are likely to enter the global middle class by 2030 (more demand
on resource-intensive foods)
22
2SOURCE: World Resources Report 2013-2014
How much food will the world need?
• Provide economic opportunities for ruralpoor who depend on agriculture for theirlivelihoods (75% of the developing world’s poorlive in rural areas).
• Increase food production on the same landarea.
• Reduce agriculture’s environmental impact.
How will it get done?
Account penetration per type of country
The Unbanked: 2 Billion Adults
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Adults in the poorest 40% of households within economiesmake up half: 1 billion
South Asia, East Asia and Sub-Saharan Africa: 1,5 billion
SOURCE: The World Bank (2015). The Global Findex Database 2014
SOURCE: IntelligentInclusion (2012)
Payments to Agriculture
• Agriculture directly accounts 3% of GDP(global gross domestic product) and it employsmore than 2 billion.
• 23% of unbanked adults (440 million people)receive payments in cash for the sale ofagricultural products (125 M in Sub-SaharanAfrica; 160 M in East Asia and the Pacific; 105 Min South Asia).
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• In Sub-Saharan Africa, 5% (or 13% ofrecipients) payments directly into anaccount (mostly a mobile moneyaccount)
• In countries where more tan halfreceiving agricultural payments:
• Kenya: 20% (37% of recipients)• Tanzania: 24 %• Uganda: 15%
SOURCE: The World Bank (2015). The Global Findex Database 2014
The Incomes of Smallholder Households
Agricultural production
Odd Jobs from both agricultural and nonagricultural activities
Average number of agricultural production and nonagricultural production income sources (June to
December 2014)
INCOMES
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and nonagricultural activities
Self-employment
Transfer payments (private remittances and public income-
support transfers)
SOURCE: Anderon J., Ahmed W. (2015) Early Insights from Financial Diaries of Smallholder Households
Three Segments of Agricultural Households in Low - and Middle-Income Countries
Noncommercialsmallholders
Commercial smallholders in loose
value chains
Commercialsmallholders in tight
value chainsNotes
Population estimates 300 million smallholders1.5 billion people in households
165 million smallholders825 million people in households
35 million smallholders175 million people in households
500 millionsmallholders 2.5 billion people in smallholder households
General crop mix Staple crops Staple crops Some cash crops
Cash cropsRelatively few staple crops
Engagement with markets
- Most production consumed by the
- Some production consumed by the
- Some production may be consumed by the
- Some production may be consumed by the
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markets consumed by the household for subsistence, and additional food is bought in the market- Very Little, if any, engagement with any markets as a seller of food
consumed by the household for subsistence- Reliable surplus ofstaple crops sold through relatively informal, local markets
be consumed by the household for subsistence- Reliable surplus of staple crops could be sold through relatively informal, local markets- Cash crops sold in regional or export markets through contract farming
be consumed by the household for subsistence- Reliable surplus of staple crops could be sold through relatively informal, local markets- Cash crops sold in regional or export markets through contract farming
Access to improved agricultural technology
Very limited if at all Limited Good, thanks to value-chain farming bundles provided by the buyer
SOURCE: Christen R., Anderson J.(2013) Segmentation of Smallholder Households: Meeting the Range of Financial Needs in Agricultural Families
Microcredit and Agriculture –Terms and Conditions
Crop loans: average of 10 months
Livestock loans: 15 to 18 months
Cash flow analysis was introduced to evaluate borrower repayment capacity
Loans started small at roughly $60 or less for 3-6 months
Centenary BankUganda
ProCredit BankEl Salvador
77
Livestock loans: 15 to 18 months
Projected household cash flows were used to schedule periodic interest and partial principal payments.
Single bullet payments were scheduled for those without periodic cash flows
Annual nominal interest rates charged on the unpaid loan principal ranged between 12-27%
Loan officers about to graduate from local universities with little or no banking experience
SOURCE: Meyer R. (2015). Microcredit and Agriculture: Challenges, Successes, and Prospects
months
Borrowers could get repeat loans of increasing size and longer term.
Borrowers graduated to “automatic” loans with substantially lower interest rates after 3 succesfulloan cycles.
Collateral requirements were flexible combining fixed assets and guarantors
Loan officers evaluate clients and submit loan applications to branch level loan committees for approval
Microcredit and Agriculture - Results
$ 190 million in loans
$ 300 million in total deposits, 70% considered rural
Rural loan officers averaged more clients (289 to 320)
Higher operating costs (5.8% to 6.2%)
ProCredit BankEl Salvador
Centenary BankUganda
88
80% of total borrowers are rural
330: average number of clients per micro loan officer is 250 (it is expected to hire more staff)
36 branches and 3 lending offices
New satellite lending offices, e-banking products into rural areas
Income margin similar to urban branches
Lower average loan sizes ($1,686 to $1,130)
Loan loss provisions were lower (2.9% to 1.3%)
SOURCE: Meyer R. (2015). Microcredit and Agriculture: Challenges, Successes, and Prospects
Microcredit and Agriculture - Insights
Strategy it pursued:
Reduce business risk with a diversified portfolio (small and medium enterprises and corporations
Strategy:
Focus on farmers with a greater capacity to grow
ProCredit BankEl Salvador
Centenary BankUganda
99
(small and medium enterprises and corporations that reach middle and higher-end markets
Larger loans for medium enterprises and corporate finance (higher profits from larger loans to enable to expand outreach to the poor)
Financing and provide farmers appropriate technology to open up larger acreages for commercial farming
Make fewer very small loans
Increase lending to other segments including agricultural value chains
Basic individual lending technology was unchanged (very small loans $1,000 to $30,000; small from $30,000 to $150,000; medium above $150,000)
SOURCE: Meyer R. (2015). Microcredit and Agriculture: Challenges, Successes, and Prospects
Thoughts for the Future
DFS (digital financial services) are addressing a number of traditional pain points inthe context of agricultural finance (easy for save, borrow, manage irregular income,obtain inputs, insure against loss)
• Expanding mobile phone access, network coverage and digital ecosystems, we will see morefinancial service providers targeting the largely untapped smallholder client base
• Mobile wallets as an entry point to full banking access in the future, starting with payments andability to save and pay small loans
Serving smallholder farmers: recent developments in digital finance
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• Nano-sizing insurance premiums
SOURCE: Grossman J, Tarazi M. (2014) Serving Smallholder Farmers: Recent Developments in Digital Finance // PICTURES SOURCE: TeamSpirit (2015); DAI (2013); Philosophy For Change (2013)
Smallholders Challenge:
Helping farmers acquired necessary inputs
Nigeria Growth Enhancement
Support Scheme (GESS )
• Provides series of incentives to encourage the critical actors in the fertilizer value chain towork together to improve productivity, household food security and income of the farmer.
• Target 5 million farmers in each year for 4 years that will receive GESS in their mobilephone directly totaling 20 million at the end of 4 years.
• Provide support directly to farmers to enable them procure agricultural inputs at affordable
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prices, at the right time and place.
mFarms• ICT platform designed to help stakeholders in agricultural value chain communicate with
each other efficiently, establish and maintain business relationships and manage the flow ofgoods and services among them. It also assist to fertilizer importers and distributors in theirbusiness management by using mobile phone .
• Indicators: Fertilizer received, fertilizer sold, stock situation, capacity of stock, and reportgeneration.
• Operational in Rwanda, Ghana and Kenya.
Smallholders Challenge:
Helping farmers maximize income at point of sale
Opportunity International Bank of
Malawi (OIBM)
• In 2007 Bill & Melinda Gates Foundation (BMGF) provided funding to OIBM to purchase a roving bank capable of providing a full range of financial services.
• The catchment area included six trading centers along a predetermined route in central Malawi. They developed products suitable for rural clients and they reduce identification requirements, reduce minimum balance for savings accounts, and waiving collateral requirements for loans.
• Farm Concern International (FCI), through USAID funding implemented the project that
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E-warehouse
• Farm Concern International (FCI), through USAID funding implemented the project that addresses the challenges of marketing cereals and pulses in Tigania East and West in Eastern Kenya. It is focused on cereals and pulses.
• It operated within FCI’s existing network of commercial villages and commercial producer groups, organizing and developing farmers' capacity, providing hands-on support in post-harvest handling and storage, and linking them to markets.
• The project worked with 25,940 households and sought to address market gaps by developing an integrated and mobile-enabled innovative financing and grain banking system to help households store and manage their crops.
Smallholders Challenge:
Managing liquidity
Tigo Cash • Service facilitates micro-transactions that are safe, fast, and affordable. It’s a Luxembourg
company, Swedish heritage. In 16 countries (Latin America, Africa & Asia) ; > 30 millionsubscribers
• Payment & remittance services
• Saves commission to distributive trade when customers buy airtime via self top-up
mVisa• Mobile phone service to meet banking needs for unbanked and underserved. Overcomes lack
of access to physical bank branches and works across different financial institutions and
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mVisa of access to physical bank branches and works across different financial institutions and mobile networks.
• Continuing with financial education, nationwide street theaters, radio programs, video games and more have helped introduce the basics of budgeting, saving and other financial matters to over 40,000 Rwandans.
Zoona
• Zambia-based , it will increase access to financial and payment services to 150,000 low-income customers per month by 2015. 2,000 Zoona Agents will benefit from enhanced revenue streams. It also provides these agents with 0% interest working capital through an innovative partnership with Kiva NGO.
• It is building a cross-country distribution network of agents to convert electronic value to cash and vice versa, in convenient, high-traffic areas such as bus stations, markets and shopping centres. Consumers are able to send and receive money, buy airtime and pay bills.
Smallholders Challenge:
Confronting special risk of agriculture
EcoFarmer• Zimbabwe’s first micro insurance product designed to insure inputs and crops against drought
or excessive rainfall and assisting smallholder farmers to make and receive payments.
• Daily weather information, farming tips and information on when and where to sell, and the best price.
• Has developed a weather-indexed drought insurance service enabling smallholder farmers to buy insurance for as little as US$0.08 per day
Kilimo Salama
• Offer farmers who plant on as little as one acre insurance policies to shield them from significant financial losses when drought or excess rain are expected to wreak havoc on their
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Kilimo Salama significant financial losses when drought or excess rain are expected to wreak havoc on their harvests.
• Partnership between Syngenta Foundation for Sustainable Agriculture, UAP Insurance, and operator Safaricom.
• Mobile phone registry, payment system and distribution through rural retailers.
Agrilife
• Platform in Kenya where financial institutions and suppliers can obtain near-real-time information on farmers’ ability to pay for services. It serves farmers who are members of producer organisations and who have business relationships with millers or other processors.
• Mobipay Kenya Limited is the company behind Agrilife Programme, has entered into current working partnerships with New KCC (a dairy processor in Kenya), Smart Logistics Solutions Limited (sorghum contractual supplier in Kenya) and Mercy Corps (dealing with multi-value chains in Uganda)
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SOURCE: World Resources Report 2013-2014
Narrative - 1
• The population of the world is growing, their per capita demand for food is growing, and the ‘newer’ foods in their diets demand far greater investment in their production per kilo/calorie. Therein lies a great opportunity for the financial system.
• Much of the world’s food is produced by families that depend on agricultural production for a significant portion of their household income. But, few families depend exclusively on farming for all of their incomes and engage in multiple income earning activities.
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• Globally, financial systems do not serve well rural households as these are generally poorer, are viewed as engaging in riskier economic activities, and are more costly to reach.
• Though recently, advances in digital payments systems are bringing rural inhabitants closer to formal banking systems for the first time.
Narrative -2
• Over the past 5 decades there has been a shift from financing agriculture through government sponsored lending programs to financing from the private sector, especially when it comes to lending to intermediaries along the value chain.
• This is particularly relevant for high value products that are sold into highly organized markets, especially for export of mass consumption.
One critical insight that these institutions have gained is that the market for individual
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• One critical insight that these institutions have gained is that the market for individual household financial services can be segmented in a way that helps understand the mix of appropriate products it requires.
• There are three basic market segments that encompass most farming families.
• Over the years financial institutions have made a lot of progress to reduce the risk of lending into the agriculture sector, manage costs, and turn a profit. These institutions include microfinancing institutions, development and specialized agricultural banks, and, commercial banks.
Narrative -3
And, here are some of the lessons they have learned along the way:• Hire trained Loan Officers who understand the regional agricultural products and cycles• Adapt individual loan products to these cycles, and related cash flow demands• Connect collections to marketing channels if possible• Provide technical assistance to guarantee quality and quantity of production• Use techniques from micro-credit to follow through and collect on loans• Understand and connect with multiple sources of income / repayment at the household• Limit exposure in the portfolio to specific crops or products – conversely, diversify loans across
sector.
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Some related experiences that offer further insights:• Usefulness of harvest savings accounts• Indexed insurance to address broad based agricultural risk• Payments and CCTs as sources of significant cash flows into rural areas• Alternative, non-bank financing mechanisms that are filling in market gaps
� Warehouse receipts� Factoring� Leasing for equipment purchase� Contract farming� Value chain supplier credit