Peter Ndegwa – Head AgriBusiness, CoopBank

AFRACA Expert MeetingManaging Risk in Financing

Agriculture

1 – 3 April, 2009

Jo’Burg, SA

Coop Bank

Publicly quoted company with a capital base of USD 0.2bn and asset base of about USD 1bn

Owned 63% by cooperative movement thru Coop Holdings Ltd and 27% by public at NSE

Has 54 branches and hopes to increase to 86 branches by end of year

Serves over 7m members and indirectly over 28m Kenyans

Coop Bank

We provide financial services to both cooperatives and corporates

Products include working capital loan, overdrafts, farm input loans +crop advance(coffee under Stabex facility by EU), dairy sector loans, school fees loan,

We are working on VC Financing, lending to SHGs(dairy) and CBSs(traders +artisans) thru seed capital from the bank and Guarantee mechanisms with ABD, AFD,

Sacco link- Visa branded cards that enables Saccos’ members access their funds at FOSAs- this is a multi-million Kes project to increase our footprint without opening more branches (brick +mortar)

Hope to be hooked up to 300 SACCOs by year end

A) Agribusiness- Value Chain Financing

Potential Risks:

Fluctuations in market prices due to oversupply e.g. grains. This is mainly occasioned by farmers harvesting at the same time and illegal imports

Lack of market access due to weak structures and cartels, hence no cash inflows to repay the loans

Fluctuations in market demand for the produce

Failure by the buyer to pay for the delivered produce; sometimes even the collapse of the buyer. Past experiences include sugar and coffee

Forgery of the delivery documents by borrowers e.g. crop advances

Diversion of the loan to uses other than the ones applied for

Cont’d

Side selling (breach of supply contract) in order to evade loan repayment

Vagaries of weather, poor weather forecasting (early warning systems) and lack weather-index insurance measures

Lack of insurance of cover for crops and animals

Destruction / encroachment of water catchment areas posing risks to environment hence affecting rain patterns

Poor/bad cooperative governance

Poor record-keeping and MIS reports

Commonly adopted risk mgt measures

Loan applications must be supported by the following;

Tri-partite agreement involving the borrower, buyer of the produce and Cooperative Bank to safeguard the market and remittances

Delivery statement indicating the date of delivery, quantities, grade and its net value in Kenya shillings certified by the buyer in case of crop advances

Proof of steady cash flows for the last 2 seasons and over the loan period

Written instructions by the borrower to the buyer to channel proceeds to his/her/their account at Coop Bank

Proof of net payments received for the enterprises in the last season and the expected net payment the new season

Account(s) with Coop Bank to channel disbursement and loan repayments

Cont’d…

Certified copies of the formal identification documents e.g. national ID card/PIN/ Certificate of incorporation of the borrower and buyer

Letter of undertaking by the buyer to honor remittance instructions

Collateral e.g. Chattel mortgage, debentures, land title deeds and guarantee or their combination

Audited accounts for the last three years or for the period in existence if less than 3 years

Registration/ trading certificates

Evaluation report on credibility, ownership and liquidity of the buyer

Call report by the CRO/CRM on physical verification of the deliveries and existence of the borrower

Measures of Risk Monitoring

Reports: Used by CMD, Branch Managers and CRMs/CROs. They include;

Daily Arrears reports, showing outstanding amounts/days. Tolerable limits for PAR shall be 5% and 90 days past due.

Monthly procedures compliance report, prepared by the CRMs ascertaining adherence to approved guidelines.

Early Alert meetings with Credit Administration Division (CMD)

Regular meetings with clients to assess business

B) Savings and Credit Cooperatives Societies- SACCOs

Risks Associated with Saccos

Lack of loan repayment ability- loss of members, parent company winding up

Misappropriation of funds by the officials

Misallocation of funds by the officials

Mitigating the risks

Proper verification of the parent company i.e. to establish its reputation

Proper and full appraisal, looking at all aspects

Ensure proper record keeping

Education of members and officials

Ensure proper internal controls and procedures are in place

Cont’d…

How long has the SACCO been in existence

Where it derives its membership

The stability of the membership against the employer (parent company).

The stability and experience of management

Identify the products they are offering to the members and the terms of such products.

Identify if they have any credit policy/ procedure and their adequacy

Identify problem areas such as loan backlogs, establish their extent and reasons

Cont’d…

Look at issues that are or may affect the employer and hence impact on the SACCO

Ensure that the check-off (monthly remittances) are regular

Thank You

Asante!