Sources of funding and support systems for Agricultural Value Chain Finance – lessons from Asia

1. Sources of funding and support systems for Agricultural Value Chain Finance – lessons from Asia Anup Singh

2. Financial exclusion in Agriculture in Asia is a prevalent problem • 600 million adult people in Asia – (one-tenth of the world’s and one-sixth of Asian population – do not have access to quality, affordable, secure, formal financial services such as savings, credit and insurance. • 90% excluded are on agriculture as their primary source of income. % of households without access to financial services • Financial exclusion means high costs for poor producers in AVC, as they have to depend on informal financial services. • Leads to social exclusion, particularly in rural areas. >80% 60-80% 40-60% 20-40% <20% Source: World Bank data, 2007 and AFI 2

3. Value chain finance presents a unique opportunity Areas Benefits • Minimises costs thus enhances efficiency • Mitigates risks Improved product quality and delivery • Reduces information asymmetry • Trust-based Financial inclusion • Enables core business strategy development • Product and process innovations • Value accretion due to net value added • Continual enhancements along the VC • Increased access to markets and information Export competitiveness 3

4. Sources of funding for agriculture in Asia are diverse in nature direct or WITHIN chain finance INDirect or OUTSIDE THE chain finance SELF-FINANCE 4

5. Direct versus indirect finance Cons Pros • Low costs, low risk • Tailor made financing • Improved chain efficiency • Better yields via improved inputs • Lesser value realisation • No cash benefits • Dependency on the lenders • No long-term loans • Lack of transparency in the arrangement. Direct Finance • Medium to long term financing • Tailor made repayment • Transparent, market-based • Less monopolistic • More efficient • Access to range of services • High cost of lending to the producers • Time consuming Requires collateral • Less access to information • Enforcement issues Indirect Finance 5 References were drawn from Calvin Miller’s work on Agricultural Value chain financing

6. Financing instruments prevalent in Asia 6 References were drawn from Calvin Miller’s work on Agricultural Value chain financing

7. Suitability of approaches and conditions for operations Input needs and extension services: Generic or specific Product type: Unorganised local staple, organised local staple, captive global buyer product or exportable cash crop Aggregation point: Not at all aggregated, at local traders and markets or at cooperatives/associations Value chain power: Government regulated, buyer or supplier power Number of producers: Small numbers located in wide dispersion, large aggregated producers Market characteristics: Limited formal markets, organised local markets or export markets Crop characteristics: Price incentives for quality, perishable post harvest, durable post harvest, no price incentives for quality Financial attractiveness: Credit worthiness and profitability based Risks associated: Supply, production, market, price and human risks Financing gap: Formal and informal finance, range of services needed 7

8. Examples from Asia 8 References were drawn from Dalberg’s Agri-financing analysis

9. Risk management – what works in Asia? Key risks Risk Mitigation • Market based pricing, hedging and buffer stock • Future, swaps, options and forward contracts Market measures • Market/price risk • Crop/Weather risk • Collateral risk • Production risk • Human risk • Warehouse receipt financing • Index based weather insurance • Crop insurance • Farmers and family insurance • Cash flow based lending • Commitment savings Innovative finance • Drought resistant varieties • Input, supplies and equipment financing • Irrigation financing Input Information • Market information services 9

10. Key lessons learnt with implications on Africa (1/2) Government role is paramount as facilitators: Government should play a role of facilitator by relaxing the policy norms; subsidising institutions and infrastructure; encouraging financial services providers to support the agricultural sector; effective land and collateral registers; increasing access to information and improving operation of courts, and the cost-effective and timely enforcement of creditors rights. 1 2 Integrate finance suppliers into the value chains: Although direct financing is flexible, it runs the risk of producers’ exploitation. Hence, governments can support lending by banks and FIs through credit enhancement programmes and risk cover through guarantees. Affordable, flexible and accessible finance products:Lack of appropriate financing product limits the value chain players to derive the full potential of the value chains. Thus, the focus should be on design of affordable, flexible and accessible financing products. 3 10 References were drawn from FAO’s work on agri-value chain financing

11. Key lessons learnt with implications on Africa (2/2) Structured technical assistance and capacity building programmes : Club credit product with a technical assistance and capacity building programme to minimise risk (Example: ‘Land Bank’ and ‘One Nation Bank’ in Philippines). 4 5 Market linkages for both forward and backward needs of the value chain: Formal financiers should recognise the entire value chain of any commodity as one interdependent unit. Enhancing information systems:Information systems and access to information are beneficial to producers in multiple ways 6 Enhanced cooperation at the producers’ level : Cooperative farming allows small scale farmers to pool their resource and invest in better quality inputs and collectively owned equipments. 7 11 References were drawn from FAO’s work on agri-value chain financing

12. Finance upstream actors • Lead firms financing Scaling up AVCF in Africa - role of formal financial institutions • Financing lead firms results in effective growth of value chain as the markets are secured, fair pricing and non-predatory model. • For producers in unorganised and organised local staple, formal financiers can finance indirectly through trade finance either to upstream actor. • Innovate • Finance producers • Formal institutions can build on the existing value chains by innovating new products and financial services to meet other financing needs • For unorganised value chains with dispersed producers and few points of aggregation, the demand for finance by the producers can be met by reaching the producers directly. 12 References were drawn from Dalberg Advisors work on agri-value chain financing

13. Mobile money as a catalyst for finance and information in Africa Importance Is Africa ready for Mobile Money? • Concentration of buyers • Producers base • Frequency of payments • Input finance mechanism used • Large subscriber base • High number of mobile money agents (which is expanding even further) • Wide network reach of MNOs • Sustainable volumes • Expanding ecosystem • Success of M-Pesa and replicators • Socio-demographics of the farmer base • Low cost of transaction • High security of the transactions • Solving the “last mile” problem • Seamless integration of buyers and sellers • Reduced leakages • Enhanced immediacy and increased frequency of the transactions • Improved economics • Accountability 13 References were drawn from Ignacio Mas’s work on mobile banking and role in agri-value chain financing

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