Expanding Agriculture financing zegeye Teklu zteklu@acdivocaeth.org zegeyeteklu@yahoo.com April 2013

1. Expanding Agriculture financingzegeyeTekluzteklu@acdivocaeth.orgzegeyeteklu@yahoo.comApril 2013

2. AGP-AMDe EXPANDING AGRICULTURAL FINANCE: ZegeyeTeklu Access to Finance Bahirdar University April 6 2013

3. ACDI/VOCA, Overview • US based international development organization • Currently manages more than 90 development projects in 40 + countries on; • Agribusiness Systems • Enterprise Development • Financial Services • Community Development • Food Security

4. AGP-AMDe, Ethiopia • - USAID, 2011-2016, $49.85m • Value chains: • Wheat • Maize • Sesame • Coffee • Honey • Chickpea Value Chain Competitiveness Access to Finance Increased investment and innovation Enabling Environment

5. ACDI/VOCA, Overview Cont. • Since 1997, ACDI/VOCA has been assisting Ethiopian cooperatives and Agribusiness Development, • Cooperative Union Project (CUP, 1998-1999), • Agricultural Cooperative Development in Ethiopia (ACE) 2000-2004, • Agricultural Marketing Development Program (AGP-AMDe) 2011-2016

6. Objectives of this presentation • Understand what agricultural Finance programs are being funded and under what terms • Discuss success stories and possible replication • Understand farmers’ and coops’ perspective on accessing finance – process, opportunities and challenges • Ideas for improving relations between cooperative and financial sectors

7. AGP-AMDe - Linking Farmers to Markets • Value Chain Competitiveness • Access to Finance • Enabling Environment • Increased investment and innovation in: • Wheat • Maize • Sesame • Coffee • Chickpea

8. The current access to finance activities of ACDI/VOCA • Improve access to finance for input and output purchases and investment for cooperatives and agro dealers through; • development of bankable business plans, • financial plans and loan applications for input/output for short and medium-term capital. • developing new or enhancing existing financial products for cooperatives and agribusinesses • improving linkages between financial institutions and finance demanders • Delivering training and development of credit facilities from agribusinesses (cooperatives) to producers for inputs (and output advances)

9. ACCESS TO FINANCE Cont. • Policy improvement (e.g. exemptions, incentives…) • Expansion of banks • Expansion of MFIs • Expansion of Cooperative Banks • Alternative finance systems

10. Lessons learned • High financial transaction costs of serving dispersed and small farm households • Heterogeneity, seasonality, and duration of farming and non-farming loan needs • Profitability and risk of on-farm investments • Loan on collateral bases • Need for training/informational needs of bank staff and farmer clients • Politically sensitive environment • Low loan repayment discipline

11. Unique Features/Requirements of Ag. Finance • Farmers need more financial services, not just credit for agricultural inputs and outputs • Financial institutions need diversified portfolios, not just agricultural loans • Transaction costs are too high for small holderfarmers • Political interventions can undermine publicly-owned institutions • Too much funding from donors and governments discourages banks from developing own resources (mobilizing deposits)

12. Ag Financing Today • Small holder farmers have limited purchasing power • Restrictive government policies eliminate international finance and private sector lending to agriculture • Agriculture lending is risky due to uncertainties in market structure • Cash flows are unpredictable, borrower collateral is limited • Agricultural value chains are vastly under financed • Banks focus on more attractive markets and larger borrowers • MFIs lend to small holder farmers but capacity is limited • SACCOS are underdeveloped and under-capacitated • Insurance sector is in infant stage of development

13. Current Experiences • 90% of lending is informal and not favorable for farmers: • Lenders: loans re-paid at harvest, high interest rates • Buyers: spot market cash purchase or storage service • Most loans are for short terms • Lenders focused on profits – not on providing good financial products • Pricing is not transparent – accounting is less efficient • Strong power relationships with large value chain lenders can be negative • Less than 10% of financing is through cooperatives • Business investments and output marketing • Cooperative development strategy – improve bankability and financial controls

14. Innovation and Risk Assessment Current Experiences, Cont. • Seasonality of agriculture • Covariant risk • Lack of: • contract enforcement mechanisms • registered credit history • collateral • insurance (e.g. crop insurance) • Geographic dispersion of clients • Low levels / poor: • economic activity • ag productivity • physical infrastructure (roads, communication, etc.) • human capital (illiteracy, health, etc.) • Policy and regulatory constraints (leasing, warehousing support systems etc) Coordination Tailored service delivery

15. The impact of these constraints on supply is… • High operating costs for the lender • High information costs for the lender • Higher real and perceived risk for the lender • Higher requirements bar for ag. sector, and coops in particular

16. Alternative ways of agricultural financing • The need for promotion alternative financing that provide both working capital solutions and investment financing crucial. • warehouse receipt financing, • leasing of agricultural equipment _ equity financing,

17. Warehouse receipts system • The Proclamation to Provide for a Warehouse Receipts System No.372/2003 identifies the Ministry of Trade(MOT) as the implementing institution with the responsibility to regulate WRF operations and enactment of directives for matters that have not been covered in the Proclamation • In a parallel system, ECX has been given the mandate to operate and regulate the warehouses run by ECX. As such, the ECX is both regulating and operating the only functioning warehouse receipt system in the country

18. Basic functions of the community warehouse receipt system End Markets Consumers ECX Traders Processors After the depositing farmers have been grouped based on location and quality standards, the group’s decision to sell is transferred to the cooperative and then to the union. Warehouse operation* Deduct warehouse operation charges and transfers to MFI Union Overseas grading and handling MFI Regulatory body Coop storage Grants loans Farmers can either sell some of their output to the cooperative and store some through the CWRS or can store all of their produce thesystem and access additional finance MFI deducts interest and coop payment and debits farmers account Farmer Payment Output Oversight WRS GRN

19. Agricultural equipment Leasing • Is a useful means of alternative for smallholders, cooperatives or medium level farmers with limited collateral and therefore restricted access to traditional credit • MOT issues licenses for capital goods leasing • According to several stakeholders, it was unclear for a period of time whether the MOT or the National Bank of Ethiopia (NBE) was the proper body to issue licenses for lease financing • This uncertainty held up the development of an innovative form of financing for the agricultural sector • However, this issue has now been settled and the MoT is currently developing what competency requirements lessors need to fulfill to qualify for a license. Once these requirements have been developed, the MoT will be able to issue licenses to companies wishing to provide lease financing arrangements on agricultural equipments

20. What is Leasing Business? "Leasing Business" is an alternative form of financing technique designed to meet the investment and working capital challenges of institutions that has weak collateral capacity to borrow against. According to the Ethiopian Capital Goods Leasing Business Proclamation No.103/1998 definition, "LeasingBusiness" Financing in kind for production and service purpose by which a Lessor provides Lessee with the use of specified capital goods on Financial Lease or Operating Lease or Hire-Purchase agreement basis, without requirement of collateral, for a specified period of time and collects in turn a certain amount of installment in periodical payments over the specified period.

21. What Is Leasing Leasing (Asset based financing) is a medium-term financial instrument for the procurement of machinery, equipment, and/or properties. A contract between two parties wherein one party (Lessor) provides an asset for use to another party (Lessee) for a specified period of time in return for specified payment.

22. Type Of Leasing Products Finance Lease: A finance lease is a contract that allows the lessor, as owner, to retain the legal ownership of the asset while transferring substantially all the risks and rewards of economic ownership to the lessee. Operating Lease: The lessee signs a contract for the short-term use of the equipment and payment predetermined rental. A common example is car rentals. The lessor bars the risk related to the residual value of the equipment, as well as the risk of obsolescence

23. Type Of Leasing Products Hire Purchase: With each lease payment, an equal percentage of the ownership is transferred to the lessee and, upon effecting of the last payment, the ownership of the capital goods shall automatically be transferred to the lessee

24. SUPPLIER VENDOR LESSEE LESSOR • HOW LEASING WORKS Delivery Payment Sells equipment Selectsequipment THREE-PARTY TRANSACTION Lease payments Rental (Contract)

25. AMDe - Structured Analytical Approach • STEP 1: Identify where finance and investment is tied to value chain competitiveness, value addition • STEP 2: Analyze the financing demand and supply gaps that limit access to needed financing • STEP 3: Evaluate the commercial interests and capacities of value chain actors to bridge these gaps • STEP 4: Design interventions that facilitate value chain actors in closing the gaps to finance flows

26. Agricultural Value Chain finance • Value chain finance means linking financial institutions to the value chain, offering financial services to support the product flow and building on the established relationships in the chain. • Right amount, at right time, for right VC actors, at right place • Not all people but Value chain actors

27. Ag Value Chain Financing Def. Cont. • Financial products and services that flow to or through any point in a value chain • Increases value chain actors' income • Increases VC growth and competitiveness • Establishes strategic alliances between the parties • Reduces transaction costs - lowers risks • Increases access to financial services

28. Value Chain • Value Chain refers to every transaction in the production and marketing of a commodity. For example in wheat, the value chain would include the business of wholesaling inputs, the business of retailing inputs, the business of converting inputs into wheat (through farm production), the business of transporting wheat, the business of milling wheat, and the business of marketing the milled wheat. • For each business in the value chain there are cash flows where goods and services are purchased and sold. Likewise there is value addition at each businesses • Farm to Fork

29. Demand and Supply of Value Chain Finance SUPPLY DEMAND End Markets Processors Banks Cooperative Union CBE / CBO Primary Cooperative Traders MFIs Producers SACCOs Seed Multipliers

30. Thank You April 2013 Bahirdar University ZEGEYE TEKLU