Climate Change: Opportunities and Challenges

1. Climate Change: Opportunities and Challenges Prepared and Presented by: Mr SEEKU JAABI Microfinance Department Central Bank of The Gambia West Africa English Speaking Regional Workshop On ‘Innovations in addressing rural finance challenges in Africa’ held on March 31- April 2, 2008 in The Gambia

2. Table of Contents • Introduction • Rationale for Climate Change Response • Climate change risk management • Value Change Financing • Stages of Agricultural finance • Financial Linkages • Technology Innovation • Tools to Mitigate Risks • Govt Policies on climate change • Conclusions

3. 1. Introduction • Need for FIs to recognise global response to climate change • Fls face a great challenge of coping with a rapidly changing risk landscape from which global sustainability issues continues to emerge • Its clear that the risks posed by climate change are serious and immediate while the opportunities largely go untapped • In Africa, we can economically use energy for development, contribute to poverty reduction be aware of environmental issues with global warming

4. 1. Introduction Cont. • Africa needs to increase its carbon foot print in a sustainable manner with resources available in terms of wind mills for poor rural masses, water mills, solar panels, biomass furnaces, solar cookers, LPG burners which are economically and less impact on environmental pollution and sickness. • The question is, are our FIs ready to finance these opportunities available, given that we have God given abundant solar energy?

5. 2. Rationale for Climate Change Response • Majority of Africans live directly off land in rural areas –i.e farming for sustenance • Food for all is produced from the land and • Land has been the first to feel the effects of climate change • Understanding climate change in rural areas is scanty and no mechanism has been developed to cope with the changes • Neither have FIs realised the changes present problems but create opportunities of products that can help preserve the environment

6. 2. Rationale for Climate Change Response • SSA is poor and out of 49 poorest countries in the world, 34 are in Africa, rural areas have the highest poverty levels • It is evident that most severe impact of climate change (extreme weather events, drought, crops failure) will fall most severely on poorest regions that are least able to cope with and adapt to impacts of climate change • Africa is already behind in understanding changes more so putting in place mechanisms to deal with it • To address this, FIs need to understand climate change, finance new innovations and technologies to ensure Africa and its local institutions are not left behind

7. 3. Climate Change Risk Mgt • With the risk posed by climate change, there is no doubt that investment environment has to change as a result • Need for CEOs to position their institutions to leverage new investment opportunities as well as how to manage climate-related risk in their client relationship • This includes assist clients to assess exposure to climate change, provide products and services that improve client’s risk mgt and integrate its related risks into investment and lending policies • Forming strategic partnerships in financing to mitigate risks, improve competition, increase profits and environmental protection in the process

8. Investment to conserve environment • Banks to provide access to supportive elements that promote care of ecosystem • Investments also directed to measures that conserve environment- waste reduction initiatives • Issues to pollution in China, India etc threatening boycott of Olympic in China • FIs should start reduce their own direct impact on environment- use of huge energy resources

9. AFRACA Assists in Disseminating Information on Climate Change • Foster cooperation by supporting regional conferences on topical rural and agric finance issues • Initiate and support multi-country studies on problems of common interest • Facilitate training of staff from member institutions through TCDC exchange programme • Commission a study on’ effects of climate change on agric prodn and food security and role of FIs for SSA’ in Benin- April 2008 • Organise various forums-central banks, commercial banks, agribanks, microfinance and determine way forward

10. 4. Value Chain Financing What is Value Chain Financing? • Defined as sequence of value –adding activities in a supply chain from production to consumer, through processing and marketing • Set of processes and flows from inputs to production, processing, warehousing, marketing and the consumer • It is about financing the flows along the chain • For centuries, traders have provided finance to farmers for harvest, inputs and other needs • Traders in turn receive finance from millers and processors who in turn are finance by wholesalers and exporters in the forward/backward linkages

12. 5. AgriculturalFinancing • Govts and donors realised that majority of rural households do not effectively have access to agric and agribusiness finance • Their direct intervention to correct the imbalance failed due to host of reasons • However, businesses have come to realise that with the new innovations in technology, information mgt and business models, wealth of new opportunities are there to profitably work directly or indirectly together • With increase attention to value chain, opportunities for promoting and facilitating access to finance became apparent

13. Agricultural Credit Era (1950 a 1985) Directed production credit Subsidized credit High transaction costs of lending High loan losses Government and donor refinanced lines of credit through agricultural banks and others Informal family and trader finance for small farmers Donor Microfinance Era (1980 a 2000) Rapid, small working capital loans Group lending approaches Focus on non-agricultural activities Forces groups savings Separation of financial services and business support services. High cost of microfinance 5. Stages of Agricultural Finance

14. Value Chain Finance(2005 to present) Strategic focus on market potential of businesses Linkages among suppliers, producers & marketing companies Growing importance of standards Greater use of risk mitigating tools Growing integration between banks and business Growing use of new technologies 5. Stages of Agricultural Finance (cont.) • Commercialization of MFIs • (2000 to present) • Formal MFIs • Little subsidy • Multiple Products • Expansion and competition • New technologies • Interest by capital market investors and lenders

15. 6. Financial Linkages- Strategic Partnerships • Large businesses may integrate credit and other financial services directly or indirectly at many or all stages in the chain by providing upstream and downstream in the chain • They can facilitate/intermediate from third party to the client in the chain, eg export company arrange funding for producers it buys from • Being within the chain often better placed chain actors obtain funding from FIs • Innovations in technology has made value chain financing saver and profitable

16. 6. Financial Linkages NGOs Credit Unions Village Banks Agro-processors Input Suppliers Marketing Companies Leasing Companies Warehouse Operators Supermarket Chains Farmer Associations Private Banks State Banks Postal Banks Insurance Cos. Non-bank financial institutions Investment funds Farmers / Rural Clients Partnering for better access, services and efficiency

17. 7. Technology Innovation • Communication Technology -- M-PESA–Kenya; G-Cash--Philippines • Purchases & sales • Commodity prices • Money transfers, top-ups air time, electricity • Payments • Point of Sale Access • ATM & Smart Cards

18. 7. Technology Innovations Cont. • Smart cards, internet, cell phone make communication with banks, farmers, agribusinesses, suppliers, exporters easier • Partnering in value chain financing increases efficiency, mitigate risks and increase profits than traditional banker doing all alone • Access to market information is available for buyers and sellers with SMS eg Trade Net Solutions in Ghana

19. 8. Tools to Mitigate Risks • Use of futures and options • Warehouse receipts as well as warehouse storage capacity • Market information services • Contract farming • Insurance • Access to technical assistance

20. 8. Risk Analysis – Incorporating New Elements • Client /business capacity • Repayment capacity • Security coverage • Cash flow • Market growth and risk • Competitiveness

21. 8. Tools to Mitigate Risks Cont. • Traditional loan risk assessment is still important but MF gives more emphasis on market, competitiveness and cash flow • Giving less to conventional collateral, hence a big benefit for the poor • This is facilitated by a new and improved technologies and product

22. 9. Government Policies to Support Value Chain Finance • Business capacity building and market integration • Contract farming and out grower schemes • Technical capacity in market norms and standards • Commodity exchanges and active futures markets • Insurance innovation, data collection and initiation • Market information and access • Infrastructural investment • Product and service innovation and diversity • Technology adaptation and access

23. 10. Conclusions • With the understanding of climate change, FIs will take up challenges and plan to accommodate new opportunities • New ways of managing risks, enabling environment for new industries and products to prevent environmental degradation • Agric finance is essential as an employer of the majority of population and food security purposes

24. 10. Conclusions Cont. • However, financing to this sector has been disappoint due to its inherent risks • Govts and donors initial attempts to turn-around the situation failed • However, entering into strategic partnerships in value chain financing became a viable way forward • Alternatively, to remain sustainable, is to diversify into products and services by exploiting within the agric value chain

25. THE END THANK YOU FOR YOUR ATTENTION

26. Contact Address Mr Seeku Jaabi Microfinance Department Central Bank of The Gambia Tel 00220- 4223168 / 9911775 Fax 00220 – 4226969 / 4201405 Email: sjaabi@hotmail.com jaabiseeku@yahoo.com