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246WB -Managing Risks in Financing Agriculture - Renate Kloeppinger-Todd
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Transcript of 246WB -Managing Risks in Financing Agriculture - Renate Kloeppinger-Todd
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7/31/2019 246WB -Managing Risks in Financing Agriculture - Renate Kloeppinger-Todd
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Managing Risks in FinancingAgriculture
Renate Kloeppinger
Rural Finance Adviser
The World Bank
AFRACA Agribanks Forum
4-7 May 2010, Abuja, Nigeria
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Presentation Outline
Background
Findings from a Conference
Findings from a Study
Conclusions
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Background
Agriculture Credit - The history of failedinterventions
Agriculture Credit Overview of recent approaches
World Banks work in Agriculture Risk Management
Food Crisis and the renewed interest in FinancingAgriculture
Studies, Conferences, and New Interventions
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Agriculture Credit and a History of FailedInterventions in the 80s and 90s and littleactivity in most of the 2000s Emphasis on Agriculture Development Banks and
large credit lines = low repayments, elite capture, politicalinfluence on credit decisions
Subsidized interest rates or interest rate caps = banksare unable to recover their costs; if there is reimbursementfrom the government most often limited funding leads tocredit rationing and again to elite capture
Loan forgiveness programs = bad credit culture
Savings completely neglected = farmers are unable tobuild up reserves for own risk management purposes
One off actions - sustainable access to credit for farmers
not a topic Guarantee programs for banks are expensive and often
lead to moral hazard and cherry-picking
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Recent approaches to agriculturefinance
Focus on private commercial financial institutions Emphasis on institutional development and capacity
building of financial institutions
Sustainable access to financial services, not only credit
Managing riskin financing agriculture is in the forefront
Focus on smallholder farmers (or their organizations)rather than large farmers only
Financing (along) the value chain receives attention
Insurance is a hot topic
Partial risk guarantee schemes are increasingly set up
Use of smart subsidies
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Expert Meeting on Managing Risk inFinancing Agriculture, April 2009,
Johannesburg
14 Findings
Financing for Agriculture is viable if supportedby sound risk management at multiplelevels
Good banking practices combined withunderstanding of the sector and the clientis a core requirement
Insurance is one tool in an overall riskmanagement strategy
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Expert Meeting on Managing Risk inFinancing Agriculture, April 2009,
Johannesburg
14 Findings Mutually beneficial partnerships through which
risk and benefits are shared lower risk
Aggregation of clients reduce risk andtransaction costs
Innovative forms of collateral and collateralsubstitutes provide added security to lenders
Financial literacy education is equally importantfor staff and clients of financial institutions
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The Study on Credit RiskAssessment and Management The
Questions Agricultural Credit Risk Assessment How is a credit request assessed?
How important is agricultural domain knowledge?
Is credit-risk quantified at the loan-level and at theportfolio level?
Agricultural Credit Risk Management How common is the use of collateral substitutes?
Do lenders facilitate access to risk mitigation
services for borrowers? What mechanisms are used?
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The Study Sample and Method
Sample:
17 institutions in 7 countries Focus on Africa and Asia
Cover major institutional types - Commercial banks(12), DFIs, and microfinance organizations.
Method: Rapid assessment of 15 institutions
Detailed assessment of 2 institutions
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The Institutions Studied
Malawi: OIBM, MRFC
Zambia: Stanbic, Barclays, Dunavant,Cropserve
Kenya: KCB, Equity, Coop Bank, AFC India: ICICI, HDFC, SBI, Basix
Thailand: BAAC
Armenia: ACBA-Credit Agricole
Kyrgyz Republic: Ayl Bank
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Study Findings - Credit RiskAssessment
Small Loans Approach 1: Parametric (rules of thumb, experience-
based)
Approach 2: Parametric + outsourcing
Large loans traditional financial ratio analysis.
3 banks use credit bureau only for largefarmers
1 bank uses bio-metric identification
5 banks use credit grading; only 1 uses riskmodeling
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Study Findings Credit RiskManagement
All banks lending to small farmers use collateralsubstitutes
Diversified loan portfolios agricultural loanportfolios 10 to 40 %
Only 1 bank bundles crop insurance; 1 bundlescredit-life insurance.
6 banks report risk-based pricing for largeloans; none for small.
3 DFIs report risk-based pricing for small loans
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Innovations
Use of biometric tools to uniquely identifyborrowers.
Parametric credit risk assessment and partial
outsourcing of this process
Tripartite lending arrangements producebuyer, lender and borrower.
Provision of fee-based agricultural and businessadvisory services.
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Some Conclusions
Lending to small farmers at scale requires non-traditional credit assessment systems
Lending to small farmers requires use of collateralsubstitutes, but not other elements of microfinance.
Multi-level diversification is key to credit riskmanagement at the portfolio level
Successful agricultural lenders have domain
expertise in agriculture at multiple levels