MicroSave Market-led solutions for financial services Sources of funding and support systems for...

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

Anup Singh

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Financial exclusion in Agriculture in Asia is a prevalent problem

% of households without access to financial services

>80%

60-80%

40-60%

20-40%

<20%

Source: World Bank data, 2007 and AFI

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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.

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.


Value chain finance presents a unique opportunity

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Minimises costs thus enhances efficiency Mitigates risks Improved product quality and

delivery Reduces information asymmetry Trust-based

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

Financial inclusion

Export competitiveness

Areas Benefits


Sources of funding for agriculture in Asia are diverse in nature

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Value chain element

Sources of financing ( increasing degree of formalisation)

Banks Co-ops MFIsInformal financiers

Value chain actors

Family and

friendSelf financed

Producers

Input Supplier

Small and marginal producers

Large farm owners

Agricultural enterprises

Agents/Aggregators Processors

Wholesalers Retailers Exporters

INDIRECT OR OUTSIDE THE CHAIN FINANCE

DIRECT OR WITHIN CHAIN FINANCE

SELF-FINANCELegend

Never used

Rarely used

Some times used

Frequently used

Mostly used


Direct versus indirect finance

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Low costs, low risk Tailor made financing Improved chain efficiencyBetter yields via improved

inputs

Lesser value realisationNo cash benefitsDependency on the lendersNo long-term loans Lack of transparency in the

arrangement.

Medium to long term financing

Tailor made repaymentTransparent, market-basedLess monopolistic More efficient Access to range of services

High cost of lending to the producers

Time consuming Requires collateral

Less access to informationEnforcement issues

Pros ConsD

irec

t F

inan

ceIn

dir

ect

Fin

ance

References were drawn from Calvin Miller’s work on Agricultural Value chain financing


Financing instruments prevalent in Asia

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Attribute Aggregator financing

Input supplier financing

Lead firm financing

Warehouse receipt financing

Inter-relationship Trust based Trust based Buy back

agreementWarehouse receipts

Benefits Easy, tailor made financing

Loan misutilisation is checked

Value added services

Increased yield

Disadvantages Seasonal, loansLimited bargaining power

Limited financing Less price benefits

Limited bargaining power

Poor implementation Connivance of warehouses

References were drawn from Calvin Miller’s work on Agricultural Value chain financing


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

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Examples from Asia

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Attributes Cut flowers, Bangladesh Cocoa, Indonesia

Input needs and extension services Specific Specific – government

intervention

Product type Exportable perishable crop Exportable cash crop

Aggregation point Aggregators and exporters Local collectors

Value chain power Aggregator and exporter power Aggregator power

Number of producers Small numbers Large number of smallholders

Market characteristics Export markets Export markets

Crop characteristics Perishable post-harvest

Price incentives for quality and perishable product

Financial attractiveness High Producers lack physical guarantee

References were drawn from Dalberg’s Agri-financing analysis


Risk management – what works in Asia?

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Key risks Risk Mitigation

Market/price risk

Crop/Weather risk

Collateral risk

Production risk

Human risk

Market measures

Market based pricing, hedging and buffer stock

Future, swaps, options and forward contracts

Innovative finance

Warehouse receipt financingIndex based weather insuranceCrop insuranceFarmers and family insuranceCash flow based lendingCommitment savings

InputDrought resistant varietiesInput, supplies and equipment financing

Irrigation financing

Information Market information services


Key lessons learnt with implications on Africa (1/2)

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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.

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.

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2

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References were drawn from FAO’s work on agri-value chain financing


Key lessons learnt with implications on Africa (2/2)

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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).

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

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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.

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References were drawn from FAO’s work on agri-value chain financing


Scaling up AVCF in Africa - role of formal financial institutions

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Finance upstream actors Lead firms financing

Finance producersInnovate

For producers in unorganised and organised local staple, formal financiers can finance indirectly through trade finance either to upstream actor.

Financing lead firms results in effective growth of value chain as the markets are secured, fair pricing and non-predatory model.

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.

References were drawn from Dalberg Advisors work on agri-value chain financing


Mobile money as a catalyst for finance and information in Africa

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Importance Is Africa ready for Mobile Money?

Low cost of transactionHigh security of the

transactionsSolving the “last mile”

problemSeamless integration of

buyers and sellersReduced leakagesEnhanced immediacy

and increased frequency of the transactions

Improved economicsAccountability

Concentration of buyersProducers baseFrequency of payments Input finance mechanism usedLarge subscriber baseHigh number of mobile money

agents (which is expanding even further)

Wide network reach of MNOsSustainable volumesExpanding ecosystemSuccess of M-Pesa and replicators Socio-demographics of the farmer

base

References were drawn from Ignacio Mas’s work on mobile banking and role in agri-value chain financing


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