Session iii ii nixon bugo - agra
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Transcript of Session iii ii nixon bugo - agra
AGRA & Partners: Facilitation of the Impact Investing Fund for African Agriculture
(IIFFAA)
Nixon Bugo
EMRC Agribusiness Forum, Kampala, Uganda 3 – 6 October 2010
December 22nd, 2009
PwC
Agenda
2
Impact Investing Fund for African Agriculture3
Next steps and Conclusions4
Challenges and opportunities in agriculture in Africa1
AGRA’s Innovative Finance Initiatives
3-6
8-13
15-62
64-66
61-64
PricewaterhouseCoopers Slide 3
The challenge in agricultural lending
In Sub-Saharan Africa, agriculture accounts for 70% of the labor force, over 25% of
GDP but only a few percentage points of commercial bank loans and investments.
Agriculture continues to be given low priority for investment despite the food security
challenge and the potential for economic growth;
Many regions in different countries, so called breadbasket areas, dispose of consistent
rainfall and plenty of arable land and therefore have a huge development potential;
Several governments have launched multiple initiatives to address the lack of financing
to the agricultural sector with limited results for small-scale farmers;
Banks have not lent sufficiently to agriculture due to three main reasons:
o Banks have a high risk perception of the agricultural sector;
o Banks do not see agriculture as a strategic sector to engage in;
o Banks do not have sufficient outreach for efficient lending.
Challenges and opportunities in agriculture
PricewaterhouseCoopers
Capital constraints facing African agriculture
Slide 4
Source: CIA - world-factbook, Central bank of Congo, Central bank of Nigeria, Central bank
of Kenya, Central bank of South Africa; BCEAO – Annual Report 2008
Contribution of agriculture to total GDP and outstanding loans to agriculture
as % of total loans
Challenges and opportunities in agriculture
PricewaterhouseCoopers
Current situation of the African agricultural sector
…but has huge opportunitiesAgricultural sector faces challenges…
Slide 5
Rise in food demand
Declining global food stocks
Growing opportunities for
Food
Feed
Energy
Agriculture is key for economic
growth and employment in Africa
However low agricultural productivity
0.5 t/ha compared to global average of
5 t/ha
A declining trend over the last 30 years
Africa has increased expenditure on
food exports to $30 billion annually
43 African countries considered as low-
income and food-deficient
Challenges and opportunities in agriculture
PricewaterhouseCoopers
Unlocking this potential requires a productive, efficient and
competitive agricultural sector
Hurdles for accessing financeHow to achieve this
Slide 6
Efficient access to finance for the entire
agricultural value chain;
Support banks to increase capacity for
lending to agriculture;
Support farmers to increase
productivity and market access.
High transaction costs for banks;
Capacity constraints for banks to enter
the sector;
Perceived high risk of lending;
Historically high default rates due to
moral hazard;
“Government money mentality”
Lack of focus (overview ) on the entire
agricultural value chain.
Challenges and opportunities in agriculture
Agenda
The Alliance for a Green Revolution in Africa2
Impact Investing Fund for African Agriculture3
Next steps4
Challenges and opportunities in agriculture in Africa1 3-6
8-13
15-62
64-66
PricewaterhouseCoopers
Risk sharing agreement (50/50) with Centenary Rural Development Bank (CERUDEB) in Uganda;
CERUDEB lent $1 million to farmers. Now lending $4 million based on the original $500,000 guarantee;
Five years after the guarantee, the total default and draw down on the guarantee is only $10,400.
Loan guarantee facility of $5 million by AGRA and IFAD to Equity Bank of Kenya, 2008;
Leveraged $50 million in loans to agriculture;
Interest rates lowered from 18% to 10% to smallholder farmers;
Around 100 specialized staff recruited by the bank;
At end of 2009, 1 Billion Kenya Shillings ($13 million) lent, representing 23.6% of targeted loan portfolio;
Small-scale farmers lent 715 million KS ($9.5 million), 73.9% of total borrowing;
By June 2010 the Portfolio stood at more than $20 Million
Large-scale farmers have borrowed 187 million KS ($2.5 million) representing 19.3%;
Agribusinesses have borrowed 64 million KS ($1 million) or 6.7% of total borrowing;
Loans to 27,248 small scale farmers, 568 large scale farmers and 220 agribusinesses.
.
AGRA’s Experience: Innovative Finance
Slide 8
Uganda: Centenary Rural Development Bank
Kenya: Equity Bank
The Alliance for a Green Revolution in Africa
PricewaterhouseCoopers
AGRA provided $1.1 million loan guarantee facility to National Microfinance Bank in Tanzania;
The Financial Sector Deepening Trust has provided a further guarantee facility of $1 million;
$10 million of loans now being provided to smallholder farmers and Agro dealers;
Lending rate lowered from 28% to 15%;
Reduced demand for high collaterals from farmers by the bank;
The bank has not reported any actual losses or requests for a draw down on the facility;
NMB estimates to recover at least 50% of the expired overdrafts;
To date, about 6,200 agrodealers have been trained and certified and eligible to access credit under this program.
Examples of AGRA’s Experience in Innovative Finance
Tanzania: National Microfinance Bank
The Alliance for a Green Revolution in Africa
Slide 9
PricewaterhouseCoopers
AGRA’s Experience: Innovative Finance
A $10 million loan guarantee provided to lend $100 million in loans through Standard bank;
The program aims to assist 750,000 farmers in those countries in Tanzania, Ghana, Uganda and Mozambique;
Standard bank provides interest rates of +3% for small holder farmers and up to +5% for agri-businesses;
The Uganda loan facility was launched in December 2009;
As of March 1, 2010, Ushs 1.2 billion (US$630,000) has been lent;
Different types of loans totaling $4.34 million, are currently in evaluation stage;
In Ghana, Standard Bank has already extended $2 million to smallholder farmers in the Millennium Village
project in Ghana;
A pipeline totaling $17 million in possible new lending to farmers has been identified; $ 8 Million loans have been
approved for disbursements.
Mozambique and Tanzania have just commenced their loan operations.
Tanzania, Ghana, Uganda and Mozambique: Standard Bank
The Alliance for a Green Revolution in Africa
Slide 10
PricewaterhouseCoopers
Agenda
2
Impact Investing Fund for African Agriculture3
Next steps4
Challenges and opportunities in agriculture in Africa1
The Alliance for a Green Revolution in Africa
3-6
8-13
15-62
64-66
61-64
PricewaterhouseCoopers
AGRA’s success story in leveraging commercial banks
Unlock access to finance for the entire agricultural value chain;
Sustainable leverage potential –10 times/systemic change;
Build capacity of banks to serve the agricultural sector;
Lower default rates than perceived by banks;
Technical assistance to Banks;
Risk adjusted interest rates.
Key evolution
The Alliance for a Green Revolution in Africa
Slide 12
PricewaterhouseCoopers Slide 13
Fund set up project
Unlock access to finance at scale for agriculture (at least USD$4 billion);
Syndicated risk sharing pooled facility to foster competition between banks and lower interest rates for farmers and agribusinesses;
Lower the risks faced by commercial banks;
Decrease transaction costs of bank lending to agriculture;
Develop a technical assistance strategy to allow efficient agricultural lending;
Build social impact mechanisms to measure effectiveness of lending to agriculture.
Vision: create the conditions for long-term and sustainable bankability of small-scale farmers
Objectives
Project structuring
PricewaterhouseCoopers
Uniqueness in the design approach
Slide 14
Market driven approach taken by the Fund
Open architecture and collaborative platform for investors, governments,
banks and technical assistance providers
Strong innovation potential
High harmonization potential
Capacity to create a systemic change through the commitment of key
actors along the chain
Social development of small-scale farmers
Development of the agricultural value chain
New value potential for intermediaries and banks
Food security for the region/country
Project structuring
PricewaterhouseCoopers
Consultation
Workshop
with African
commercial
banks,
NGO’s &
investors
Slide 15
Consultation & InterviewsFund development process
A unique process involving various actors in the development
of the Impact Investing Fund
1 2
In-depth
meetings
with
selected
players
Desktop
research
Development
of
the Fund
3 4
IFC
EIB
USAID DEG
BMGF AfDB
MIGA
IFAD
35 organisations/funds interviewed as to
role as investors in such funds;
15 commercial banks interviewed;
Several investors showed a strong
interest to participate;
Several African banks showed interest
as lender banks.
Project structuring
PricewaterhouseCoopers Slide 16
Strong focus on commercial bank perspective
Attractive guarantee coverage for the bank;
Insurance package for farmers;
Technical assistance support for banks, farmers, small businesses etc.;
Risk coverage reduction over time allowing the banks to take ownership;
Reduction of own funds requirements through guarantees;
Opportunities for business development;
Potential incentive payments for low claims experience;
Preferential allocation of more guarantees in the event of low claim rates or
strong social impact performance;
Provision of data and expertise to ease market entry;
Opportunity to display corporate socially responsibility.
Incentives for banks
Project structuring
PricewaterhouseCoopers Slide 17
Emerging Issues
Tailoring of fund structure, share classes and governance to investor needs;
Allowing full flexibility necessary;
Very few initiatives stimulating commercial lending to small scale-farmers at scale;
No harmonised model or market practice available for risk sharing mechanisms;
No one-size-fits-all model for risk sharing existing (first loss/last loss/ shared loss);
A simple guarantee is not sufficient for intermediation and technical assistance
across the value chain;
To allow efficient delivery of finance Need multiple de-risking solutions.
Assessment of current practices
Project structuring
PricewaterhouseCoopers Slide 18
The Impact Investing Fund for African Agriculture:
A 5 components de-risking solution package
Impact
Investment Fund
Structure
Investors African
commercial
banks
Agricultural
loan
beneficiaries
Guarantee
vehicle (SIF)
Technical
Assistance
Catalyst
(Fiduciary
Account)
Risk Sharing
and Insurance
Bankincentives
1
5
3
4
Full value chain
Technical Assistance
Full value chain
Impact Measurement
Loanportfolio
Loanportfolio
Financial First
Investors
Impact First
Investors
2
The concept
PricewaterhouseCoopers
IIFFAA
Description of the components
Risk Sharing Facility (covered by the Fund)
Insurance Component (covered by TA)
Technical Assistance Facility (covered by TA)
Bank Incentive Mechanism
Impact Measurement Metrics
Impact investing Fund for African Agriculture
• Serves as performance measurement and reward tool for
commercial banks
• Provides social impact feedback to Impact First Investors.
• Drives capacity building along the agricultural and
financial value chain.
• Deploys incentives to banks to strategically move into
agricultural lending
• Deploys risk sharing and insurance instruments that
minimize the financial risk of lending to agriculture.
1
2
3
4
• Adds or helps in the development of index based crop
and weather insurance.
5
Slide 19
Impact
Investment Fund
Structure
Investors African
commercial
banks
Agricultural
loan
beneficiaries
Guarantee
vehicle (SIF)
Technical
Assistance
Catalyst
(Fiduciary
Account)
Risk Sharing
and Insurance
Bankincentives
1
5
3
4
Full value chain
Technical Assistance
Full value chain
Impact Measurement
Loanportfolio
Loanportfolio
Financial First
Investors
Impact First
Investors
2
The concept
(covered by Fund and TA)
(covered by Fund and TA)
Overall the TA account is estimated at
25% of all Fund assets
PricewaterhouseCoopers
General investment target of the IIFFAA
Slide 20
Investment rules
Investors Commercial
BanksFarmers
Philanthropic
Investors
Donors / IFIs
Commercial
Institutional Investors
Luxembourg
Scheme
Risk Sharing
Vehicle
Bank A
Bank B
Bank ZRisk Sharing
Agreement
Credit agreement
Interest: x%
Credit Portfolio
- Interest (x-y)
- Default rate
- Coverage rate
on credit portfolio
Liquid asset
basket
e.g. MMI
Portfolio
performanceOffering
Documents
Investment
vs.
Return
distribution
Social Impact
Matrix
Continental
sub-fund
Regional
sub-fund
National
sub-fund
PricewaterhouseCoopers
General investment target of the Impact Investing Fund for African
Agriculture
ProductsLoan beneficiaries
Slide 21
Food crops
Cash crops
Livestock
Fisheries
Etc.
Small-scale farmers
Medium- large-scale farmers
Agribusinesses, Agro-dealers and
Processors
Core objectives:
1. Sustainable social development for Sub-Saharan Africa’s agriculture and
population;
2. Financial return for investors.
Investment rules
PricewaterhouseCoopers
General investment target of the Impact Investing Fund for African
Agriculture
Eligible loan beneficiaryEligible Portfolio
Slide 22
Small-scale famers
Basic entrepreneurial interest;
Production of agreed products;
Pre-agreement of a target market or off-
taker;
Subscription to the technical assistance
provision and monitoring.
Agribusinesses
Provision of an entrepreneurial business
plan;
Subscription to the technical assistance
provision and monitoring.
50-70% Small-scale farmers
30-50% Agribusinesses
Ensure value chain coverage Limitation of default
Investment rules
PricewaterhouseCoopers
Technical Assistance allocation
Slide 23
Technical Assistance allocation
Loan beneficiariesBanks
Motivation and acceptance to undergo
capacity strengthening;
Provision of social impact reporting;
Assist farmers with TA in the range of
15% of loan or US$ 100-200 p.a
Max budget for agribusiness: 5% of loan;
For agribusiness: own investment >
Fund TA investment.
Budgets allocated after a need analysis;
Budget depending on strategic
commitment and performance;
Amount considered in guarantee pricing;
Max budgets allocated proportional to
guarantee;
Bank TA investment > Fund TA
investment.
• Default reduction;
• Sustainability;
• Bank commitment.
• Default reduction;
• Sustainability;
• Beneficiary commitment.
PricewaterhouseCoopers
Country sub-funds….To ensure targeted investments and
development for the specific countries / regions
Investors CommercialBanks
Farmers
Philanthropic Investors
Donors / IFIs
Commercial Institutional
Investors or HNWI
Bank A
Bank B
Bank ZRisk Sharing
Agreement
Credit agreement
Interest: x%
Credit Portfolio
- Interest (x-y)
- Default rate
- Line of risk
on credit portfolio
- Coverage rate
on credit portfolio
Technical assistance and
Social Impact Matrix
Impact InvestingFund
Regional
Sub-Fund
National
Sub-Fund
Sub-fund: Nigeria
Governments
Slide 24
Sub-Funds
Continental
Sub-Fund
PricewaterhouseCoopers
Sub-Fund investment policy
Slide 25
Regional Sub-FundContinental Sub-Fund
Core countries in scope: Uganda,
Tanzania, Kenya, Ghana, Mozambique,
Nigeria, Zambia, Malawi, Ethiopia,
Rwanda, Cameroon, Mali, Senegal,
Burkina Faso, Niger;
In the long term equal representation of
core countries;
In case national sub-funds exist for core
countries, the exposure of the
continental fund to such countries will be
decreased.
• Investor protection;
• Risk diversification;
• Development of small scale
farmers.
• Development all across
Africa
Sub-Funds
3 Regions: West, East, Central;
In the long term equal representation of
countries in regions;
In case national sub-funds exist for
countries in a region, the exposure of
the continental fund to such countries
will be decreased.
PricewaterhouseCoopers
The Risk Sharing Facility
Slide 26
Tailored risk sharing solutions
• The facility will cover a percentage of a lending portfolio of a bank to agricultural loan beneficiaries
• The guarantees will take the form of letter of comfort and claims will only be made when there are
actual losses realized on the portfolio.
• The risk sharing facility will consider: the volume of lending; the part of the value chain that the
bank is lending to; the term of lending; The type of bank, experience and capacity for agricultural
lending and; the commercial conditions such interest rates, guarantee and collateral requirements.
• First loss arrangements for banks that want to lend to the smallholder agricultural sector, or a clear
long term commitment to the sector by the employment of dedicated staff or other investments.
• Only shared loss arrangements for lending to agro-dealers, seed companies, fertilizer companies,
equipment leasing, agro- processors and millers etc, or to medium scale commercial farmers.
• The risk sharing facility will be accessed by the banks at a fee. The guarantee fee will be set at a
level based on the financial economics of the fund
Objectives: increase bank lending to agriculture and creating financial
return for investors
The 5 components
PricewaterhouseCoopers
The Insurance Component
Slide 27
Insurance
• Identify existing insurable risks and existing solutions for coverage, such as crop and weather risks;
• Assist in the development of insurance solutions such as weather index insurance, yield insurance
etc. in countries where such insurance products are not available;
• Cooperate with local and international insurance providers willing to extend their offerings to assist
in the development of appropriate local insurance products
• Link insurance products such as life insurance to the loan provided by banks to loan beneficiaries.
Objectives:
• Add another de-risking factor and develop micro-insurance;
• Cooperation with local and global insurance players to develop adequate
insurance products;
• Use existing innovative market solutions.
The 5 components
PricewaterhouseCoopers
The Technical Assistance Facility
(pre-lending)
Communication CentreKnowledge & Innovation Centre
Slide 28
Use multimedia channels to propagate
and inform on agricultural financing in
order to expand the acceptance and
understanding among farmers and
banks;
Provide educational training to banks
and intermediaries on agricultural
finance;
Organize conferences and networking to
build a community for sharing
information and best practices.
Analyse key factors in default rates;
Analyse the financing needs and
specificities of the different agriculture
value chains;
Introduce technological and financial
innovation to reduce the cost for banks
and farmers;
Provide Financial engineering support to
bank for proposing packaged solutions;
Provide a Social Impact reference
framework and analyze associated data;
Provide training courses to banks and
intermediaries.
The 5 components
PricewaterhouseCoopers
The Technical Assistance Facility
(on an ongoing basis)
Agricultural value chainBanks
Slide 29
Provide support on increasing
productivity through optimal use of seed,
soil, irrigation, herbicide & pesticide;
Support farmers on ways of developing
access storage facilities & markets;
Provide farmers financial education and
planning to propagate a culture of
banking;
Support farmers with their initial
relationship to the banks.
Support banks in building capacity to
serve the agricultural sector;
Advise banks on developing tailored
products such as term financing
facilities for the agricultural sector;
Support banks in expanding their
outreach to the farmers and agricultural
sector to ensure wide distribution;
Objective: creating a catalyst for change with the TA Fund
The 5 components
PricewaterhouseCoopers
Bank Incentive Mechanisms
Slide 30
Incentives
• Appropriate incentive mechanisms to move banks to a strategic commitment to agricultural lending
• Bank Incentive Mechanisms would include:
Reduction of own funds requirements through the provision of eligible guarantees;
Potential incentive payments for low claims experience;
Provision of data and expertise to ease market entry;
• Avoid moral hazards;
• Reward economic and social performance such as low default rates, higher lending to small scale
farmers, etc.
Objective: set incentives for long term financial viability and strategic moves
into agricultural lending
The 5 components
PricewaterhouseCoopers
Impact investing metrics/bank rating
Slide 31
Methodology and impactImpact investing metrics/bank rating
Client
activity
(economic)
40 points
Bank
activity
60 points
Scoring based on:
Bank activity (% of agri and smallholder
loans as to total loans, In-house training
and promotion..); and
Client (farmers, agri businesses) activity
(growth in revenue/ income, change in
number of employees…).
Certification and labelling by independent
third party;
Banks receiving a certification would receive
incentives (such as lower guarantee fees…)
from the fund to encourage greater lending
to the agricultural sector.
Objective: Reward bank performance and report social performance to
investors
The 5 components
PricewaterhouseCoopers
Impact investing metrics/bank rating
Slide 32
Client activityBank activity
- Number of Scheme loans advanced as a %
of all loans advanced in the same time period
- Amount advanced through the scheme as a
% of total lending in the period
- In-house training and promotion
- % growth in agricultural loans advanced
outside AGRA scheme less growth in total
commercial loan portfolio
The 5 components
- Revenue split by agricultural sub-sector
- Growth in revenue income
- Change in profit margin over the reporting period
- Change in number of employees
- Type of employees
- Change in number of female borrowers
- Change in yield (arable farming only)
- Growth in proprietor asset base (smallholders)
- Access to healthcare services (smallholders)
- Proportion of children in school
- Provision of subsidised services by employer
(assets, access to education and healthcare)
Environmental impact
- Environmental degradation
- Change in ground water levels on an annual basis
- Waste water being discharged to water bodies
- New or improved access to energy
PricewaterhouseCoopers
Impact investing metrics/bank rating
Slide 33
Process
The 5 components
FUND MANAGER
Board of DirectorsExternal Social Impact
Advisors
Technical
Assistance
Committee
Investment
Committee
Financial
OperationsReporting
On the ground
operations
Investor
Mgt.
Asset
Mgt.
Guarantee
Mgt.
Risk
Mgt.
Bank
dealsTA Mgt.
• The rating will be generated by collecting portfolio level social impact indicator data by bank
• Dedicated external Social Impact Advisors will generate bank ratings to ensure independence and fairness and make use of ratings to attract additional investment to the scheme.
PricewaterhouseCoopers
Governance of the Impact Investing Fund
Slide 34
Functions of the Fund bodiesStructure of the Fund governance
FUND
MANAGER
Board of
Directors Advisory Committee
Technical
Assistance
Committee
Risk Sharing
Committee
Financial Operations
ReportingOn the ground
operations
Bank
deals
TA
MngmtInvestor
Mngmt
Asset
Mngmt
Guarant
Mngmt
Risk
Mngmt
Board of Directors:
Composition: key investors to the fund , representatives of country
sub-funds, promoters and independent directors
5 year term, Ultimate power and liability
Advisory Committee:
Composition: promoters, main investors, independent members
Decisions on conflicts of interest
Decisions on changes to investment policy
Risk Sharing Committee:
Composition: Fund Manager, promoters, independent members
Ex-post approval of all bank deals, performance monitoring of RSA
Technical Assistance Committee:
Composition: Fund Manager, promoter, main TA investors and
independent members
Ex-post approval of all major TA contracts and tool implementations
Performance monitoring of TA
Governance
PricewaterhouseCoopers
THANK YOU
3-6
15-62
64-66
PricewaterhouseCoopers Slide 36
CONTACTS
Nixon Bugo
Innovative Finance
AGRA
Tel: +254 733 12 18 96