Making Risk-Sharing Models Work with Farmers, Agribusiness and Financial Institutions FAO Ford Foundation IFAD International Conference on Rural Finance Research: Moving Results into Policies and Practice Theme 2, Session III: Institutions for Expanding Outreach of Financial Products and Services in Rural Areas Presentation by Bettina Wittlinger, ACCION International March 20, 2007

Presentation Outline Research Objective and Methodology Risk-sharing Models Replication Key Achievements and Findings Future Research Areas

Research Objective and Methodology

Industry Learning Multi-organizational Learning Individual Organizational Learning Practitioner-led Research Methodology Competitive, Thematic Small Grants Program Implementation + Learning Process-oriented Industry-focused

Research Stages

Research Objective To develop and pilot-test risk-sharing models between farmers, agribusinesses and financial institutions to increase farmers’ access to markets and financial and non-financial services. Indian farmers migrating from villages after the monsoon in search of job opportunities.

Risk-Sharing Models

Risk-Sharing Models at a Glance ModelInstitutionsActors Model 1 Market Facilitator Partners with Bank to Develop Credit Franchisee Model IDE India  Commercial bank  Equipment dealers Model 2 Market Facilitator Links Buy-Back Arrangements as Guarantee for Drip Irrigation IDE India  Bank  Sugarcane factory  Farmer Model 3 Financial Institution Creates Risk- Sharing Model with a Trust Fund to Finance Red Pepper Farmers Caja Nor Peru  CNP  Exporter  Input suppliers  Farmers Model 4 Financial Institution Uses Buyer Contract as Guarantee for Soybean Farmers ACCION/ El Comercio (Paraguay)  El Comercio  Storage providers  Farmers

Model 1: Credit Franchisee Bank Scales-Up Rural Credit Outreach FARMERS Receive credit from Dealer to purchase drip irrigation MARKET FACILITATOR Facilitator to ICICI Facilitates Dealers in becoming credit franchisee DEALERS Credit is Leveraged by ICICI I D E I

EID PARRY SUGARCANE FACTORY FARMERS BANKS DEALERS Farmers register land with sugarcane Factory Dealers supply drip equipment to Farmers on receipt of money from Bank Factory pays farmers after deducting loan installments due to banks Farmers present letter from Factory to Bank and bank lends to Farmer through Dealer Model 2: Buy Back Arrangements as Guarantee Farmer sells sugarcane to Factory I D E I

Models 1 and 2: Challenges & Lessons learned Defining realistic goals Investing in demonstration plots Keeping your principles & negotiating hard I D E I Structuring a win-win scenario Defining clear roles Designing the loan product & operations Negotiating incentive schemes

MFI - CNP Input suppliers Buyers/Processors TRUST FUND Farmers Network Manager Model 3: Risk-Sharing Trust-Fund CAJA NOR PERU

Model 3: Composition of Trust Fund CAJA NOR PERU

Model 3: Challenges & Lessons learned Developing role of network manager Providing sufficient, quality technical assistance Selecting the Value Chain Dealing with external factors Generating commitment from agribusinesses CAJA NOR PERU

Model 4: Buyer Contracts as Guarantee

Model 4 – Buyer Contracts as Guarantee Rural Branch – El Comercio Silo Farmer

Model 4: Results Portfolio at risk - less than 3%

Replication

Replication – Experience from Model 4 Attributes for potential silos Extensive experience in the region Relationship with farmers and agribusinesses Good references from agribusinesses Financially viable and stable Commitment to small farmers & El Comercio EL Comercio replicated the soy – silo risk-sharing model with tobacco, cotton and sesame Value Chain Selection How similar is the value chain to the soy value chain? Does El Comercio staff members have existing knowledge about the region? Attributes for small farmers Diversification of income (required in weaker value chains) Farming experience

Key Achievements and and Findings

Risk-sharing models – Key Achievements Model Description Model Achievements AdvantagesDisadvantages Lower Price Risk for Farmer Enhance Production Quality Guarantee for Repayment Lower Cost for Financial Institution Model 1: franchisee model No goal Through Drip irrigation No goal Guarantee offered by Franchisee Potential for scale where drip dealers are located High investment in training, internal control Model 2: Buy-back arrangements as guarantee for drip irrigation -access to markets - agrees on price Through Drip irrigation Agreement Recovery delegated Potential for scale where buy-back arrangements are present Existing debts could prevent farmer from accessing credit Model 3: Risk-sharing model with a trust -access to markets - agrees on price Network manager: missing technical expertise Buyer did not cover losses incurred after pilot CNP covered losses Risk-sharing will be helpful to farmers Develop an entrepreneurial network manager Model 4: buyer contract as guarantee - access to markets - agrees on price Through Technical assistance by silo Contract used as guarantee Transaction costs, recovery delegated Scale and replication is possible in other value chains. Also possible to replicate in weaker value chains

Risk-sharing Models: Key Findings 1. Analysis & Mapping of Value chains is critical to form risk-sharing models 2. Developing the profile each potential partner is crucial 3. Gaining commitment from all stakeholders & structuring operational details requires time & investment 4. Dynamic & organized value chains offer more possibilities, but are not required 5. Market facilitators can be catalysts for linking farmers to formal financial institutions 6. Pilot-testing should be done before replication

Areas for Further Research Developing a value chain analysis tool for financial institutions Validating a decision making matrix for financial institutions and market facilitators Measuring of impact on financial institutions and farmers Further examining the role of market facilitators Further studying risk-sharing arrangements in weaker value chains High VOLUME Low Buyers Matrix Model for Farmers Need of technical assistance Agreement with producer or farmer to avoid selling Throw out Find more or new markets Low QUALITY High

Thank you CAJA NOR PERU I D E I