AFRACA RISK MGMT SEMINAR ON RURAL CREDIT( MALAWI EXPERIENCE) HELD AT METCOURT HOTEL - RSA Presented by J L D Zainga of MUSCCO

INTRODUCTION.  MUSCCO – MALAWI UNION OF SAVINGS AND CREDIT COOPERATIVES LTD.  IT WAS FORMED IN 1980 WITH THE SOLE MANDATE OF PROMOTING SACCOS IN MALAWI.  IT IS THE NATIONAL ASSOCIATION OF SACCOS IN MALAWI.

MUSCCO  MUSCCO HAS 70 PRIMARY SACCOS SPREAD THROUGH OUT THE COUNTRY AFFILIATED TO IT.  TOTAL SACCO MEMBERSHIP STANDS AT 85,000.  OVER 45% OF THE MEMBERSHIP LIVE IN RURAL AREAS.

MUSCCO HAS THREE DEPARTMENTS  SACCO DEVELOPMENT- DEALS WITH PROMOTION OF SACCOS AND TRAINING.  FINANCE DEPARTMENT- THE BANKER TO THE SACCOS, THE INSURER TO SACCO MEMBERS.  GENERAL MANAGEMENT AND ADMINISTRATION.

CENTRAL FINANCE PRODUCTS MENU  CENTRAL FINANCE RECEIVES DEPOSITS FROM SACCOS IN FORM OF : 1SHARES 2ORDINARY DEPOSITS 3SPECIAL DEPOSITS 4FIXED DEPOSITS 5 LOAN COLLATERAL DEPOSIT

CENTRAL FINANCE PRODUCTS MENU  CENTRAL FINANCE – THE LENDER OF LAST RESOLT FOR SACCOS AND SMALLHOLDER FARMERS ORGANIZATIONS.  CENTRAL FINANCE EXTENDS- LIQUIDITY LOANS DEVELOPMENT LOANS AGRICUTURAL LOANS FARM INPUT LOANS TO SACCOS AND SMALLHOLDER FARMERS ASSOCIATIONS

MANAGEMENT OF FARM INPUT LOANS.  MUSCCO WORKS WITH NATIONAL SMALLHOLDER FARMERS ASSOCIATION OF MALAWI (NASFAM) AND KASUNGU SMALLHOLDER VIRGINIA PROJECT MONITORED BY LIMBE LEAF TOBACCO COMPANY.

NASFAM  SMALL HOLDER FARMERS IN THE NORTH AND CENTRE GROW BURLEY TOBACCO UNDER THE SUPERVISION OF NASFAM IN FARMERS ASSOCIATIONS.  NASFAM OFFICIALS IDENTIFY TOBACCO CLUBS WITH GOOD TOBACCO PRODUCTION RECORDS AND RECOMMEND THEM TO MUSCCO FOR FINANCING.

KASUNGU SMALLHOLDER VIRGINIA PROJECT.  KASUNGU SMALLHOLDER VIRGINIA PROJECT( MONITORED BY LIMBE LEAF) PROMOTES THE PRODUCTION OF FLUE CURED TOBACCO BY SMALLHOLDER FARMERS.  KSVP OFFICIALS IDENTIFY SMALLHOLDER FARMERS’CLUBS WITH GOOD FLUE CURED PRODUCTION RECORDS AND RECOMMEND THEM TO MUSCCO FOR FINANCING

THE SCREENING PROCESS  MUSCCO, NASFAM AND KSVP SCREEN THE CLUBS AS REGARDS TO ELIGIBILITY TO PARTICIPATE IN THE FARM INPUT LOAN SCHEME.  THE SCREENING PROCESS LOOKS AT THE FOLLOWING :  PAST YEARS PRODUCTION VOLUMES IN KGS

THE SCREENING PROCESS  PAST YEARS AVERAGE PRICE PER KG.  THE LOAN AMOUNT BEING APPLIED FOR.  CHECK THE VALIDITY OF THE CLUBS TOBACCO GROWING REGISTRATION NUMBER.  CHECK THE VALIDITY OF CLUBS MEMBERSHIP TO THE ASSOCIATION.

THE SCREENING PROCESS  CHECK THE CLUBS ABILITY TO PAY 10 % COLLATERAL DEPOSIT.  CHECK THE CLUBS ABILITY TO PAY 2.5% INSURANCE PREMIUM FOR CREDIT LIFE.  CHECK IF THE CLUB HAS SIGNED A DIRECT MARKETING CONTRACT WITH ANY OF THE REGISTERED TOBACCO BUYERS.

LENDING METHODOLOGY  MUSCCO ADVOCATES FOR SOLIDARITY GROUP LENDING METHODOLODY BECAUSE OF THE FOLLOWING REASONS:  PEER PRESSURE  JOINT LIABILITY  GROUP COLLATERAL DEPOSITS LIEN.  NO ADVERSE SELECTION ON CLUB MEMBERS.  LENDING IN CYCLES

FARM IN PUT LOAN PACKAGE PER HECTARE  TOBACCO INPUTS  KGS BAGS OF SUPER D FERTILIZERS  2- 50KG BAGS OF CAN  2-50KG BAGS OF UREA - MAIZE  2-50KG BAGS OF NPK 23:21:0 - MAIZE  I PACK OF CHEMICALS  MK45, FOR FIREWOOD AND OTHER ACCESSORIES.

FARM INPUT DISBURSEMENT  HAVING PAID THE COLLATERAL DEPOSITS REQUIRED MUSCCO AND THE FARMERS ORGANIZATION IDENTIFY THE SUPPLIER OF FARM INPUT TO SUPPLY THE INPUTS TO THE FARMERS IN CLUBS.  THE DISTRIBUTION OF FARM INPUTS IS SUPERVISED BY THE FINANCING ORGANIZATION AND THE FARMERS ORGANIZATION.

LOAN DOCUMENTATION  AFTER THE COMPLETION OF FARM INPUTS DISTRIBUTION CLUBS DO COMPLETE LOAN APPLICATION FORMS.  COMPLETE STOP ORDER FORMS FOR LOANS TO BE DEDUCTED AT THE MARKET.  COMPLETE DIRECT MARKETING AGREEMENTS WITH TOBACCO BUYERS.

FIELD MONITORING  TOBACCO FIELDS MONITORING STARTS IN JANUARY UP TO MARCH THE IDEA IS TO VERIFY THAT INDEED FERTILIZERS WERE USED FOR THE INTENDED PURPOSE.  MONITORING CURING AND SUN DRYING OF TOBACCO IN SHEDS  ESTIMATING NUMBER OF TOBACCO BALES TO BE SOLD IN RELATION TO LOAN SIZE PER MEMBER.

FIELD MONITORING  MONITORING THE USE OF REGISTRATION NUMBERS TO MAKE SURE THAT CORRECT NUMBERS ARE BEING USED. THIS CHECKS AGAINST DIVERTING TOBACCO BALES BY USING OTHER REGISTRATION NUMBERS TO BY PASS STOP ORDERS.

FIELD MONITORING  URGING FARMERS TO BAIL THEIR TOBACCO VERY EARLY SO AS TO BE ABLE TO SALE THEIR TOBACCO EARLIER AND MAXIMIZE PROFIT BY PAYING LESS INTEREST ON THE BORROWED AMOUNT.  WORKING WITH TRANSPORTERS TO ENSURE THAT BALES ARE TRANSPORTED TO THE FLOORS IN TIME.

TOBACCO SALES MONITORING  COLLECTING SALES DATA FROM AUCTION FLOORS TO KNOW WHICH CLUBS HAVE COMPLETED REPAYING THEIR LOANS.  PREPARE EARLY INTEREST REBATES TO CLUBS THAT HAVE COMPLETED REPAYING THEIR LOANS. THIS IS A CONTINUOUS EXERCISE UNTIL THE END OF THE TOBACCO SELLING SEASON.

OTHER RISK MITIGATING TECHNICS INCLUDE:  LETTERS OF DEFAULT GUARANTEE. THIS IS WHERE A MEMORANDUM OF UNDERSTANDING IS SIGNED BETWEEN THE TOBACCO BUYER AND THE PROVIDER OF FINANCE IN CASES WHERE OUT GROWERS(CONTACTED FARMERS) ARE ENGAGED TO GUARANTEE DEFAULTED LOAN AMOUNTS UP TO 30%.  COMPULSORY CREDIT LIFE INSURANCE FOR ALL SMALLHOLDER FARMERS BORROWING FROM US.

TECHNICS  LOAN AGING THAT LEADS TO MAKING GOOD LOAN LOSS PROVISIONS.  LOAN PORTFOLIO MIX i.e. 50% Agriculture Production( cash crops) 50% Agriculture commercial (Food crops) Loan portfolio diversification ( Don’t put all your eggs in one basket. Loans should have different maturity periods.

TECHNICS  BUYING WEATHER INDEX INSURANCE TO HEDGE AGAINST EXCESS AND DEFICIT RAINFALL ON LOAN PORTFOLIO BASIS.  ATTENDING FARMERS ASSOCIATION’S AGM AND PRESENT SMALL GIFTS TO BEST PERFORMING CLUBS AND ASSOCIATIONS.

MAJOR RISKS CONTROLLED BY THE ABOVE PROCESSES ARE.  DEFAULT RISK.  CREDIT RISK  LIQUIDITY RISK.  INTEREST RISK.  MFI-REPUTATION RISK  WEATHER RELATED RISKS.

EFFECTS OF (IAC) RISKS  LOW LEVELS OF DEFAULT -5%  HIGH INCOME ON LOANS – COLLECT % INTEREST  LOAN PORTFOLIO GROWTH.  INCREASE IN NUMBER OF FARMERS ACCESSING CREDIT FROM MFIS.  INCREASE IN MFIS DEPOSITS COLLECTED.

EFFECTS OF (IAC) RISKS  INCREASED INCOMES FOR FARMERS RESULTING IN POVERTY REDUCTION. (use of baseline inform)  HIGH LEVEL OF FOOD SECURITY IN RURAL HOUSEHOLDS AS TOBACCO LOANS PAY FOR MAIZE FERTILIZERS.  HIGH DEMAND FOR LOANS WHEN COMPARED TO FUNDS AVAILABILTY.

MUSCCO LOAN PORTFOLIO GROWTH IN 3 YEARS  PERIOD LOAN AMT REP RATE 2007 MK 20.5M 100% 2008 MK 57.5M 100% 2009 MK209.0M ? Our Loan Portfolio has grown this big because of high cost of fertilizers in 2008 and increased number of KSVP hectares financed in US $ = MK

CHALLENGES  MARKET PRICES FLUCTUATIONS  HIGH INTEREST RATES  HIGH COST OF FERTILIZERS  HIGH TRANSPORTATION COSTS  HIGH TRANSACTIONAL COSTS IN BANKS.  HIGH LABOUR COSTS. ALL THESE HAVE A BEARING ON LOAN RECOVERY.

PRODUCTION TRIANGLE  PRODUCTION Labour, Land,Climate  MARKETINGFINANCE Auction & Cont PricesLoans and Int

THE END  THANK YOU VERY MUCH FOR YOUR ATTENTION.  JLD ZAINGA  MUSCCO  MALAWI