Expanding Agriculture financing zegeye Teklu zteklu@acdivocaeth Expanding Agriculture financing zegeye Teklu zteklu@acdivocaeth.org zegeyeteklu@yahoo.com April 2013

AGP-AMDe EXPANDING AGRICULTURAL FINANCE: Zegeye Teklu Access to Finance Bahirdar University April 6 2013

ACDI/VOCA, Overview US based international development organization Currently manages more than 90 development projects in 40 + countries on; Agribusiness Systems Enterprise Development Financial Services Community Development Food Security ACDI/VOCA is a full-service international economic development firm dedicated to improving lives and livelihoods worldwide. ACDI/VOCA addresses the most pressing and intractable development problems related to: Agribusiness Systems Enterprise Development Financial Services and Community Development

AGP-AMDe, Ethiopia Value chains: - USAID, 2011-2016, $49.85m Wheat Maize Sesame Coffee Honey Chickpea Value Chain Competitiveness Access to Finance Increased investment and innovation Enabling Environment Chickpea—Introduce new, higher-yielding varieties and improve downstream handling, processing and marketing to increase profitability and competitive and reliable supply to meet growing demand, primarily from domestic consumers, the World Food Programme (WFP) and new foreign buyers such as PepsiCo. Coffee—Increase supply and consistent quality of coffee to meet strong demand in quality coffee export markets and obtain a significant price increase by capturing greater price premiums. This will require higher yields, quality control in post-harvest handling and storage throughout the chain, an improved and more effective system of standards and grading, and enhanced links to quality export markets. Honey—Increase supply and quality of honey to meet strong local and export demand for quality table honey. This will require increased productivity and quality by producers, and a significant increase in the share of crude honey being sold through cooperatives and industrial processors to end markets. Maize—Double farm yields and reduce inefficiencies in downstream handling, processing and marketing to reduce per unit costs, increase farm profitability and create a competitive and reliable supply to domestic consumers. In future years, Ethiopian maize will supply domestic food and feed processors and regional export markets (Kenya and Sudan). Sesame—Increase supply and quality of sesame to meet strong demand in export markets, with increased sales through competitive and transparent cooperative channels. This will require higher yields, quality control in post-harvest handling and storage, more reliable access to working capital by cooperatives, and stronger export market linkages. Wheat—Double yields and reduce inefficiencies in downstream handling and marketing to reduce per unit costs, while increasing farm profitability, reliable supply to consumers and small-scale mills as well as the share going to industrial processors. Under Component 1 our primary interventions are: Enhance Marketing and Market Linkages Build capacity of cooperatives, unions and agro-Dealers to Become Effective Service Providers Increase Improved Inputs and Farm Technology Component 2: Establish linkages between cooperatives and financial institutions and private markets, building on existing capacity and improving the enabling environment. Component 3: Fertilizer growth, expansion of the seed industry, increasing women’s access to new technologies and information Component 4: $14.2M grants fund, facilitate the introduction of and investment in a broad range of competiveness-enhancing activities

ACDI/VOCA, Overview Cont. Since 1997, ACDI/VOCA has been assisting Ethiopian cooperatives and Agribusiness Development, Cooperative Union Project (CUP, 1998-1999), Agricultural Cooperative Development in Ethiopia (ACE) 2000-2004, Agricultural Marketing Development Program (AGP-AMDe) 2011-2016 The Cooperative Union Project (CUP, 1998-1999) with the goal of enhancing food security and rural income through Cooperative business development, Agricultural Cooperative Development in Ethiopia (ACE), an extension and expansion of CUP (2000-2004).

Objectives of this presentation Understand what agricultural Finance programs are being funded and under what terms Discuss success stories and possible replication Understand farmers’ and coops’ perspective on accessing finance – process, opportunities and challenges Ideas for improving relations between cooperative and financial sectors So considering everything said, our workshop goal here today is to:

AGP-AMDe - Linking Farmers to Markets Value Chain Competitiveness Access to Finance Enabling Environment Increased investment and innovation in: Wheat Maize Sesame Coffee Chickpea Chickpea—Introduce new, higher-yielding varieties and improve downstream handling, processing and marketing to increase profitability and competitive and reliable supply to meet growing demand, primarily from domestic consumers, the World Food Programme (WFP) and new foreign buyers such as PepsiCo. Coffee—Increase supply and consistent quality of coffee to meet strong demand in quality coffee export markets and obtain a significant price increase by capturing greater price premiums. This will require higher yields, quality control in post-harvest handling and storage throughout the chain, an improved and more effective system of standards and grading, and enhanced links to quality export markets. Honey—Increase supply and quality of honey to meet strong local and export demand for quality table honey. This will require increased productivity and quality by producers, and a significant increase in the share of crude honey being sold through cooperatives and industrial processors to end markets. Maize—Double farm yields and reduce inefficiencies in downstream handling, processing and marketing to reduce per unit costs, increase farm profitability and create a competitive and reliable supply to domestic consumers. In future years, Ethiopian maize will supply domestic food and feed processors and regional export markets (Kenya and Sudan). Sesame—Increase supply and quality of sesame to meet strong demand in export markets, with increased sales through competitive and transparent cooperative channels. This will require higher yields, quality control in post-harvest handling and storage, more reliable access to working capital by cooperatives, and stronger export market linkages. Wheat—Double yields and reduce inefficiencies in downstream handling and marketing to reduce per unit costs, while increasing farm profitability, reliable supply to consumers and small-scale mills as well as the share going to industrial processors. Under Component 1 our primary interventions are: Enhance Marketing and Market Linkages Build capacity of cooperatives, unions and agro-Dealers to Become Effective Service Providers Increase Improved Inputs and Farm Technology Component 2: Establish linkages between cooperatives and financial institutions and private markets, building on existing capacity and improving the enabling environment. Component 3: Fertilizer growth, expansion of the seed industry, increasing women’s access to new technologies and information Component 4: $14.2M grants fund, facilitate the introduction of and investment in a broad range of competiveness-enhancing activities

The current access to finance activities of ACDI/VOCA Improve access to finance for input and output purchases and investment for cooperatives and agro dealers through; development of bankable business plans, financial plans and loan applications for input/output for short and medium-term capital. developing new or enhancing existing financial products for cooperatives and agribusinesses improving linkages between financial institutions and finance demanders Delivering training and development of credit facilities from agribusinesses (cooperatives) to producers for inputs (and output advances)

ACCESS TO FINANCE Cont. Policy improvement (e.g. exemptions, incentives…) Expansion of banks Expansion of MFIs Expansion of Cooperative Banks Alternative finance systems

Lessons learned High financial transaction costs of serving dispersed and small farm households Heterogeneity, seasonality, and duration of farming and non-farming loan needs Profitability and risk of on-farm investments Loan on collateral bases Need for training/informational needs of bank staff and farmer clients Politically sensitive environment Low loan repayment discipline

Unique Features/Requirements of Ag. Finance Farmers need more financial services, not just credit for agricultural inputs and outputs Financial institutions need diversified portfolios, not just agricultural loans Transaction costs are too high for small holder farmers Political interventions can undermine publicly-owned institutions Too much funding from donors and governments discourages banks from developing own resources (mobilizing deposits)

Ag Financing Today Small holder farmers have limited purchasing power Restrictive government policies eliminate international finance and private sector lending to agriculture Agriculture lending is risky due to uncertainties in market structure Cash flows are unpredictable, borrower collateral is limited Agricultural value chains are vastly under financed Banks focus on more attractive markets and larger borrowers MFIs lend to small holder farmers but capacity is limited SACCOS are underdeveloped and under-capacitated Insurance sector is in infant stage of development This is all probably still very much similar to the situation we are facing in Ethiopia today – from the perspective of direct lending i.e. finance sector to ag. sector… < 14 million smallholder farmers, organized in more than 10,000 farmer cooperatives, with average farm of 1 – 1.5 HA, limited purchasing power Restrictive policies that eliminate international finance and private sector lending to agriculture Banks focus on large borrowers, mostly avoiding agriculture Collateral requirements extremely high Loans granted not sufficient to meet the actual demand MFI’s present in rural areas, but lending capacity minimal i.e. only micro-loans Underdeveloped and under-capacitated SACCOS, with small capital base Insurance sector in infant stage of development

Current Experiences 90% of lending is informal and not favorable for farmers: Lenders: loans re-paid at harvest, high interest rates Buyers: spot market cash purchase or storage service Most loans are for short terms Lenders focused on profits – not on providing good financial products Pricing is not transparent – accounting is less efficient Strong power relationships with large value chain lenders can be negative Less than 10% of financing is through cooperatives Business investments and output marketing Cooperative development strategy – improve bankability and financial controls However, there are apparent issues which are prevent financial industry from lending to VC actors in general… More than 90% of VC financing in Ethiopia for farmers is done through lenders and buyers, mostly informal lending – disadvantage for farmers Lenders: production credit to be paid of with harvest, high interest rates Buyers: spot market cash purchase or storage service Most loans are for short terms Lenders more focused on profits from products Usually less transparent in pricing and less efficient in accounting Strong power relationships from value chain lenders could be negative Less than 10% of financing, mostly for business investments and output marketing, processed through cooperatives (not counting fertilizer loans which are issued to regional BoAs) Cooperative development strategy – improved bankability and financial controls?

Current Experiences, Cont. Seasonality of agriculture Covariant risk Lack of: contract enforcement mechanisms registered credit history collateral insurance (e.g. crop insurance) Geographic dispersion of clients Low levels / poor: economic activity ag productivity physical infrastructure (roads, communication, etc.) human capital (illiteracy, health, etc.) Policy and regulatory constraints (leasing, warehousing support systems etc) Coordination Innovation and Risk Assessment Tailored service delivery …and there are issues that difficult to deal with for both finance industry and VC participants... The possible solutions would include: a) better coordination between coops and finc sectors and provision of targeted training services for coop sector; b) better innovation and risk assessment capacity within fin. industry which would lead to c) better responsiveness to ag. financing requirements

The impact of these constraints on supply is… High operating costs for the lender High information costs for the lender Higher real and perceived risk for the lender Higher requirements bar for ag. sector, and coops in particular However, these constraints have obvious side-effects…

Alternative ways of agricultural financing The need for promotion alternative financing that provide both working capital solutions and investment financing crucial. warehouse receipt financing, leasing of agricultural equipment _ equity financing,

Warehouse receipts system The Proclamation to Provide for a Warehouse Receipts System No.372/2003 identifies the Ministry of Trade(MOT) as the implementing institution with the responsibility to regulate WRF operations and enactment of directives for matters that have not been covered in the Proclamation In a parallel system, ECX has been given the mandate to operate and regulate the warehouses run by ECX. As such, the ECX is both regulating and operating the only functioning warehouse receipt system in the country

Basic functions of the community warehouse receipt system End Markets ECX Traders Processors Consumers After the depositing farmers have been grouped based on location and quality standards, the group’s decision to sell is transferred to the cooperative and then to the union. Warehouse operation* Deduct warehouse operation charges and transfers to MFI Union Overseas grading and handling MFI Coop storage Regulatory body Grants loans Farmers can either sell some of their output to the cooperative and store some through the CWRS or can store all of their produce the system and access additional finance MFI deducts interest and coop payment and debits farmers account Farmer GRN Payment WRS Output Oversight

Agricultural equipment Leasing Is a useful means of alternative for smallholders, cooperatives or medium level farmers with limited collateral and therefore restricted access to traditional credit MOT issues licenses for capital goods leasing According to several stakeholders, it was unclear for a period of time whether the MOT or the National Bank of Ethiopia (NBE) was the proper body to issue licenses for lease financing This uncertainty held up the development of an innovative form of financing for the agricultural sector However, this issue has now been settled and the MoT is currently developing what competency requirements lessors need to fulfill to qualify for a license. Once these requirements have been developed, the MoT will be able to issue licenses to companies wishing to provide lease financing arrangements on agricultural equipments

What is Leasing Business? "Leasing Business" is an alternative form of financing technique designed to meet the investment and working capital challenges of institutions that has weak collateral capacity to borrow against. According to the Ethiopian Capital Goods Leasing Business Proclamation No.103/1998 definition, "Leasing Business" Financing in kind for production and service purpose by which a Lessor provides Lessee with the use of specified capital goods on Financial Lease or Operating Lease or Hire-Purchase agreement basis, without requirement of collateral, for a specified period of time and collects in turn a certain amount of installment in periodical payments over the specified period.

What Is Leasing Leasing (Asset based financing) is a medium-term financial instrument for the procurement of machinery, equipment, and/or properties. A contract between two parties wherein one party (Lessor) provides an asset for use to another party (Lessee) for a specified period of time in return for specified payment.

Type Of Leasing Products Finance Lease: A finance lease is a contract that allows the lessor, as owner, to retain the legal ownership of the asset while transferring substantially all the risks and rewards of economic ownership to the lessee. Operating Lease: The lessee signs a contract for the short- term use of the equipment and payment predetermined rental. A common example is car rentals. The lessor bars the risk related to the residual value of the equipment, as well as the risk of obsolescence

Type Of Leasing Products Hire Purchase: With each lease payment, an equal percentage of the ownership is transferred to the lessee and, upon effecting of the last payment, the ownership of the capital goods shall automatically be transferred to the lessee

HOW LEASING WORKS LESSEE LESSOR SUPPLIER VENDOR THREE-PARTY Delivery Selects equipment Sells equipment Payment THREE-PARTY TRANSACTION Lease payments Rental (Contract)

AMDe - Structured Analytical Approach STEP 1: Identify where finance and investment is tied to value chain competitiveness, value addition STEP 2: Analyze the financing demand and supply gaps that limit access to needed financing STEP 3: Evaluate the commercial interests and capacities of value chain actors to bridge these gaps STEP 4: Design interventions that facilitate value chain actors in closing the gaps to finance flows

Agricultural Value Chain finance Value chain finance means linking financial institutions to the value chain, offering financial services to support the product flow and building on the established relationships in the chain. Right amount, at right time, for right VC actors, at right place Not all people but Value chain actors

Ag Value Chain Financing Def. Cont. Financial products and services that flow to or through any point in a value chain Increases value chain actors' income Increases VC growth and competitiveness Establishes strategic alliances between the parties Reduces transaction costs - lowers risks Increases access to financial services

Value Chain Value Chain refers to every transaction in the production and marketing of a commodity. For example in wheat, the value chain would include the business of wholesaling inputs, the business of retailing inputs, the business of converting inputs into wheat (through farm production), the business of transporting wheat, the business of milling wheat, and the business of marketing the milled wheat. For each business in the value chain there are cash flows where goods and services are purchased and sold. Likewise there is value addition at each businesses Farm to Fork

Demand and Supply of Value Chain Finance End Markets Processors Banks Cooperative Union CBE / CBO Primary Cooperative Traders MFIs Producers SACCOs Seed Multipliers

Thank You April 2013 Bahirdar University ZEGEYE TEKLU