MicroSave Market-led solutions for financial services Sources of funding and support systems for Agricultural Value Chain Finance – lessons from Asia Anup Singh 1

MicroSave Market-led solutions for financial services 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 2  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.

MicroSave Market-led solutions for financial services Value chain finance presents a unique opportunity 3  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 AreasBenefits

MicroSave Market-led solutions for financial services Sources of funding for agriculture in Asia are diverse in nature 4 Value chain element Sources of financing (  increasing degree of formalisation) BanksCo-opsMFIs Informal financiers Value chain actors Family and friend Self financed Producers Input Supplier Small and marginal producers Large farm owners Agricultural enterprises Agents/Aggregators Processors Wholesalers Retailers Exporters Legend Never used Rarely used Some times used Frequentl y used Mostly used

MicroSave Market-led solutions for financial services Direct versus indirect finance 5  Low costs, low risk  Tailor made financing  Improved chain efficiency  Better yields via improved inputs  Low costs, low risk  Tailor made financing  Improved chain efficiency  Better yields via improved inputs  Lesser value realisation  No cash benefits  Dependency on the lenders  No long-term loans  Lack of transparency in the arrangement.  Lesser value realisation  No cash benefits  Dependency on the lenders  No long-term loans  Lack of transparency in the arrangement.  Medium to long term financing  Tailor made repayment  Transparent, market-based  Less monopolistic  More efficient  Access to range of services  Medium to long term financing  Tailor made repayment  Transparent, market-based  Less monopolistic  More efficient  Access to range of services  High cost of lending to the producers  Time consuming Requires collateral  Less access to information  Enforcement issues  High cost of lending to the producers  Time consuming Requires collateral  Less access to information  Enforcement issues Pros Cons Direct Finance Indirect Finance References were drawn from Calvin Miller’s work on Agricultural Value chain financing

MicroSave Market-led solutions for financial services Financing instruments prevalent in Asia 6 Attribute Aggregator financing Input supplier financing Lead firm financing Warehouse receipt financing Inter- relationship Trust based Buy back agreement Warehouse receipts BenefitsEasy, tailor made financing Loan misutilisation is checked Value added services Increased yield DisadvantagesSeasonal, loans Limited 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

MicroSave Market-led solutions for financial services 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 7

MicroSave Market-led solutions for financial services Examples from Asia 8 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 producersSmall numbers Large number of smallholders Market characteristicsExport markets Crop characteristics Perishable post- harvest Price incentives for quality and perishable product Financial attractivenessHigh Producers lack physical guarantee References were drawn from Dalberg’s Agri-financing analysis

MicroSave Market-led solutions for financial services Risk management – what works in Asia? 9 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 financing  Index based weather insurance  Crop insurance  Farmers and family insurance  Cash flow based lending  Commitment savings Input  Drought resistant varieties  Input, supplies and equipment financing  Irrigation financing Information  Market information services

MicroSave Market-led solutions for financial services Key lessons learnt with implications on Africa (1/2) 10 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 References were drawn from FAO’s work on agri-value chain financing

MicroSave Market-led solutions for financial services Key lessons learnt with implications on Africa (2/2) 11 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 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. 7 7 References were drawn from FAO’s work on agri-value chain financing

MicroSave Market-led solutions for financial services Scaling up AVCF in Africa - role of formal financial institutions 12 Finance upstream actors Lead firms financing Finance producers Innovate  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

MicroSave Market-led solutions for financial services Mobile money as a catalyst for finance and information in Africa 13 Importance Is Africa ready for Mobile Money?  Low cost of transaction  High security of the transactions  Solving the “last mile” problem  Seamless integration of buyers and sellers  Reduced leakages  Enhanced immediacy and increased frequency of the transactions  Improved economics  Accountability  Concentration of buyers  Producers base  Frequency of payments  Input finance mechanism used  Large subscriber base  High number of mobile money agents (which is expanding even further)  Wide network reach of MNOs  Sustainable volumes  Expanding ecosystem  Success 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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