Financing coffee farmers in Ethiopia: challenges and opportunities Bastin, A. - Matteucci, N. Lux Development (Luxembourg) – Marche Polytechnic University (Italy) FAO Conference on Rural Finance Research March 2007

Overview on Ethiopia Ethiopia: one of the poorest countries: ranks 170 out of 177, UN-HDR (2006) Recent GDP & GDP/N recovery (mid-90’) Volatile & unbalanced export Coffee on total export: from 63% (1995) to 37% (2004), mainly due to price shocks since 1999 Coffee crisis: huge impact on a small-scale agriculture; low access to rural communities Many farmers, traders, cooperatives bankrupted The pervasive (nation-wide) impact of the crisis

. Big agricultural potential in a poverty trap Agricultural potential; 84% of population is rural Lack of infrastructure: transport, TLC, health, etc. Natural calamities (drought) in some areas, recent conflicts Poor agricultural practices and lack of surplus, difficult to mobilize High quality, organic coffee VS poor value chain No traditional finance for the poor Which role for a “sustainable” Microfinance ? (Morduch,1999) Which credit, saving and risk management instruments ? (Dercon, 2002)

. A survey to fill the informative gap No detailed evidence on financial services for Ethiopian coffee farmers Only 1 million the outreach of MFI (end of 2004), out of 70 mill. - 84% rural Our survey on Jimma Zone, coffee-oriented (Oromia, largest Regional State); Summer 2005 Interview of 120 coffee farmers(random sampling) Complemented by focus group discussions Further interviews with financial providers, etc.

Jimma Zone in Ethiopia

Background Statistics MeanStd. Dev.MedianMin.Max. Age (years) Family Size (n.) Working people (n.) House - road distance (Km.) House - market distance (Km.) Land size (Ha) Coffee size (Ha) First activity income (%)

1)Coffee price volatility: 85% 2)Coffee Disease: 55% 3)Lack of access to loans: 47% Risk Management instruments: 1)Activity diversification (other crop, animal fattening): 45% 2)Coffee differentiation (organic) : 42% ……… 5)Commercial credit: 14% Risk management VS risk coping strategy, cf. Dercon, 2002 Main risks perceived

Access to FS (loans) (64% of sample) Source of loan: Frequ. (%) Mean (Birr) - [$] Coeff. Variat. (%) Min. Amount (Birr) Max. Amount (Birr) Friends [34]116601,250 Traders [17] Money lenders [22] Cooperativ [13] MFI [105] ,500 Total [38]

Duration and cost of loans by source Source Duration (months) Min - Max Annual interest rate (%) Min - Max Friends Traders Money lenders Cooperat.3600 MFI

1)Consumption (food, clothing, education, house construction) : 53% 2)Other productions (trading, animal fattening, other crops) 32% 3)Coffee Inputs: 14% Remember: MFI loans in the sample are only for production Use of Loans

1)Inappropriate terms (grace period, duration, etc.): 37% 2)No problem: 29% 3)Small amount: 20% 4)High interest rate: 14% Main problem with loans

FS demand and financial GAP Mean (Birr) Mean ($) MinMaxCoeff. Var. (%) DEMAND (Birr) 2, , GAP (Birr) 2, , GAP % (unweighted average) 86 (58)

Saving products: 64 % Loans: 25 % Saving and loans: 10 % However, SP mostly unavailable in rural areas (saving “in kind”) SP as a partial substitute for risk management products (insurance) (F) SP could extend the outreach of MFI (I) Most useful (potential) FS product

Conclusions Huge loan gap. Moreover, 1/3 credit is informal: costly and subsistence-oriented MFIs: 1° provider (1/3 sample). It offers the best conditions. Limited outreach. MFI loans as enablers of risk management strategies !!! Further evidence needed on “financial” cooperatives Clear demand for saving products

Product Innovations from MFI required: 1) Better tailored production loans (possibly also consumption loans) 2) Saving products for rural communities 3) Increase the outreach of MFI Training in finance for operators in rural communities (also for cooperatives) Rural Banks? Policy recommendations