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© FAO January 2008
Strategies for Financing Farm Activities
Module 3: Investment and Resource Mobilization
Session 4: Strategies for Increasing Farm Financing Resources
F A O P o l i c y L e a r n i n g P r o g r a m m e
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© FAO January 2008
By
of the
FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS
Strategies for Financing Farm Activities
Maria Pagura, Rural Finance OfficerRural Infrastructure and Agro-Industries Division, FAO, Rome, Italy
About EASYPol
The EASYPol home page is available at: www.fao.org/easypol
This presentation belongs to a set of modules which are part of the EASYPol
Training Path Policy Learning Programme – Module 3: Investment and Resource Mobilization, Session 4: Strategies for increasing farm financing resources
EASYPol has been developed and is maintained by the Agricultural Policy Support Service, Policy Assistance and Resource Mobilization Division, FAO.
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© FAO January 2008
FAO Policy Learning ProgrammeModule 3: Investment and Resource Management
Session 4: Strategies for Increasing Farm Financing Resources
Objectives
Provide an overview of different strategies, instruments and institutions that improve farmers’
access to finance.
Study in detail four case studies highlighting the strengths and weaknesses different farmer finance innovations.
Summarize lessons learned in the institutional planning, financing and implementation of rural financing systems
reform.
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© FAO January 2008
FAO Policy Learning ProgrammeModule 3: Investment and Resource Management
Session 4: Strategies for Increasing Farm Financing Resources
Demand for agricultural finance
See
notes for
details
Retailers/Exporters /Wholesalers
Rural Households
Rural Households
Non-Agricultural Rural Businesses
Non-Agricultural Rural Businesses
Off-farm Microenterprises
Off-farm Microenterprises
Processors
Input Suppliers
Farmers / Producer Groups
Local Traders & Processors
Multiple
economic
actors in
rural space
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© FAO January 2008
FAO Policy Learning ProgrammeModule 3: Investment and Resource Management
Session 4: Strategies for Increasing Farm Financing Resources
Financial service needs
Build new plantPurchase new equipmentCash flow management
Processors�
Input Suppliers�
Farmers / Producer Groups
�
Local Traders & Processors
�
Retailers / Exporters / Wholesalers
Purchase truckPurchase farm inputs and outputCash flow managementIncome smoothing
Purchase of fixed assets (land, tractors)Purchase inputs (seed, fertilizer, labor)Mitigate risk (crop insurance)Cash flow managementIncome smoothing
Purchase InventoryCash flow management
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© FAO January 2008
FAO Policy Learning ProgrammeModule 3: Investment and Resource Management
Session 4: Strategies for Increasing Farm Financing Resources
Financial service needs
Rural Households
Rural Households
Non-Agricultural Rural BusinessesNon-Agricultural
Rural Businesses
Off-farm Microenterprises
Off-farm Microenterprises
Purchase inventoryPurchase of fixed assetsCash flow management
Cash flow managementRisk management Fixed investments
Income/consumption smoothing
Savings instrumentsMitigate risk
Access to remittancesLife events
Financial service needs of non-agricultural actors are also broader than credit and include:
Short term credit Term creditDepository and transfer servicesInsurance
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© FAO January 2008
FAO Policy Learning ProgrammeModule 3: Investment and Resource Management
Session 4: Strategies for Increasing Farm Financing Resources
Supply of finance
Formal bank finance
Non-bank finance
banks, investment, insurance, leasing, and cash transfer companies
finance between value chain actors, rural MFIs, coops, NGOs, personal finance
Multiple suppliers of
finance in rural space
Public finance government
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© FAO January 2008
FAO Policy Learning ProgrammeModule 3: Investment and Resource Management
Session 4: Strategies for Increasing Farm Financing Resources
Formal bank finance
Short/long term loans
Lines of credit
Emergency loans
Payment/transfers
Saving facilities
Insurance
Leasing
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© FAO January 2008
FAO Policy Learning ProgrammeModule 3: Investment and Resource Management
Session 4: Strategies for Increasing Farm Financing Resources
Financial institution suppliers
Strengths:offer broad range of financial servicesaccess to external capitalpositioned to take on new clientsoffer credit histories that are easy to take from one institution to anothercredit generally not tied to a crop/product continue if market conditions changemarket-based structure results in less monopolistic or predatory relationships
Weaknesses:reluctant to lend for agricultureinsufficient systems to reach rural areaslarge systems and procedures making it difficult to innovateconventional lending practices, e.g., accept only physical assets as collateral
See
notes for
details
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© FAO January 2008
FAO Policy Learning ProgrammeModule 3: Investment and Resource Management
Session 4: Strategies for Increasing Farm Financing Resources
What is a ‘Value Chain’?
Value Chain = series of actors and activities needed to
bring a product from production to the final consumer
Value Chain Finance: Credit or other financial services flowing through actors along
these chains
Value Chain Finance: Credit or other financial services flowing through actors along
these chains
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© FAO January 2008
FAO Policy Learning ProgrammeModule 3: Investment and Resource Management
Session 4: Strategies for Increasing Farm Financing Resources
Benefits of value chain finance
Value Chain Finance can: Improve the overall effectiveness and efficiency of the value chain by:
identifying relationships along the value chain
mitigating constraints
exploiting opportunities for value chain finance
exploring how formal financial institutions can enter the equation
If designed well, value chain finance interventions can increase the competitiveness of small producers, as well as a range of agricultural and agribusiness enterprises.
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© FAO January 2008
FAO Policy Learning ProgrammeModule 3: Investment and Resource Management
Session 4: Strategies for Increasing Farm Financing Resources
Processing
Financial and Information flows
Physical flows
Inputs
Enabling environment (policies, regulations, institutions: the business climate)
Production Distribution Consumption
Finance and supporting services
Adapted from da Silva and Batalha, 2000
A value chain at work
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© FAO January 2008
FAO Policy Learning ProgrammeModule 3: Investment and Resource Management
Session 4: Strategies for Increasing Farm Financing Resources
Value chain actors
Actors in the Chain
Actors outside of the Chain
Rural Households
Rural Households
Non-Agricultural Rural BusinessesNon-Agricultural
Rural Businesses
Off-farm Microenterprises
Off-farm Microenterprises
Processors
Input Suppliers
Retailers / Exporters
Farmers / Producer Groups
Local Traders & Processors
Retailers / Wholesalers
See
notes for
details
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© FAO January 2008
FAO Policy Learning ProgrammeModule 3: Investment and Resource Management
Session 4: Strategies for Increasing Farm Financing Resources
Value chain finance
Trade credit
Input supplier finance
Contract farming
Inventory credit/warehouse receipt finance
Collateralized lending –
factoring, repos
Import/export finance
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© FAO January 2008
FAO Policy Learning ProgrammeModule 3: Investment and Resource Management
Session 4: Strategies for Increasing Farm Financing Resources
Value chain financing
Strengths:
Cost-effective ways to screen potential clients
Tap new assets for securing loans
Help to increase yields and prices
Help to lower costs
Change the way agricultural products are sold
Weaknesses:
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
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© FAO January 2008
FAO Policy Learning ProgrammeModule 3: Investment and Resource Management
Session 4: Strategies for Increasing Farm Financing Resources
Agricultural finance -
Case studies
South Sudan Agricultural Market InvestmentInnovative Use of a PPP to Build Institutional Capacity Rapidly
DrumNetAn Enterprising Third Party Transaction Manager
Financing A New Value Chain Divine Chocolate
Mobile Banking
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© FAO January 2008
FAO Policy Learning ProgrammeModule 3: Investment and Resource Management
Session 4: Strategies for Increasing Farm Financing Resources
Standard financial sector reforms are not enough to stimulate financial intermediation in rural space.
Investments in innovations and experimentation in rural finance is missing from most contexts.
Multiple actors and ways to finance activities have emerged at the farm level despite of lacking enabling environments.
Conclusion
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© FAO January 2008
FAO Policy Learning ProgrammeModule 3: Investment and Resource Management
Session 4: Strategies for Increasing Farm Financing Resources
Christen, R.P. and D. Pearce, “Managing Risks and Designing Products for Agricultural Microfinance: Features of an Emerging Model,” CGAP Occasional Paper No.11, Washington, DC: World Bank, 2006.
Gonzalez-Vega, C., “Deepening rural financial markets: Macroeconomic, policy and political dimensions,” commissioned paper at the Paving the Way Forward in Rural Finance: An International Conference on Best Practices, www.basis.wisc.edu/rfc/, Washington, D.C., June 2003.
Meyer, R., R. Roberts, and A. Mugume, Agricultural Finance in Uganda: The Way Forward, Ugandan Financial Systems Development Programme, FSD Series No. 13, German Technical Co-operation and the Swedish International Development Agency, June 2004.
Pearce, D., A. Goodland, and A. Mulder. “Rural Finance for Agriculture,” Agriculture Investment Sourcebook. Washington, DC: World Bank, 2004.
Further readings
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© FAO January 2008
FAO Policy Learning ProgrammeModule 3: Investment and Resource Management
Session 4: Strategies for Increasing Farm Financing Resources
Links to Module 3
: Sessions 1-8
Session 1: Investment in agriculture & rural development
Session 2: Environment for private investment in agriculture & rural development
Session 3: Sources and uses of financial resources
Session 4: Strategies for increasing farm financing resources
Session 5: Risk mitigation in agricultural investment
Session 6: Sector-wide approaches (SWAps)
Session 7: Socio-economic & livelihood analysis
FAO Policy learning programme
Module 3: Investment and Resource Management
FAO Policy learning programmeCapacity Building Programme on Policies and Strategies for Agricultural and Rural Development