Transcript
Page 1: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

OWURAKU SAKYI-DAWSON (PhD)DEPT. OF AGRICULTURAL EXTENSION

UNIVERSITY OF GHANA, LEGON

Africa Regional Workshop on Promoting Access to Rural Finance for Enhanced Agricultural Productivity, 16th July 2013. Accra International

Conference Centre

Page 2: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Introduction

• Focus• … innovative options for bridging

agricultural and rural finance demand and supply gaps in Africa

• - Strategies• - Mechanisms• - Complementary technologies• - Policy issues

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Page 3: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Supply gaps: Low supply to agric and rural areas

Credit Supply Indicator Developing Countries

All Africa Rural Africa

High income OECD and non-OECD

Population with access to financial services

20% 4%

Population with access to formal credit

1%

% Bankable households

12% 91%

SME lending volumes as percentage of GDP

4% 20%

% of rural population with access to formal financial services

10%

Nigeria Adult population ever banked

26% 14%

Microfinance access by households in WAEMU

20%

Agriculture households with access to microfinance in WAEMU

7%

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Page 4: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Other agric and rural finance supply gaps in Africa

Supply gap? High and diverse demand exist – value chain

lens High unmet “demand in middle part” of value

chains▪ E.g. small producers, traders, processors

▪ Impact – counter developmental?

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Page 5: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Reasons for supply demand gaps

– Supply side challenges e.g.

– Demand side challenges

– Constraints at the country, legal policy, and management levels

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Page 6: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Some principles in the complementary approach

Build long-term capacity of both -financial services providers

& -value chain actorsProvide incentives to the

entities participatingFacilitate access to wide range

of services

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Page 7: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

International market

Medium/ large-scale buyers and exporters

Local Traders

Farmers Association

Smallholder farmersRetailers/Kiosks

Input Supply Companies

(Seeds, Fertilizers)

Commercial

Banks

Commercial

Banks

Domestic market

MFIs, Credit Unions, Coops

MFIs, Credit Unions, Coops

MFIs or Commercial Banks

MFIs or Commercial Banks

Commercial Banks

Commercial Banks

Current finance flow (size of arrow indicates volume)

Potential finance flow

COMPLEMENTARY APPROACH: POLICY FRAMEWORK

Source: USAID, 2005 7

BUILD ON EXISTING VC & FINANCIAL RELATIONSHIPS

Page 8: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Local processors, wholesalers

Commercial banks equity

funds

Local traders, producer

associations

Industrial processors, exporters

Small producers, micro-enterprises

Commercial banks and companies

Banks, microfinance institutions, companies,

unions

Microfinance institutions, savings and

credit co-ops, companies, associations

Short term loans, savings, group loans

Medium-term loans, leasing

Short and medium-term loans, leasing

Long-term loans, guarantees, equity

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Page 9: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Strategies for facilitating finance for value chain development Craft a new value chain(s) –

– Financial and technical capacity building• Cooperation between producers, buyer, financial agent • Provide producers with access to financial services needed

for their business Expand an existing chain liquidity

– Lead firm strategy• Strong lead firms in the chain used as vectors to reach non-

bankable suppliers • The lead firm is the collateral for providing finance to the

suppliers Unleashing investment capital into an existing

value chain– Micro-leasing – through associations

– Temporary equity financing 9

Page 10: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Innovative mechanisms for effective agricultural and rural finance 1• Warehouse receipts– A receipt is given to the farmer after their

produce is sent to certified participating warehouse e.g. Ghana Grains Council

– The receipt serves as a collateral for loans• Contract farming / out-grower

schemes– Buyers offer “cash or in kind” as a form of

credit for purchasing of produce– E.g. Maize farming (informal) pineapple (formal)

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Page 11: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Innovative mechanisms for effective agricultural and rural finance 2

• Re-purchase agreements (Repo finance)– Bank purchases the products from the

seller and also signs a contract to sell it back to the previous seller later in the future

• Private equity– The financier (by a bank or an investor)

purchases shares from a value chain company / actor

– The actor thus has capital to invest in activities

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Page 12: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Innovative mechanisms for effective agricultural and rural finance 3• Leasing– The actor e.g. the farmer is provided with

equipment for few years on a contract basis– The lease is paid off by the farmer in

installments– The leasing company may either reposes or

sell the equipment to the farmer at the end of the lease period

– Process is less risky than provision of loans to farmers

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Page 13: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Innovative mechanisms for effective agricultural and rural finance 4

Factoring An invoice is received by a farmer after

delivering produce to a buyer The invoice is sold to a third party

(Factoring house) The factoring house pays the farmer

deducting a fee, and sends the invoice to the buyer for payment

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Page 14: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Complementary supportive technologies 1• Use of ICT to bundling

development services with agricultural finance:

• E.g. DrumNet • Key actors within the supply chain are

identified eg. Banks, buyers, and input dealers– Smallholder farmers are linked to the

key actors– Inclusion of ICT in the process

enhances its effectiveness and efficiency

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Page 15: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Complementary supportive technologies 2• The Kenyan example of M-PESA

(Mobile Money)– This system was developed through

Vodafone with financial assistance from DFID

– Lunched in March 2007– Registered customers are able to send

money home without the need of a bank account

– Customers purchase electronic money using cash

– Mobile phones are used in performing financial transactions

– The electronic money can also be converted into cash, through its sale to agents

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Page 16: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Mobile money in Africa 3

Africa has been the hotbed for Mobile Money:15 of the top 20 countries in the world wrt mobile money usage

An estimated 80% of adults still unbanked, combined with new developments in commercial payments and a youth market with strong loyalty to mobile channels

The potential for growth is enormous16

Page 17: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Esoko mobile technology platform for value chain information exchange 4 Uses SMS messaging aimed improving

transparency of markets and the operational efficiency of organizations

Collects and provides content such as prices, bids and offers, weather, and agricultural tips to which users can subscribe.

Farmers negotiate better prices, choose markets, timing of sales, participate in outgrower schemes through Esoko profiling and reputational history. 17

Page 18: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Complementary supportive technologies 5

Biometric Technology in rural credit markets: Malawi, Kenya, Tanzania Common biometrics (fingerprints, face,

iris, retina, speech, and handwritten signatures) used▪ This prevents identity theft

Smallholder farmers can apply for loans using this biometrics

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Page 19: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Innovative risk management in rural and agriculture finance

Financing Strategies + Innovative Financing Mechanisms + Supportive Mechanisms and Technologies =Innovative risk management Bringing the business into the picture

Using soft collateral in place of hard collateral

Looking at the potential of the business case rather than using past financial records

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Page 20: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Critical stakeholders in reducing supply demand gap in rural finance

Governments

Banks and other financial agents

Private non-financial Companies

Donors

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Page 21: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

The role of government in the strategy

Appropriate legal framework wrt financing strategies, mechanisms and technologies

Other roles of government• Minimal government intervention in the area

of setting interest rates

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Page 22: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Role of banks and other financial agents in the strategy

Extending credit to other / small actors

Aiding in setting-up of warehouse receipt lending system

Developing links between small farmers, buyers, and suppliers

Working with smallholder farmer associations

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Page 23: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Role of private companies in the strategy

Ensure that quality standards are maintained by setting up the warehouses and operating them professionally

Using the mechanisms

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Page 24: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Role of donors in the strategy• Partnering with community-based financial

organizations (CBFOs)

• Working with farmers not well integrated in the product market

• Using subsidies to support the building capacities of the lenders in areas of training and technical assistance e.g. MiDA in Ghana)

• Supporting lenders based on transparent criteria

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Page 25: Innovative options for bridging Agricultural and Rural Finance Demand and Supply Gaps in Africa

Conclusions:

Strategy for effective agricultural and rural finance is founded on the realization that it is absolutely necessary to integrate small and medium scale farmers and other actors into mainstream financial systems for African Development

Believe in existence of and workability of a strategy for linking smallholder farmers to financial markets

But cannot be done as business as usual 25

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THANK YOU

CONTRIBUTIONS? COMMENTS ? ADDITIONS? QUESTIONS

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