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

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  • 1. 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

2. Introduction Focus innovative options for bridging agricultural and rural finance demand and supply gaps in Africa - Strategies - Mechanisms - Complementary technologies - Policy issues 2 3. 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% 3 4. Otheragric 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? 4 5. Reasons forsupply demand gaps Supply side challenges e.g. Demand side challenges Constraints at the country, legal policy, and management levels 5 6. Some principles in the complementary approach Build long-term capacity of both -financial services providers & -value chain actors Provide incentives to the entities participating Facilitate access to wide range of services 6 7. International market Medium/ large-scale buyers and exporters Local Traders Farmers Association Smallholder farmers Retailers/Kiosks Input Supply Companies (Seeds, Fertilizers) Commerci al Banks Commerci al Banks Domestic market MFIs, Credit Unions, Coops MFIs, Credit Unions, Coops MFIs or Commerci al Banks MFIs or Commerci al Banks Commercial Banks Commercial Banks Current finance flow (size of arrow indicates volume) Potential finance flow COMPLEMENTARY APPROACH: POLICY FRAMEWORK Source: USAID, 2005 7 BUILDON EXISTING VC & FINANCIAL RELATIONSHIPS 8. 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 8 9. Strategies forfacilitating 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 10. Innovative mechanisms foreffective 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) 10 11. Innovative mechanisms foreffective 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 11 12. Innovative mechanisms foreffective 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 12 13. Innovative mechanisms foreffective 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 13 14. 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 14 15. 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 15 16. 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 enormous 16 17. 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 18. 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 18 19. Innovative riskmanagement 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 19 20. Critical stakeholders in reducing supply demand gap in rural finance Governments Banks and other financial agents Private non-financial Companies Donors 20 21. 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 21 22. Role of banks and otherfinancial 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 22 23. 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 23 24. 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 24 25. 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 26. THANKYOU CONTRIBUTIONS? COMMENTS ? ADDITIONS? QUESTIONS 26